Growth

How five entrepreneurs balance risk and reward

- June 5, 2024 7 MIN READ

 

In the landscape of entrepreneurship, success often hinges on the delicate balance between risk and reward. To embark on the journey of building a business from the ground up is to embrace uncertainty and the inevitability of experiencing some failures along the way, writes Anthony Lam, Entrepreneurs’ Organization Melbourne Board Member.

This is largely the essence of entrepreneurship, embracing risk not as a deterrent, but as a catalyst for growth and evolution. Entrepreneurs are experts in calculated decision-making, seizing opportunities and seeing potential where others see obstacles.

For this article, I spoke to five members of Entrepreneurs’ Organization (EO) in Australia, a global, peer-to-peer network of more than 18,000+ influential business owners with 220 chapters in 75+ countries to explore how they navigate the delicate balance between risk and reward.

We unveil the psychological drivers underpinning their appetite for risk, strategies they employ to mitigate risk and the contingencies planned for any setbacks.


sam bass headshot

Sam Bass, owner of Business For Sale

  1. Sam Bass, owner of Business For Sale and Entrepreneurs’ Organization Queensland Member

“Balancing risk and reward is fundamental in navigating the unpredictable waters of entrepreneurship. It’s what makes being an entrepreneur fun and scary at the same time.

The art lies in making calculated decisions where the potential upside significantly outweighs the downside, yet always being prepared for the possibility that things may not go as planned.
A principle I often lean on is the concept of “affordable loss.” Instead of fixating on the potential gains, I evaluate what I can afford to lose.
This mindset shift is powerful – it encourages taking risks that are measured and manageable so that you can grow your business without risking losing it all.
Take, for example, the decision to hire new talent. This represents a clear risk-reward scenario.
I hired a General Manager to help run my business and it dipped into short-term profits. When I faced this dilemma, I assessed not just the financial cost, but the opportunity cost of not expanding the team. By focusing on how much I was willing to invest (and potentially lose) for a chance at a greater end product, I made the decision to hire. This didn’t just expand our capabilities; it prepared us for more growth, attracting more talent and investment down the line.
The reward ended up outweighing the risk, but the risk was mitigated as I can always restructure the staff at the company whilst keeping it profitable.

Costa Vasili, Founder and CEO of Ethnolink

  1. Costa Vasili, Founder and CEO of Ethnolink and Entrepreneurs’ Organization Melbourne member

“In his renowned book ‘Great By Choice’, Jim Collins introduces the concept of ‘firing bullets, then cannonballs’. This strategy involves undertaking low-cost, low-risk experiments to discover viable paths before committing significant resources to a ‘big bet’.

This philosophy underpins my approach at Ethnolink. Using this concept, we calibrate our strategic focus with minimal risk.


In recent years, we’ve employed this tactic to refine our strategic direction. Our ‘bullets’ have included launching a tailored and niche interpreting service, geographic expansion into new interstate markets, and broadening our service offering. This was a very deliberate approach that we took, and we chose not to overinvest resources into all three at the early stages. These initiatives were invaluable in allowing us to gather data and learn from our experiences.

These exploratory initiatives, in particular, have enabled us to identify and robustly pursue the most promising avenue, streamlining our efforts towards areas with proven potential. This method has been instrumental in focusing on what truly works for Ethnolink, leading to significant growth.

From my perspective, ‘betting the house’ on an untested idea is a high-risk strategy that often leads to problems. I’ve observed many entrepreneurs gain overconfidence and a sense of invincibility. Mitigating risks through the ‘fire bullets, then cannonballs’ strategy helps ensure the organisation’s long-term protection.

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Shivani Gupta, CEO and Founder of Leadership Engineers

  1. Shivani Gupta, CEO and Founder of Leadership Engineers and Entrepreneurs’ Organization Queensland member

Any risk requires a return on investment or ROI. When I wanted to scale my wellness business which was a brick and mortar outlet, the investment was going be over a million dollars. I calculated the best case, worse case and realistic case for a return on investment over several years, to decide whether or not I could bear the risk for that period.  I also check in around my mental wellness and whether with other things going on in my life, if I can handle the stress that goes with that risk, as the cost of failure is rarely just monetary.

