To embrace a life of entrepreneurship is to embrace a culture of risk-taking. It would be lovely to open your doors to customers with the guarantee of business success, but small business owners will always have to confront the potential pitfalls of starting a new venture.
Entrepreneurs accept uncertainty in exchange for potential profit and business growth. While these risks are highest in the early days of a business, each small business owner will find themselves taking calculated risks throughout the life of their company.
How much risk should you expect to encounter when starting your own business? Here’s a look at risk in entrepreneurship, and the ways that successful businesses overcome these many risks to thrive long-term.
Types of risk in entrepreneurship
- Market risk
- Financial risk
- Operational risk
- Strategic risk
- Technological risk
- Product risk
- Reputational risk
- Economic and environmental risk
- Legal and regulatory risk
Risk theory, also known as ruin theory, is a mathematical concept often used in the insurance industry to determine the probability of insolvency in an endeavor. Its principles also apply to the types of risk that new business owners encounter: financial risk, market risk, competitive risk, and technology risk, among others. Here are some of the most common business risks that an entrepreneur faces as they scale up their operations:
1. Market risk
Customer demand rises and falls, and new trends can sweep through an industry at a moment’s notice. One of the risks of entrepreneurship is that you could launch a product that you find exciting, but it never finds an audience. This is why entrepreneurs must commit to market research before investing personal assets or investor capital in their business.
2. Financial risk
It costs a lot to get a new business off the ground. Whether you’re investing your own money or someone else’s, there’s no guarantee that business funding will generate a return—or even be paid back. If you can’t sell enough products, or if unexpected expenses pop up, you and your partners may lose your investment. Offer the most realistic financial projections you can when approaching investors, so everyone can enter the venture clear-eyed.
3. Operational risk
You’ll encounter numerous operational risks in the day-to-day functions of your company. Supply chain disruptions, production failures, and human error are among the many circumstances that can derail business operations. Aim high with each key employee you hire for the business, as human talent can sometimes reduce the risk of these operational mishaps.
4. Strategic risk
As an entrepreneur, you—and your team—won’t always get things right. Your choice to enter a new market, launch a new product, or pursue a merger or acquisition might end up yielding losses rather than gains. All smart decisions are preceded by careful planning, so perform your due diligence before embracing ambitious new strategies. Create a strategic business plan at the start of your venture so you can refer back to it at pivotal crossroads.
5. Technological risk
With so many business operations now conducted online—often via cloud computing—you risk things like technological mishaps and data breaches. For instance, your ecommerce store could crash under the weight of too much site traffic, or a hacker could steal your customer data. Part of being your own boss is assuming accountability for all technical operations that occur within your organization.
6. Product risk
When bringing a new product or service to market, there’s always the risk that it won’t meet customer needs or expectations. Extensive research can improve your odds of finding a product-market fit, and exhaustive quality control can help ensure that the goods you ship to consumers will do right by your business name.
7. Reputational risk
Many of your potential customers will research your company before choosing to do business with you. Your company’s reputation may be just as important as the individual products and services you sell. You run the risk of denting your reputation through shoddy workmanship, poor customer service, and inaccurate product descriptions—among other things. Account for these reputational risks and develop a strategy to combat them when drafting your business plan.
8. Economic and environmental risk
Not all risks are preventable, no matter how well your internal processes run. Factors outside your control, like natural disasters or global economic downturns, can impact everything from your daily cash flow to your overall viability as a business. For instance, if you sell upmarket goods or services related to travel, for example, you may lose clients in a recession because they view your offering as a luxury rather than a necessity. When it comes to environmental risk, you may be able to protect yourself by purchasing business insurance that covers your expenses in the wake of a natural disaster.
9. Legal and regulatory risk
Some regulated industries (like alcohol, cannabis, and health care) face additional scrutiny with respect to local, state, and federal laws. Regulatory requirements and commerce laws aren’t set in stone, meaning compliance will be an ongoing process. There’s also the risk of lawsuits—from customers, suppliers, competitors, or the government itself. Some of the most successful companies regularly face litigation, which they address by setting aside money for legal fees.
How risk-taking can benefit your business
- Promoting first-mover advantage
- Driving innovation
- Facilitating personal growth
- Shaping your marketing strategy
When Briogeo founder Nancy Twine left her career on Wall Street to start her own business, she viewed risk-taking as an inherent part of the entrepreneurial process. “The thought of leaving such a great career that I was really thriving in at Goldman Sachs to start a hair care product line was, in a lot of ways, pretty risky,” Nancy says on an episode of Shopify Masters.
Despite this, Nancy saw a lot of upside to the risky road ahead. “I’ve always been taught to take smart risks,” she says. “So I knew that if I was going to leave my career in finance to start my own company, I wanted to feel really good about what I was going to embark on.”
