12
Feb
2014

Risk Is Not A Four-letter Word

What do you think of when you hear the word risk? It’s probably not good, is it? The first two entries in the Merriam-Webster Dictionary for risk are ‘(1) possibility of loss or injury, or (2) someone or something that creates or suggests a hazard.’ But, the little word risk does not deserve its gloomy reputation.

In statistical terms, risk is the degree of uncertainty between an expected outcome and the actual outcome. Modern business definitions of risk take into account the possibility of a positive outcome. The ISO 31000 (2009) Guide defines risk as the ‘effect of uncertainty on objectives.’

The higher the uncertainty, the higher the risk. Events with low uncertainty, like snow at higher latitudes in January, have low risk. So that’s why you’ll find a thriving ski resort industry in the Northeast and Rocky Mountains. Events with high uncertainty, like it snowing in Florida, have high risk. Ever ski in Orlando?

All businesses face risks or uncertainty. But start-ups and new business ventures tend to get labeled as risky in big red letters. Tell your family and friends that you’re starting a business and the responses will likely resemble one of the following: “Isn’t that risky?” “What happens if it fails?” These well-meaning glass half empty folks only think in terms of negative outcomes. Why? No, they are not pessimists. They don’t know enough about your venture to properly assess the degree of uncertainty of you achieving your goals.

The key to managing risk is information. Information is the sword against which uncertainty falls. Merriam-Webster defines information as a ‘knowledge obtained from investigation, study, or instruction.’ Investor Warren Buffett has been quoted as saying “Risk comes from not knowing what you’re doing.”

Entrepreneurs and investors approach risk by continually gathering and using as much information as possible to make the best decisions possible. My company, Dangos, builds mobile applications for travel and tourism. When faced with the decision of which market niche to pursue first, our choices were: Large Parks, Theme Parks or Large Events. Sometimes if felt like trying to guess under which cup the magic ball was hidden. We eliminated Large Events, like music festivals, as our first venture. Why? I, and no one else I’ve met yet, know enough about the industry. I don’t have enough information. We considered the next two options. OK, time to get more information. Which option will allow us to generate revenue quicker? Which option is sustainable on its own? Armed with more information, we decided on a path and are committed to that niche for the next year.

There are some types of risk that simply do not allow for information gathering: changes in the labor pool, political instability, the availability of raw materials and/or natural disasters. Wise entrepreneurs either accept risk or attempt to avoid it altogether.

While risk is certainly an important factor to consider in any business venture, it’s important to understand what risk truly is: the difference between what you think will happen and what actually happens.

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