The trick is to figure out how to measure the risk. Then to do what we can to mitigate the risk. And finally to decide if the return on the investment (ROI) for taking the risk is positive in our minds. Insurance companies are, of course, in the business of doing just that—measuring risk and calculating ROI potentials.
It is much more sound to take risks you can measure than to measure the risks you are taking.—Taleb, Nassim Nicholas (2010-05-04). The Black Swan
This topic came up as I worked with some students on a business plan project. The thought of liability, potential damages, lawsuits and partner agreements rarely come up when we’re thinking about that great new business we’re going to build.
The ROI calculation issue is really just the usual standard risk vs reward conversation. For most entrepreneurs, the perceived rewards of building a business outweigh the concerns around failure, lawsuits, regulations, taxes, etc. I am not sure if they have actually thought about and tried to quantify the challenges, or are simply ignoring them. Either way, it’s generally a good thing. Because we need folks willing to risk failure in order to build new and disruptive products and services.
On the other hand, we also see a great many startup companies fail. I suspect for many reasons, not just unmeasured risks. Yet one thing we can do to help ourselves is to make sure we are making conscious and informed decisions about known risks for our businesses. But what about the unknowns?
In this respect, the two main categories to consider are the known-unknowns and the unknown-unknowns! 🙂 Certainly if we know what we don’t know, we can do the necessary research in order to understand and perhaps mitigate the perceived risks. Where going concerns get in trouble is with the totally unexpected risk. As mentioned in the Taleb quotation above, as long as we take risks we can measure, we’re likely to be okay. The risks we are already taking that are unknown to us become problematic when they become visible—after the fact, usually.
I’m not sure I agree with Taleb completely, though. When new information comes to light, we may become aware of risks we are taking that we had not previously been able to consider. I see nothing wrong with doing our best to measure that risk we are taking in order to figure out how to mitigate or eliminate it.
So I come back to where I started. Business is a risk. We should work to uncover all the potential risks we are undertaking with our businesses. We often can, and we should, mitigate the biggest risks. We should keep track of the smaller risks to make sure circumstance don’t change in a way that causes them to grow. And we want always to be watching to uncover new risks that arise either from new information or changing environment.
Thank goodness that many of our leaders are entrepreneurs that have no difficulty taking considerable risks in order to build an outstanding company. Risks are not inherently bad. Needless risks might be. What are the risks in your business? Do you work to mitigate them? Do you have a process to discover previously undiscovered risks?