Risk in Entrepreneurship: Everything You Need to Know

Taking risks is a part of daily life — driving a car, going on a trip abroad, opting for the gas-station sushi on that one road trip years ago (no judgment, we’ve all been there). 

An entrepreneur’s life, however, is not for the faint of heart. Building a business from the ground up takes guts. Whether you’re years into scaling your startup or dabbling with the idea of being your own boss, use this guide to ensure you’re prepared to navigate the risks of entrepreneurship. 

What is risk-taking in entrepreneurship?

While the word “risk” might make you think of chaos and unpredictability, in the context of entrepreneurship, risk-taking is a calculated and measured byproduct of starting a business. 

Risk-taking in entrepreneurship is the process of identifying, evaluating, mitigating, and trying out potential opportunities and strategies that may help you build or grow your business but could also lead to personal or professional loss. 

Different types of risk in entrepreneurship

According to the Harvard Business Review, business risks are bucketed into three categories: preventable risks, strategy risks, and external risks. 

Preventable risks stem from within an organization (whether a team of one or 1k), are entirely controllable, and should be avoided at all costs. Examples of preventable risks include lying to potential investors, ignoring environmental regulations, or engaging in illegal business activity. 

Strategy risks are beneficial and necessary in entrepreneurship. These risks arise from strategic opportunities that show potential for return on investment. Some examples include launching a new product line, expanding into another country, or bringing on a new investor. 

The final category is external risks. As the name suggests, these risks come from beyond your business operations and are outside of your control. For example, you’ll likely have little to no influence over current economic conditions or states of emergency, but they may impact the success of your ventures.  

Importance of risk-taking in entrepreneurship

A 2017 study at Harvard Business School confirmed what many suspected: A risk-taking personality is a precursor for a successful startup. 

While those who naturally run headfirst toward the unknown are more likely to explore entrepreneurship, anyone can get comfortable with taking bold yet well-reasoned risks. There are some clear benefits to taking intentional risks when starting or scaling a business, including: 

1. Getting the first-mover advantage 
2. Learning quickly from your wins (and failures) 
3. Expanding your experimental mindset 
4. Building skills in risk identification and management
5. Becoming adaptable to change 

Successful businesses need to continuously evolve and experiment. When it comes down to it, entrepreneurs might as well call themselves Professional Risk-Takers. 

Risk-taking in entrepreneurship examples

Turning a side hustle into a full-time career 

One of the first questions every aspiring entrepreneur will ask themselves is: “When will I be ready to turn my passion projects into a startup?” Trying out your business as a side hustle can be smart because it minimizes the risks of testing product-market fit and finding your first customers. 

But once you’ve built a proof of concept and generated some revenue, it might be time to quit the day job and dedicate yourself full time to your venture. 

For David Khim, co-founder of content marketing agency Omniscient Digital, the decision to launch his business in June 2022 was made even more difficult due to market conditions. 

“This appeared to be a risky time to jump in full time because we focus on services for B2B software companies, which were getting hit hard by the market and seeing layoffs across the board. We wondered if clients would cut us as part of the cost-cutting exercise. We wondered if these software companies would still be open to investing in working with agencies,” says Khim.

“We wonder if we’d be able to get a business loan if we were in trouble. We wondered if the business didn’t work, would we be able to get new jobs?” 

But the founders had already built the business on the side for three years, and therefore were confident in their company’s ability to get clients, service them, and maintain a healthy net profit margin.

A tip for handling this transition: Before you jump ship, have a solid business plan in place. There are plenty of business plan templates online that you can borrow, but think critically about your financial performance and exit plan. 

Use the revenue figures from your side hustle, and model financial projections to see if it’s feasible to take your company full time. And while it might sound pessimistic, consider what you’ll do if your startup goes bust. Baking in an exit strategy with performance indicators and a timeline will prepare you for the worst-case scenario. 

Hiring your first employee 

Depending on your business model, hiring your first employee can come with a variety of risks. First, there are the preventable risks of making sure you follow the mandatory hiring process to comply with the law. 

More important, there are strategic and external risks involved. From the strategic angle, you’re taking on the responsibility for your employees’ livelihood, and adding to your business expenses. Ensure your business is set up to sustain employment by taking a critical look at its financial performance and operations.

