Entrepreneurs think differently about risk

Listen to me chat with my co-founder Kevin Springer.

Risk is an ambiguous word. What is risky to one person may not be risky to another. For some, boarding an airplane carries a high risk they’ll die in a crash. Others fly every other week and never give a crash more than a passing thought.

We all take risks every time we walk outside our front door. We risk getting hit by a bus crossing the street. We could catch a flesh eating disease sitting in a crowded theatre. Hell, you could stay in your home and have a meteorite land on your head.

Risk is everywhere. Yet some people are paralyzed by the fear of risk when it comes to entrepreneurship.

In his book ‘How to Think Like an Entrepreneur’, Philip Delves Broughton references Howard Stevenson, a professor at Harvard Business School.

“Stevenson felt that most entrepreneurs do not see themselves as risk-junkies. They are willing to take the risks necessary to achieve their often difficult goals, but they abhor pointless risk.”

I like this because it clarifies that entrepreneurs aren’t the base jumpers of the business world, they’re more like marathon runners. They have a definitive goal that requires hard work, and yes, an element of risk. But the risk isn’t enough to kill you, and regardless, the reward is worth it.

I wasn’t always a risk-taker. When I was at community college at age 19 studying applied arts, I opted for my second year to be graphic design instead of photography. I was a much better photographer than I was a designer, but I felt like I’d be more likely to find full-time employment as a designer than as a photographer (boy, was I right).

I wasn’t ready at that age to think about working for myself without the safety net of a regular pay cheque.

A few years later I started seeing my colleagues leave their jobs at agencies to become freelancers. ‘Maybe that’s for me” I thought. It took another year or two to finally build up the client list (and the guts) to put in my two week notice.

I started full-time freelancing in 2008. Then I started an agency in 2009, and left that to pursue my SaaS startup, Proposify in 2014. It’s now been ten years since I took the plunge into entrepreneurship. Here’s what I learned:

Freelancing is a gateway drug to entrepreneurship

We all know freelancing is on the rise, due in part to the 2008 financial meltdown. According to Upwork, 54 million in the US alone now freelancers.

It’s the easiest business in the world to start. All you need is some sort of skill. Designers, writers, developers, marketers, lawyers and accountants seem to make up most of the freelancers out there, but you could also be a freelance cleaner, personal assistant, pet groomer, dog walker — anything that people will pay you a livable wage to perform.

If you’re currently employed at a company, you’re already renting out your time to a “client”. To be a freelancer you’re doing the exact same thing, except instead of one employer you might have several of them. Software makes tracking invoices and expenses easier too.

Some people hold back from freelancing because they’re afraid of the risk (‘What if I can’t find clients?’). But it’s about the same level of risk that you’ll get laid off from your job. And if client work is drying up and you really don’t see a way out, you can always apply for full-time jobs. So what really is the risk again?

Once you’re out there closing deals and sending invoices you realize that it’s pretty easy.

Making your first hire

Your first hire is a milestone. You’ve gone from a lone wolf feeding yourself to now having a pack to feed.

Many hold off on that important step because—risk.
“What if I hire that person and they don’t work out?”
“What if I can’t sell enough to cover that person’s salary?”

An entrepreneur realizes that the risk is still pretty low. If you can’t afford the employee or they aren’t performing, you let them go. It’s not easy to do, or the desired outcome, but it’s still pretty low risk in the grand scheme of things.

There are people out there who avoid hiring at all costs, opting instead to outsource work to remote companies or freelancers. To me that’s just another form of hiring, but you miss out on a lot. You don’t get as much consistency. You don’t get to learn how to lead a team. You don’t get the satisfaction that comes when you see a person you’ve invested time, money and energy in training come into their own.

Building an asset

Some entrepreneurs get it right away, for others it takes years in the trenches. What are you working towards? What are you building?

A company is meant to be an entity that lives on after you.

Once you get that, once it really sinks in, everything changes. The best entrepreneurs built something that doesn’t need them any more. They can sell it, they can go public, they can die—the business remains.

That web design company you started isn’t about having a handful of people help you sell your time. If you’re just selling you, the founder, the rock-star, then as soon as you’re on vacation the business crumbles. That restaurant that requires your genius in the kitchen to run on Friday night, that’s just a job. And you happen to be both the employer and employee.

A book that deals with this subject beautifully is The E-Myth Revisited by Michael E. Gerber

The bottom line is that if you run a business that will die if you as the founder don’t show up for work carries a much bigger risk than one where you have a management team carrying out the day-to-day work.

Pillar clients

People tend to overvalue big clients who pay their firm a lot of money. They get the red-carpet treatment. If a companies average client pays them $10,000/month and they land a client who pays them $100,000/month, it’s amazing how much more they’ll value that client. Pay more attention to their wants and demands.

But a lot of entrepreneurs, while perhaps welcoming the short-term boost in revenue, would feel anxiety at having a client paying 10x more than the average. The risk being, you scale up your team to meet the needs of the big client, and if they leave you after a year you need to make layoffs. This happens all the time in an agency.

