Risk Averse? More Harm than Good?

Career AdviceWorking Life

Is it better to be safe than sorry when making business decisions? Risk is the thing.

"Risk is a paralyzing concept for some people," said Rex K., CEO of asset-management software maker Asset Panda. "Everything in life entails risk - some of which we understand to be risky, and some of which we don't understand to be risky."

Risk aversion hurts the team:

• Employees get bored
• No innovation
• Growth stops
• Opportunities are missed
• Perspectives are missed

Kurzius, an entrepreneur, is all too familiar with the paralyzing effects of risk. A few years ago, shortly after launching his first venture - an IT staffing company - Kurzius felt "euphoric" at having actually started a company. However, instead of making decisions and growing the business, he doodled. "I created a logo and worked on letterhead instead of actually doing the things that would make my company successful," Kurzius said.

The reckoning arrived months later, when the fledgling business owner realized he had paid a lot of bills, but had no revenue. “I realized if I didn’t start bringing in revenue, there would be no business,” he said. “It was a flight or fight kind of thing.” Kurzius started calling clients and doing the things he needed to do to make money. He ran the company for 10 years and sold it to a bigger company in an all-cash transaction. “It was a really nice outcome,” he said.

What is risk?

"Risk is an inherent element of any business venture," said Jay Jung, founder and managing partner at Embarc Advisors, a strategic consulting company for startups and small businesses. He explained that some risk is calculated, meaning that it is a risk that you can control for and make a conscious risk-return tradeoff. Risk that you cannot control is often called luck. "Both play a big role in business," he said.

A person's appetite for risk can change over the course of their career. Jung was in his 20s when he started a tech-startup in 2003, right after an economical crash. It might not have been the best time, but he did it anyway. He wanted to gather experience and take the risk. He was willing to fail, and so he took that risk and worked through it.

After some time, it did fail and Jung grew more averse to risk, he said.

"I realized that in an effort to control my career and financial risk, I was trading off my happiness," Jung said.

Calculating risk

The two businesses have different approaches: Embarc was a new player in an established industry, so he had the luxury of slowly building a strong foundation, he said. With Evixar, a network solutions startup, "speed is key," he said. "You need to be first to market and continue to innovate."

"Remember that everything is a risk-return tradeoff," he said to his clients. "And if something looks too good to be true, it probably is."

Duggins, who is the chief risk officer at the fintech company Octane, defines risk as an event that is unexpected and causes harm.

When you assess risk, you consider potential outcomes: If the rewards for taking a risk are big, you're more likely to take it, but if the rewards are small, you're less likely to take the risk.

To calculate risk, Octane leadership multiplies the value of success by the likelihood of success and divides that by the cost of the project. This calculation yields a risk-adjusted product multiple of return, Dushane said.

How Risk Aversion Hurts a Team

Risk aversion can lead to procrastination, rejection of new ideas, and overthinking decisions. Risk aversion is more common than risk acceptance, according to a 2020 Harvard Business Review article. Instead of proposing new ideas, executives in large corporations often choose marginal improvements, cost-cutting, and ‘safe’ investments. According to the authors, corporate compensation packages tend to reward safety instead of risk, so managers are more likely to take the safe route to protect their careers.

Compt CEO Amy S, stated that managers who are "rather safe than sorry" with low-risk decisions are putting other factors at risk, such as employee happiness and revenue growth.

Slower Growth

In order to see growth in a company, entrepreneurs have to look to the future, be able to see potential problems, and be willing to take risks. "If you don't take risks, you won't progress," said Kurzius. "If something is going well, I believe we need to change it and make it better."

For example, Asset Panda started out as a company that assists consumers, not businesses, with insurance problems. Kurzius only concentrated on that market for a year, not going after the business-to-business market because he was worried it was too competitive and not the best use of Asset Panda's platform. "Once we understood how to attack that market, it basically destroyed the idea of failure," he said. "We should have done it sooner," he said.

“If something’s been working great and has been for years, my first thought is, we need to break it and fix it.”