And try as you might to hire the right person for the job, you still bear the external risks that the candidate simply isn’t a match in the long run. 

However, the risks can result in rich payoffs. Take Beth Kennedy, founder of marketing agency SATT.co. By August 2021, she knew it was time to leave her job and pursue freelancing full time. In her first five months, she quickly went from having one client to five clients. Her life was consumed with work.

“I originally left my 9-to-5 for more freedom, and somehow I traded the 9-to-5 for a 24/7 work life. It was time to hire my first full-time employee. That’s when it all felt real: ‘What if this all disappears tomorrow? How can I be responsible for another person?’” says Kennedy. 

She evaluated the risk of hiring her first employee and knew that her business had enough funds in the bank to cover an employee’s salary for five months — then took the leap. 

“I hired my first full-time marketing coordinator in January [2022] — she’s a dream come true. Not only has my business continued to grow since then, but both my employee and I are able to have flexibility in our schedules, leaving time for fun, creativity, and life.”

Raising capital for your venture 

If there’s anything that’ll up the ante for entrepreneurs, it’s raising capital. Whether you take out a line of credit, fundraise through a business accelerator, or borrow some money from Uncle Bob’s savings, the stakes to succeed become higher when you take on more cash. 

There are many risks to consider when raising capital. For example, a failed business no longer just affects you; it might result in steep losses for your investors. On the other hand, if you give away too much equity to raise funds, you could lose majority ownership and control of your business. 

Despite the potential pitfalls, raising capital is a necessary component for many startups. Just make sure to do your due diligence so that you’re not taking on more risk than you and your business can tolerate. 

How to improve risk-taking in entrepreneurship

Natural risk-takers, meticulous planners, and folks in between rejoice: Everyone can improve their risk-taking mindset. Use these tips to change the way you think about risk to improve the odds of success. 

Use a risk-assessment framework 

Consider using the National Institute of Standards and Technology’s framework for risk management. This government agency promotes American innovation and industrial competitiveness, but you can apply this handy framework to any type of risk you encounter as an entrepreneur. 

1. Identify the risks that your company may face. 
2. Categorize the risks based on their characteristics (e.g., product risk, market risk, etc.). and potential impact. 
3. Select the potential methods used to mitigate the risk (e.g., bringing on a CTO, releasing a prototype to your target audience, etc.).
4. Implement and test the potential mitigation method(s). 
5. Assess the suitability of the mitigation methods. 
6. Authorize the decision to take on the risk. 
7. Monitor performance over time. 

Following this systematic process for reviewing and evaluating risks will help you make smart decisions about which chances to take and ensure that you have mitigation techniques in place. 

Start with smaller risks 

Not all risks are created equal. For instance, deciding to explore your business ideas as a side hustle involves less risk than hiring your first full-time employee. 

If you’re just starting out as an entrepreneur or haven’t taken many business risks in the past, consider prioritizing smaller opportunities that are easier or less costly to explore. This way, you’ll be able to test and learn more frequently, without the fear of significant loss. 

Build a culture that praises smart risk-taking 

Company culture isn’t just for established businesses — entrepreneurs should be intentional about what behaviors and priorities are most important for their company from the start.

Consider including smart risk-taking as a pillar of your culture, even if you’re a solopreneur. Encourage everyone (including yourself) to take calculated and well-reasoned chances. Successes and failures alike should be praised, as long as they follow your ground rules for a worthy risk to take.

Risk-bearing in entrepreneurship

Not every shot is going to hit the mark. Even the most well-researched and promising opportunities might not go exactly to plan. That’s where risk-bearing comes in. 

Risk-bearing in entrepreneurship means taking responsibility for risks taken and accepting potential losses. 

As an entrepreneur, you are the first line of defense for bearing risks. Depending on the size of your business and the magnitude of risks borne, others could be impacted, including investors, employees, and customers. It’s no wonder that stress management can be a challenge for business owners. 

But don’t worry — you’re not defenseless should a business opportunity go wrong. Business insurance can help protect your company from external risks, such as the theft of company property. 

Additionally, your business structure can provide an additional layer of protection from personal loss. For example, starting an LLC can prevent your personal assets from being seized should your company be sued. 

Bearing risk comes with the territory of being an entrepreneur. But with the right tools in place, you’ll be set up to identify, evaluate, and take on risks like a pro. 

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