In the past, I’ve fallen into the trap of only assessing the monetary risks, ending up with a heavy weight on my shoulders. Today, I always check in with myself on both, and will let an opportunity pass if it isn’t making sense for both.

I also utilise the expertise of my peer network, Entrepreneur’s Organization (EO). When I’ve started or exited a business, I always run it by a brains trust of my fellow entrepreneurs who have also recently launched or exited a business. In EO we don’t give advice, rather, we share examples and stories from our own experiences of what has and hasn’t worked, so that the person with the challenge (e.g. exiting a business) can take what is relevant to their own situation and leave the rest.

Dave Fastuca

Dave Fastuca, Growth Forum co-founder and CMO.

  1. David Fastuca, CEO and Co-founder of io and Entrepreneurs’ Organization Melbourne Member

Reflecting on my journey with Locomote and Growth Forum, I realise the significance of balancing risks and rewards.
With guidance from a strong network, here’s how I approach this balance:
1. Research: I start by gathering information about market trends, customer needs, and the competitive landscape. This knowledge forms the foundation of my decisions. This may seem basic, but we often overlook these things and leave it to “assumption”, and we know how that saying goes about making assumptions…
2. Risks: I carefully consider the potential downsides of each decision. What’s the worst that could happen, and how likely is it? I always have a plan B in place.
3. Reward: I identify the potential benefits of my decisions. How will this move the needle for my business? I look for tangible outcomes like revenue growth, market share expansion, or increased brand recognition.
4. Decisions: With all the data at hand, I make choices that align with my business objectives and my appetite for risk.
5. Monitor: After making a decision, I monitor its impact closely. I’m always ready to pivot and make necessary adjustments to stay on track with my goals.

In business, as in life, it’s about making calculated moves. It’s about not being afraid to take a leap when you’ve done your homework and you know the net is there.

Christina Gerakiteys

  1. Christina Gerakiteys, Founder and CEO of UtopiaX and Entrepreneurs’ Organization Sydney member

We write Innovation Strategies for organisations, both large and small. Part of the process involves asking the organisation to devise a risk and reward strategy that is unique to the organisation. There is no one-size-fits-all answer. The brave, bold and most innovative organisations, write their own playbooks.

Writing a Risk and Reward strategy involves creating an Appetite for Risk matrix. This is something commonly undertaken by boards, not traditionally by the executives or managers of the organisations themselves. This process involves a commitment to resources, to personnel and most importantly to psychological safety around failure.

How do we balance Risk and Reward? By practising what we preach. We set limits. We resource a project. We know as entrepreneurs that perseverance and persistence are crucial factors to success. And testing a product has become easier and doesn’t need to chew up all the financial resources.

During a visit to a Boston café while at the Front End of Innovation Conference, I encountered a unique product testing opportunity. A gentleman offered to buy my coffee in exchange for assistance with testing a family bank’s new website y-frame, unknowingly tapping into my passion for user experience. Tasked with finding a picture from a card on the y-frame sketch within 30 seconds, I failed due to there being two tab sections. Despite this, he bought my coffee. It was a win-win, with the café benefitting from increased business, while the bank directly engaged its target market. Overall, this café encounter exemplified a cost-effective and community-oriented approach to product testing.
This was a great example of a business writing its own Playbook on approach to Risk and Reward.

Whilst entrepreneurs often have a higher appetite for risk than most, they are employing a variety of strategies to mitigate the risks, both monetary and psychological.

From embracing the concept of ‘affordable loss,’ to the gradual risk-taking strategy of ‘firing bullets, then cannon balls,’ or valuing research over assumption and closely monitoring results with readiness to pivot, each risk is highly calculated.

Entrepreneurs who embrace these methods not only enhance their chances of success but also cultivate resilience in the face of uncertainty, paving the way for sustainable growth and innovation in the ever-evolving landscape of business.


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