Kurzius stated that being too risk-averse has led to leaving money on the table, as well as making poor financial decisions.

MISSED OPPORTUNITIES

Leaders who are too risk-averse will not spend the capital or hire the people they need to grow. “If you wait too long to spend money or go after a new market, you miss the window of opportunity,” said Spurling. "If you don't take risks, it can really stunt your growth," she said. "You have to find a balance."

An article reported that when Netflix co-founder Marc Randolph and other executives proposed that a large video rental company purchase them for $50 million, they were laughed out of the room. The video company is now bankrupt, and some say passing on the Netflix deal is the biggest reason why.

MISSED PERSPECTIVE

According to Spurling, sticking to safe hires and avoiding new trains of thought means missing out on other perspectives. “I used to be part of a team that was very analytical, with everyone thinking that way,” she said. “That made it difficult for us to work with creative types,” she added. Consequently, management avoided bringing in people who thought differently, either via perspective or the way they process information. Spurling believes that “you can’t just do everything analytically, you need creativity as well.”

STIFLED INNOVATION

If you're not failing, you're not experimenting enough. You need to be a little risky, without risk, you cannot innovate.

"I don't want my employees to sit in a little box and say, 'Okay, this is the way the box works and how it's always worked,'" he said. Companies may initially find success by sticking to tried-and-true methods, but over time, lack of innovation will lead to failure.

BORED EMPLOYEES

For 2022, Octane plans to launch into five new verticals. In order to make the process navigable and reduce risk, the teams have set incremental goals: Getting customer feedback, building a product, going into markets. By setting smaller goals, the company is able to see more quickly what isn't going to work, and it moves the teams working on those unsuccessful endeavors to projects that have more potential for success.

"In order to have happy teams, you must be willing to take risks and allow for growth opportunities."

The company successfully launched into three markets with a fourth on the way; however, the fifth turned out to be not a great fit for the company. Despite this, “teams working on that project had been relatively happy,” Dushane said. “There is no option to avoid risk and have happy teams because if you avoid risk, you’re avoiding opportunities for growth. And teams are never happy in an organization that’s stagnant.”

Jay Jung of Embarc agrees that risk is an exciting thing, especially for younger folks. He went on to say that "A company that does not take appropriate risk will find itself losing some of its most energetic and ambitious team members."

How to Encourage Risk Acceptance

How does it help a team to accept risks? Employees will feel excited, innovative and more brisk. Growth will be faster and more opportunities will be gained. These are three ways to encourage risk:

CELEBRATE FAILURE

If Octane does not succeed, it celebrates. The reason for this is because Duggins said that if they don't, it would send the message that failure and risk are not tolerable. Teams that pursue risky endeavors could become discouraged and think that their efforts aren't valuable. By examining and learning from failures, as well as applying successes to future projects, teams can stay happy and productive, he said.

BE TRANSPARENT

Kurzius often speaks to his employees about the importance of innovation and how failure can help lead to success. “I try to create a friendly environment where we can have open and honest discussions, and I usually end meetings by asking, ‘What worked and what didn’t?’” he said. He also publicly sets aggressive goals, which are bound to contain some degree of failure due to their size.

"Transparency like this encourages a culture of risk-acceptance and innovation," he said. "I often talk about the hamster wheel of success: You have an idea, you put it into action, it fails or you receive constructive feedback, you adapt, and then you succeed. That's how winning is done. It's not about being perfect--it's about getting back up every time you're not."

WATCH YOUR LANGUAGE

It's not uncommon for managers to use risk-averse language without thinking about it. For example, saying "no" to an idea immediately squashes any potential risk. Additionally, responding to a proposal with a slew of questions that likely don't have answers also douses the idea in risk-aversion. Amy S. of Compt refers to this as "throwing so many monkey wrenches into (an idea) that you end up with analysis paralysis."

Positive language can encourage people to take risks. For example, "yes and" is a phrase used by improv actors that encourages building on an idea.

It can be risky to move from being risk-averse to accepting risks. However, if you do take those steps, you may find yourself achieving what is said by the proverb: "Nothing ventured, nothing gained."