Sometimes going out on a limb can stimulate an innovative idea, or it can encourage you to take a bird’s-eye view of your overall business model. Here are four ways that taking on risk might benefit your business long-term:
Promoting first-mover advantage
Taking calculated risks lets you explore untapped markets and capitalize on emerging industry trends. This may lead to what’s sometimes called a “first-mover advantage,” where a company establishes a dominant position before competitors enter the market. By the time others catch up, you’ve already built a reputation among your target audience.
Driving innovation
Some of the best new ideas emerge from high-risk endeavors. By fostering a culture of innovation, you encourage your team to experiment with novel ideas, products, and services. Some of these experiments will end in failure. However, you only need one success to obtain the intellectual property you can anchor your whole business around.
Facilitating personal growth
There’s an old expression that “you learn by doing,” and this applies to failed endeavors as well as successful ones. By putting yourself out there and taking a reasonable number of risks in your business, you can build your competence and leadership skills. If your risky endeavors succeed, you’ll be better positioned to steward them to new heights. If they fail, you have valuable experience to draw upon for next time.
“Whether it’s navigating a career, personal finance, relationships … I’m just really, really excited because I’ve learned so much over the years,” says Nancy.
Shaping your marketing strategy
A test-and-learn approach can give your business a structured way to take and learn from risks in your marketing strategy. This might mean trying new advertising channels or testing new product placement. Whatever the test, make sure you’re clear on the hypothesis that underlies it and what success would look like. You might also want to start small—by testing new ideas on small audiences and then scaling up if you find success.
How to manage risk as an entrepreneur
- Start with a comprehensive business plan
- Diversify your revenue streams
- Invest in cybersecurity
- Purchase business insurance
- Network within your industry and seek advice
According to the US Bureau of Labor Statistics, upward of 25% of new businesses fail within the first year, depending on your geographic region. That doesn’t mean that entrepreneurship isn’t worth the risk. With careful planning and conscientious management choices, you can greatly improve the odds of your company’s long-term survival. Here are the steps any entrepreneur should take to mitigate risk:
Start with a comprehensive business plan
You can anticipate and obviate many forms of risk by drafting a thorough business plan at the very beginning of your process. A business plan will make you confront the current realities of the market, including the competitive landscape and the base of potential customers. It will also give you a sense of how much financial risk you’ll be taking on. Your plan should include risk mitigation strategies, which will serve you down the road as issues invariably arise.
Diversify your revenue streams
Few successful businesses rely on one single market or one single revenue stream over the course of their existence. Marketing to different groups of people—including those with different budgets—expands your customer pool. Selling different categories of products (e.g., cooking classes along with cookware) can reduce your vulnerability to market fluctuations or unexpected disruptions. If one market or revenue stream dries up, you’ll have others to fall back on.
Invest in cybersecurity
One of your most sacred duties as a business owner is safeguarding sensitive business and customer data. Much of your data likely lives on cloud servers, which means you need to safeguard all access points. If you’re serious about mitigating technological risks, invest in firewalls, antivirus software, and data encryption. Train your team in best practices for cybersecurity. If possible, have at least one dedicated staff member who principally focuses on this.
Purchase business insurance
Lots of unexpected events can befall a business, from lawsuits to property damage to community-wide environmental damage. Protect your business with appropriate insurance policies, such as liability, property, and business interruption insurance. If you’re lucky, you’ll never have to make a claim. But if bad luck befalls your business, you’ll be grateful for the insurance.
Network within your industry and seek advice
Your fellow entrepreneurs may be among your most valuable assets as you explore risk mitigation. Cultivate good relationships in the industry, and ask for advice. When possible, hire seasoned industry veterans and draw upon their expertise.
“One of the things that I did that was really smart was that early on I found people who could help me,” says Nancy. “So when I was working my day job, there were people behind the scenes who were helping with other things. For example, I ended up hiring a cosmetic chemist who was working on the formulas.”
Risk in entrepreneurship FAQ
How can an entrepreneur plan for risks?
Entrepreneurs can plan for risks on multiple fronts. They can develop a comprehensive business plan that includes contingency strategies, diversify revenue streams, invest in cybersecurity, and seek expert advice to anticipate and mitigate potential risks.
What is the risk theory of entrepreneurship?
The risk theory of entrepreneurship states that entrepreneurs are willing to take calculated risks in pursuit of potential rewards.
What is high risk in entrepreneurship?
High risk in entrepreneurship refers to ventures with a significant probability of failure or substantial financial loss. Examples include expanding into a financially unstable market or investing in an as-yet-unproven technology.
