There is a common perception that most entrepreneurs are gamblers by nature and are often willing to take on risks to make their dreams come true.
While most entrepreneurs do have a risk tolerance that’s greater than average, we are actually risk managers. Here’s what I mean:
Taking Risk Versus Managing Risk
At the surface level, casual observers see two people betting large sums of money in hopes of making a lot more. It is VERY different.
A risk-taker takes wild risks without a reasonable comprehension in the probability of success. They are willing to risk just about anything for the chance to win an outsized payout. This is equivalent to betting your entire bankroll on a single hand in poker. Yes, you have a chance to win. If you have AA’s you might have better than most chances to win. However, if you start factoring in how many cards you’ve seen (historical knowledge), how many players you’re going against, and etc… a risk-taker usually wouldn’t realize his decent hand he went all-in with is now a garbage hand that is likely to lose all his money.
A risk manager, on the other hand, is someone who is looking at the same types of risks and also betting on some of them. The key difference is that they’ll do everything they can to get the full picture and also take steps to minimize possible downsides. You are more likely to find entrepreneurs at a poker table, reading the players and the flow of chips to get extra information and reduce the risk of their betting. They’ll know the probability of winning with the cards in their hand and the cards on the table at any moment before they push all their chips in.
Shooting For the Stars
When Tesla Musk decided to build a company around making electric vehicles or EVs, it looked like a crazy risk to many people. But for Musk, it was a calculated risk. He knew, for instance, that all the technology he needed to build his EVs already existed. The batteries, AC drives, wheels, chassis, and electronics could all be acquired. He didn’t have to take on any risk in trying to develop those things himself. He evaluated the fact that competition is stagnant so he had a chance to be first to market. He knew R&D is expensive and appetite small so he had to sell at a loss to gain critical mass. Thus going public had to be done to minimize his monetary risks even further. With risks and gains calculated, he took steps no one else was willing to and is now Bill Gates famous.
That was a calculated risk that might have looked crazy to most people. Every single risk element had been considered and managed, even his bankroll. Don’t forget he had already founded and sold PayPal. That meant that even if Tesla failed, he knew he had enough of a cushion to land on that it wasn’t going to ruin his life.
If you want to think like an entrepreneur, look at every decision through the mindset of a risk manager; don’t assume what people doing is reckless. Be critical as to understand why, how, and what the gains might be. If you do the math, you might find yourself in front of a great investment opportunity. Worst case scenario, you’ve learned from a stupid risk taker’s ignorance. This will certainly help with your own future ventures.