In his article, Whale Hunting or Scale Hunting?, Ben Chestnut, CEO of Mailchimp, writes:

“Our CFO shared a spreadsheet with me a few months ago that listed our top 150 customers. I’ve never asked for anything like this, so this was totally new to me. At the very top, we had our #1 customer who pays tens of thousands of dollars every month, and who later threatened to leave us. I remember that It was interesting to see who our top paying customer was, and I was glad that our product was robust enough to handle their extreme volume, but I smiled most about the fact that they only accounted for 0.1% of our monthly revenue. I thought to myself, “If the bottom fell out of their industry (which I’ve seen before), or if terrorists disrupted their industry (which I’ve seen) or if financial institutions totally screwed up their industry (which I’ve seen), or if this customer flat-out decided to leave (which came true in December), or if an even bigger competitor launches a competing service to theirs (which recently just happened), I’d still have 99.9% of my revenue. That’s good–one less thing.”

There will always be decisions that need to be made.

Once your business has matured, and you’ve been growing steadily for years risk doesn’t go away, it just changes. New decisions need to be made:

• Do you raise money now while you can, or wait? The risk is that it might not be there when you need it most. (We raised investment recently and I plan to share some learnings)
• You have two term sheets on the table from good investors. Which one do you choose? What if the deal falls through with the first one, will you burn a bridge with the second?
• Do you go after a completely new market segment, or double-down on what you know works? What if your existing market dries up?
• Should you build a new complimentary product to cross sell to your customers, or just partner/integrate with another company?
• Should you rewrite your software from the ground up or just keep what you have a refactor it? There’s plenty of risk either way (By the way, we re-wrote Proposify and there’s a lot of lessons I plan to share about that one).

How to evaluate risks

If you’re trying to evaluate whether or not to start a business, join a startup, sell your company, buy a company, make a strategic hire, you need a process for evaluating risk. Here’s mine.

What is the upside?

Typically you begin the process of evaluating a risk because there’s an opportunity that requires a break from the norm.

If you’re considering leaving your job to go on your own as a freelancer, the upside is being your own boss, living your life on your terms, choosing who you work with, and so on.

If you’re considering raising money for your company, it’s because you see an opportunity to scale ahead of revenue and need cash to make it happen.

Start with the upside so it doesn’t blind you from even considering a risky decision.

What is the worst thing that can happen?

This is where a lot of people start and it’s why they don’t even bother evaluating the rest of it.

A person who hates their job and doesn’t want to work for anyone again might shrug off becoming a freelancer because of the risk involved in quitting a 9–5, losing the steady paycheque and benefits, potentially not having clients and needing to find a new job.

However I like to think “then what?” Will that kill me? No, it just means that you may need to find a new job. Plenty of people get laid off and need to find new jobs, that’s not the end of the world.

If you’re worried that raising money for your startup will cause you to give away too much ownership in your company and that your investors will one day take control and oust you from the company, that’s a real fear. But even then, you still would own your shares in the company. Maybe if they oust you from the company it’s because you’re doing an abysmal job as CEO and they need someone who can grow the company. You still would own a big chunk of that company.

For almost every risk you can think of, the worst-case scenario is not a death sentence. If your worst case scenario ends up being “I die on the streets penniless” then maybe the risk IS too high.

What is likely to happen?

It’s impossible to know likelihoods of either the upside or downside with any certainty, but intuition should tell you how likely either scenario is.

Is it highly likely you’re going to end up on the streets begging for change because you made a big move? Or is it more likely that you may end up with some debt and need a new to find job? Maybe when you’re old and looking back on your life you’ll be proud of yourself that you followed your dreams and didn’t sit on the fence?

Is this a necessary risk?

Of course “necessary” is subjective. Is any business decision we make necessary for survival?

But here’s where the question get’s interesting: What are some alternative strategies you can deploy to cover your risk?

Perhaps in the case of the freelancer, you can build up clientele on the side before quitting your job? Maybe you can negotiate with your boss so you work part-time and still earn a regular, albeit smaller, paycheque.

If you’re raising money for your startup you can choose whether or not to take a deal and from whom. What if you work out a deal where you as the founder can take secondary capital from the raise to hedge your bets? That’s exactly what the founders of Basecamp did, and it’s also a similar deal we worked out in our latest raise at Proposify.

If you can cover your ass without compromising on the upside of the decision, it’s a no-brainer. Speaking of ass-covering, let’s talk about Elon Musk.

Being comfortable going back to zero

People are afraid of going backwards, of losing something they have. Maybe it’s their life savings, their house, or their reputation as a “successful” person in their community. It holds them back.

Not all risks are created equal. Elon Musk putting millions of his personal money into Space X and Tesla was a massive risk. As the story goes, he made $100M off the sale of Paypal and then had to borrow money for rent.

He had the confidence that he’d pull it off, but more importantly, he didn’t fear the risk.

“There’s a tremendous bias against taking risks. Everyone is trying to optimize their ass-covering.” —Elon Musk

I believe that when you lose attachment to possessions and pomp you gain a superpower: Having nothing to lose. You can go for broke and nobody can stop you. Your ass is exposed and you’re not worried about it.

Look at risk differently

People worry about the risk of their plane crashing disproportionate to what the statistics tell us. They know they’re more likely to die in a car crash, yet they happily drive their car multiple times per day without worry.

Everything changes when your mindset shifts from looking at the downside of a business decision to looking at the upside and being okay if it fails.

A lot of people focus on the risk. Entrepreneurs look at whether the upside more than makes up for the downside. And they also look at the absolute worst that can happen, what the likelihood of that failure is, and any strategies they can deploy to hedge their bets and minimize the downside.

I’m writing a book to help entrepreneurs push through struggles in their business and personal lives to come out on top. If you enjoyed this article I’d appreciate you giving it some claps and signing up to get my book when it comes out.