There is a single underrated, under-examined quality quietly but powerfully defining the arc of your career and the shape of your life. It underpins your educational path, your interpersonal relationships, your professional pursuits, and you’re net worth. It influences your choices large and small, from what you’ll order for dinner tonight to when you’ll have your first child, from the outfit you chose from your closet this morning to the career you are — or aren’t — pursuing.
This trait determines both the texture and the speed of your days, and in high doses, it is the fundamental ingredient that unites all successful entrepreneurs: risk tolerance.
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without a high metabolism
Matched with resilience, intelligence, and a dose of luck, high risk tolerance can lead you to greatness. At the same time, low risk tolerance can keep you stuck in patterns that will leave you unfulfilled, as you watch others take the leaps and dives you dream of from afar. As an entrepreneur and business coach I have watched the paths of countless individuals be shaped by their personal levels of risk tolerance, and I have seen how necessary a high tolerance for risk is to entrepreneurial success. Of course, risk tolerance is not a fixed quality: it can be developed and harnessed with intention.
"if you are serious about building your career
as an entrepreneur, you can and must
take active measures to increase
your risk tolerance and grow
comfortable with the
precocity and unpredictability
of the path you have chosen".
I have also been surprised by the ways in which changes in circumstance can strengthen, reduce, or simply expose our true tolerance for risk. Counterintuitively, I have seen dozens of new parents decide that it’s time to take the plunge and start their own company or join an early-stage, high-risk start-up. I’ve also seen individuals perfectly positioned for a big career change weaken their resolve at the last moment. Often, it is difficult to know our true risk tolerance levels until we are put under pressure: like an egg in boiling water, our resolve can harden, or it can crack.
Our tolerance for risk is often influenced by our formative years, and whether or not those around us typically rewarded or discouraged risk-taking. But if you are serious about building your career as an entrepreneur, you can and must take active measures to increase your risk tolerance and grow comfortable with the precocity and unpredictability of the path you have chosen.
Studies of the entrepreneurial personality have shown that along with innovativeness, proactiveness, self-efficacy, and a need for achievement, entrepreneurs are individuals who, when compared with their peers, cope better with stress, and respond more quickly to problems, and with fewer inhibitions. This willingness to dive in, and ability to thrive under pressure, are fundamental characteristics of a high tolerance for risk. Though recent years have seen the entrepreneurial path become somewhat more mainstream, it is still, on the ground, a path marked by uncertainty and instability. That is the nature of creating something truly new. Often, individuals who think they’d make excellent entrepreneurs turn out to be lousy ones not for lack of intelligence or skills or networks, but for sheer lack of risk tolerance once the going got tough. In a widely-cited study conducted by Charles Holt and Susan Laury for the American Economic Review, individuals were asked to participate in low-stakes and high-stakes lotteries. Some participants were asked to play with real money; others were asked to play only hypothetically. In each option, participants were offered a choice between risky and less risky actions.
When faced with hypothetical high-stakes opportunities, most participants chose to take the less risky action. When faced with real, money-bearing high-stakes opportunities, even more participants chose the less risky path. In short, most individuals back down when faced with a high-risk situation in which both gains and losses might be large.
Entrepreneurs are the rare breed who not only hold steady in such high-stakes scenarios, but seek such opportunities out. Starting a business or joining an early-stage start-up means risking your social status, your income, and much of your free time; it means risking years of loneliness and years without proper support. It means putting your energy, your financial standing, your social capital, and often years of your life on the line for a high-risk, high-reward, high-failure path.
A 2010 study also in the American Economic Review found that in three-fourths of cases, entrepreneurs made almost no money off of their equity. Average returns also remained quite low. It is no secret that the vast majority of start-ups fail; but most do not know just how daunting those statistics can be when you’re faced with living them.
