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A Simple Model For Entrepreneurial Risk Taking While hindsight vision is always 20x20, most entrepreneurs can't afford that, for they have lost a lot by then and often in an irrevocable manner

By Dr. Pavan Soni

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While we intuitively understand that entrepreneurship is all about risk taking, and often it's told that not taking a risk is perhaps the greatest one. But the question is which risk is worth taking and at what cost? How would one distinguish between a once-in-a-lifetime opportunity versus bet-your-company kind of a gamble? While hindsight vision is always 20x20, most entrepreneurs can't afford that, for they have lost a lot by then and often in an irrevocable manner. In this piece, I offer a practical model of risk taking, which is equally amicable to entrepreneurs as much to anyone seeking change.

Think of the two axes as upside and downside of any action. Upside stands for all the positives that a choice may yield, in the short or long term, whereas the downside represents all the risks, losses and potential debts associated with that decision. You must note that we are awful when it comes to choosing between short-term good and long-term bad. As in the case with smoking, or eating junk, that presents a very compelling short-term gain but a well-known and definitive long-term risk, we find it hard to overcome the immediate pull. There is a term in psychology for this weird but all too common behaviour: hyperbolic discounting. It's when we choose smaller, immediate rewards over larger, later rewards. That's when people continue taking unpalatable risk in the short run, often fuelled by both ignorance and arrogance.

While most of us suffer from the hyperbolic discounting, the entrepreneur is a special breed. She is the very epitome of overconfidence, the embodiment of the 'just do it' dictum. One is considered less of an entrepreneur if not driven and consumed by the urge to do it all.

Now, let's take in perspective our general tendencies to discount the downside in the short term, and the typical see-no-wrong view of an entrepreneur. This raises the debate on prudent risk taking to newer levels of significance.

Let's start with the belief that you know at any moment the upside and the downside associated with a decision. This is a very lofty assumption. However, with practice one could prune intuition and come close to a more accurate description of the odds of success on any decision. If we plot the highs and lows of the upside and downside in a two-by-two we get four quadrants. Let's discuss each with an example from the milieu of enterprise creation.

High upside and high downside: gamble

Entrepreneurship is often labelled as 'bet it all' kind of a gamble. You win big, you lose big. But not all of business is of that nature, after all not many are trying to colonialize the planet Mars. It's critical to know when you are setting yourself up for large, and mostly unnecessary kind of risk, because you are willing to let go what you have while chasing something what you may have. A common example is investing your life's savings into your dream startup. It doesn't take your dream to turn into a nightmare if you aren't watching your steps wisely. Another one is the founders diluting their equity to becoming marginal players as they find it difficult to refuse a posh investor. What may seem urgent or scarce is seldom the case, for there are many ways to win a market and attract investors. So, it's important to identify the high upside and high downside type decisions slowly and carefully, and take the gamble, if at all, knowingly. As a rule of thumb, take such gambles only if you must.

High upside and low downside: Take risk

An opportunity that offers a high upside and a low downside is a straightforward candidate for risk taking. Except that it's not so straight forward, for the upside isn't always high in the short run. Think of putting your best people on research and development versus sales, or building a patent portfolio instead of sweating your existing assets profusely. Each decision has a relatively mild downside, but the high upside is deferred, and hence the founders remain committed to the status quo. The key is to ask the question: what is the cost of not making this choice? If you continue with the current trajectory how much longer can you sustain the momentum? For most situations the answer is pretty clear. Bite the bullet.

The maxim of 'just do it' fits here. Most people don't take risk when it is due, or rather overdue. They have sufficient savings, they are talented, and yet they aren't keen on starting a side huddle that may someday lead them to a venture. Or eschewing a promised promotion to pursue higher education abroad. Such risks are worth taking.

Low upside and high downside: Avoid risk

What happens when the upside is low and the downside is high, but both into the future. The smoking or unethical business dealings are of that nature. The upside is immediate, but mostly mild, and the downside is deferred, even though severe. Kickbacks in corporate sales, fake invoicing, infringing copyrights, and the like, are behaviors that one can live very much without, but since the kick of not getting caught is so compelling that it's hard to resist. And when the downside kicks in, there's no escaping.

The key is to be disciplined here and offering a 'high quality no'. It means a no which is not followed up with any emotions, such as of anger, guilt, remorse, pride, or shame. As the legendary David Packard incisively observed, more businesses die from indigestion than starvation. Its saying no to a thousand things that make a good business. It's very easy to spread yourself thin with too many irons in the fire and you not only open yourself to avoidable competition but also cut a sorry figure in front of your customer. So, avoiding such temptations is as important as taking necessary risk.

Low upside and low downside: Ignore

Another form of discipline is to let go of situations that aren't terribly interesting but seem to be compelling 'now'. They are born out of the FOMO (fear of missing out), where one is made to believe by the media or other pundits that you are in the midst of once-in-a-lifetime event and you would be a fool not to act (read, commit). That's when you need to go back to the basics of what your business really needs at that point in time and into the future and take decisions accordingly. If it's a no, it's a no. Period.

That decision can only come from a clear head. One which doesn't suffer from the compulsion of impressing others or the fear of losing out. I haven't seen many once-in-a-lifetime events. Even Covid-19 may not be one, and yet many people devised their own reasonably well honed heuristics to navigate it. As a rule of thumb, be suspicious if somebody pushes you to take a decision immediately. It's more in their interest than yours.

While this two-by-two is casted with reference to entrepreneurial decision making, it's not a bad heuristic for personal choices, for life isn't as complex as we make of it.

Hope this serves you well. Make your choices, wisely.

Dr. Pavan Soni

Founder, Inflexion Point

Dr. Pavan Soni is an Innovation Evangelist by profession and a teacher by passion. He is the founder of Inflexion Point, a strategy and innovation consulting. Apart from being an Adjunct Faculty at IIM Bangalore, Pavan has consulted with leading organizations on innovation and creativity, including 3M, Amazon, BCG, Deloitte, Flipkart, Honeywell, and Samsung, amongst others. Pavan was the only Indian to be shortlisted for the prestigious 'FT & McKinsey Bracken Bower Award for the Best Business Book of the Year 2016'.

He is a Gold Medalist from MBM Engineering College Jodhpur, and did his PGDIE from NITIE Mumbai. Pavan finished his Doctoral Studies from IIM Bangalore in the domain of innovation management.

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