Apart from having an optimistic mind set as we discussed last time, it is essential to assess your tolerance of risk level before you start your venture.
In general there are three ways to source startup capital:
1) Personal Money
2) Bank Loan
3) Investors (other people’s money)
Here we discuss the risk tolerance in detail of the above 3 options based on the assumption that the entrepreneur is inexperienced and is about to launch his/her FIRST venture. (For Experienced entrepreneur, level of risk-taking is different.)
Option 1) Personal Money
No one want to lose money. When we are starting a new business, we of course are full of confidence that the idea will work and earn a good profit (otherwise no one will start any business in the first place!). Yet even though you are confident, you should still assess your risk beforehand and run the case based on the worst case scenario – Bankruptcy, which means you will run the risk of losing all of your invested capital. Imagine how you will handle this situation and how you would feel. If you still feel ok, then please go ahead! However if the idea fills you with anxiety and dread, perhaps the venture is too risky for you and you will need to find a way to manage the risk.
Investing more than your risk tolerance, you will constantly live in fear and feel extremely stressful. Without a strong mindset, it will be very hard (and not healthy) to run a business. Think about it – do you want to spend the next 3-5 years living in extreme stress everyday? I also doubt if you can handle challenges well and make sound business decision when you are very stressful and will surly lower your success rate!
Option 2) Bank Loan
If you are taking a loan, it seems that the risk is lower but you have to ensure that your business will be able to generate enough cash flow to cover the interest payments and return the principal. Without a sustainable cashflow, you will not be able to pay back the loan and eventually the business will fail. You have probably heard of cases when people borrowed too much and exceed what the business could support. Without a positive cashflow, even if your business works, it still will not be profitable. In extreme cases some even choose to end their lives as they are unable to escape the loan cycle and find a solution. Personally I think this is the most stressful case among the three options.
Option 3) Investors
You are giving out equity in exchange of startup capital, ie. you have shared your risk with other people. However not everyone are comfortable on investing with other people’s money especially if they are your family and friends. For me, I feel 100x more stressful than investing with my own money as I don’t mind losing my own but will dread very much losing my friends’ money. I would say it is a different kind of stress. It is a personal stress as you run your business with the risk of losing your reputation, family relations and friendship. So think twice and assess if you can take that risk.
The key to success as an entrepreneur is not necessarily a high risk tolerance in itself. It should be one’s ability to manage risk and flexibly handle challenges. The amount of capital risk you are taking should correlate with the risk of your business idea. Last but not least, if you have spouse or children, consider how they will tolerate the risk. Family support is crucial to an entrepreneur’s success.
So does it mean you cannot be an entrepreneur if you have a low risk tolerance? Definitely not! Instead, you should consider to take on a partner to share the risk with you or take a smaller step. For me, I decided to open a small take-away shop as my first business venture as this was the risk level I could manage back then. Now I am able to take on a larger risk and run a 50-seat full service restaurant as I have gained much more experience. So just take one step at a time. Start with something you are comfortable with, the chance of success will also increase!