It is easy to dream, from a distance, that you will be the one to succeed; it is harder to stay steady in light of the odds when you’re finally on the diving board, faced with taking the plunge. Of course, a high risk threshold will only get you so far. Once you’ve taken the risk of beginning the entrepreneurial path, as a founder or early-stage employee, a second quality comes into focus: your ability to process risk, as you metabolise it. Processing risk means working hard to mitigate unnecessary instability and breaking down your company’s [risks ] into manageable components. And when mitigation is not possible, successful entrepreneurs develop strategies to manage risk over time. Steve Jobs, perhaps the most visionary and admired entrepreneur of all time, was a master of managing risk: from his early failures he learned what risks were worth taking, and which were not; he learned when to trust his risk-taking instinct and when to reign it in. Jobs’ time at Apple was marked by large risks and even larger innovation; in the years following his firing, the company experienced an ‘innovation discount’ of 31%. After his return, the company’s innovation premium grew to 52%. Investors are looking for companies led by individuals who are not only risk tolerant but risk-savvy, capable of judging when a risk is worth taking and when a risk is needless while simultaneously managing the stress latent in any high-risk enterprise.
For some, the stress, not the risk, is what cuts their business short: as it grows, a company’s success is dependent on its team’s ability to cope well under pressure, tackling the necessary tasks even in the most stressful, doubt-filled times. For those who have that metabolism for risk and stress, the rewards, when they come, are substantial. This is why founders and early-stage employees — the ones who take the biggest leaps, and risk the most — are typically given the most equity. Because risk tolerance, so central to our lives, is often taken for granted, ignored, or simply not cultivated, there are lucrative, challenging, and fulfilling opportunities for those who know how and when to cope with high levels of risk. This path is rewarding because so few choose to take it.
The vast majority of individuals, skilled and driven as they are, have mediocre risk thresholds: if everyone had a high tolerance and appetite for risk, entrepreneurship would not be so lucrative and rewarding. (There would also be far fewer doctors, lawyers, professors, and bankers; a low tolerance for risk doesn’t mean a person is doomed to failure. More often than not, low risk tolerance leads individuals to enter secure and profitable career paths; they just don’t become entrepreneurs.)
There is an intuitive art to risk tolerance and risk management: some are born with that intuition, and the rest of us work at it day to day. It is that first big plunge — the decision to leave a more stable path, and begin forging your own business and bringing a brand-new idea to life — that throws off the vast majority of people. But those who weather that risk with grace and take the dive often find that the sheer act of embracing a large risk makes subsequent risks easier to swallow. I once mentored an aspiring entrepreneur who for years had dreamed of starting her own online shop for an in-demand product. This was in the early years of the internet, when few if any such online businesses existed. Though this aspiring entrepreneur had all the know-how, intelligence, and verve to make her idea a reality, it took her years to gain the courage to stomach the risk of leaving her stable, albeit miserable, job. When I finally asked her why she kept delaying, she replied, “Because if I fail, I will have no more dreams left.” To her, postponing her dream was a way of preserving it: her fear of failure meant she preferred the fantasy of being an entrepreneur to the reality of risking so much for so uncertain a reward. But when she finally realised the irony and absurdity of denying herself her biggest dream, she built up her risk tolerance, left her unhappy job, and started her company. Instead of finding herself with “no dreams left,” she soon found herself at the centre of a challenging but thriving business.
At the end of the day, when you’ve embraced the entrepreneurial mindset, what seems like a large, unfathomable risk to others will seem to you like a savvy, strategic play.
If you’re at the early stages of building your own company, you’ve taken that leap, and you know how it goes. If you’re still climbing the diving board, wondering if you’ve got it in you: take a step up to the edge, and take a bet on yourself. Your tolerance for risk might surprise you.
Thrive have a network of successful entrepreneurs and business owners who are on hand to discuss your idea, plan, growth strategy. Alternatively if you’re seeking funding in 2019 Thrive will be working with established funding consultants to help you seek the initial investment to get your idea off the ground.