How much risk can you take?

6 min read

19 June 2012

Businesses need to take risks to grow and so, too, do business owners and entrepreneurs. The important question to you, therefore, is: how much?

I listened with great interest to the Real Business debate at the Investec Entrepreneurs’ Summit last week, where the motion was “Too many British businesses are happy merely to survive, rather than take risks and grow”.

Whilst those against the motion – Better Capital’s Jon Moulton and Wonga founder Errol Damelin – just won the debate, I was amazed there was no mention of the subjective, very personal nature of individual risk tolerance amongst businesspeople and entrepreneurs. The assertion that businesses are prepared to take risk was accepted, but it was not discussed how much risk they personally are willing to take, how they assess it and whether there is a link between the level of risk and success.

Most entrepreneurs I know would not regard themselves as high risk-takers. Sure, they take risks all the time, but in their minds this is not roulette with a binary outcome; it’s a question of a range of outcomes. For the more successful ones, it’s an approach to mitigate downside risk where possible.

High risk does not necessarily equal high returns. What is essential is a high level of conviction and self-belief, particularly when everybody around you is saying that what you are trying to achieve is impossible. That means that decisions backed by a degree of emotion are necessary. In contrast to this, I have seen people try and fail where they refused to let the facts get in the way of their judgment. Make no mistake, the facts do matter.

Even if these entrepreneurs do not see themselves as taking risk, it became clear in the Entrepreneurs’ Summit “Management matters” panel that a majority of the audience felt that their team was under-performing, but only a minority were prepared to do anything about it. Was such inertia down to sheer laziness or, more likely, a concern over the risk of the outcome? 

I spoke to a number of delegates who were nervous about equity dilution from taking on finance for growth, and even the risk of taking on new staff. Fear of failure is still holding too many people back, although most recognise that failure often gives us the learning experiences we need to succeed.

Some time ago I heard Sir Philip Green, who had setbacks earlier in his career, say that when he bought BHS, others thought it was a high-risk deal – but his assessment of the risk was that it was not.

In the last session at the Summit we listened to an exceptional, entertaining and highly inspirational keynote presentation by Lloyd Dorfman, who founded Travelex in the midst of an economic downturn. Along the way he took what appeared to be some major risks, gambling his whole business. Does risk tolerance reduces as we get older, particularly if we are successful? In youth, are we often more likely to be fuelled by burning ambition, the “confidence of ignorance” and less to lose? Given the opportunity, I would have liked to ask Lloyd if his risk tolerance was lower now than when he started.

It feels counter-intuitive but many people seem to become more risk-averse as they get older and wiser. Jon Moulton’s view, supporting his position against the motion, is that there is risk all around us right now.

My position is that entrepreneurs have to take on more risk than most to have a chance of real success, but that they don’t need to gamble. If there is nothing ventured, there is nothing gained. The current economic uncertainty combined with the accessibility of new technology is creating a whole new generation of entrepreneurs who are spotting market opportunities that just weren’t there before.

As the CBI Future Champions report shows, the “gazelles” – a small number of high-performing mid-sized businesses – are the innovators and job creators that will get this country moving again, not the politicians or the multinationals. If we are ever going to make Britain great again, then our cultural attitude to both risk and failure must change as must our willingness to celebrate success. We can’t rely on the government or the banks – so it is down to UK business and its entrepreneurial community to share experiences, knowledge and wherever possible provide the funding for growth.

The Real Business Hot 100 is evidence of what is happening out there for a few. We just need more of them – and who wouldn’t want to be one? My mantra is: “vision without action is hallucination”.

If you want to achieve faster growth rather than just survive, it must be worth asking yourself:

  1. What is my risk tolerance?
  2. What, if anything, is holding me back?

In this global economy we have no choice. Both risk and opportunity are all around us.

Martin Leuw is a serial entrepreneur and former CEO of IRIS, UK’s largest private software house.