Startup Founders Must Understand Their Risk Tolerance

Founders are facing a risky world. In order to navigate it, you need to understand how you prefer to handle the challenges you face.

Written by Ben Jennings
Published on Apr. 19, 2023
Startup Founders Must Understand Their Risk Tolerance
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This is a challenging time for startups and their founders. According to Crunchbase News, venture funding for the third quarter of 2022 totaled $81 billion, down from $90 billion (53 percent) year-over-year and by $40 billion (33 percent) quarter-over-quarter. This reduction in funding is due to economic instability across the U.S. as businesses began to prepare for a looming recession. 

Combining this with inflation in the U.S. hitting 7.1 percent in November of 2022, there is a lot more uncertainty for startups in today’s landscape, compounded by the day-to-day risks that go along with driving any entrepreneurial endeavor. As a result, founders are navigating new and emerging risks while they face difficult financial decisions in the year ahead. 

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Risk and the Startup Economy

If 2022 brought anything to businesses, it was a whole new risk landscape. From a potential recession and geopolitical instability, climate change, Supreme Court rulings, and political unrest, business leaders have been forced to look at how they conduct everyday business differently. The pressure on human capital and the additional focus on fiscal responsibility has caused business leaders to re-evaluate previously established plans. The complexity of these new risks has brought an unfamiliar level of concern and anxiety to founders as they are challenged to grow their businesses.

As chief revenue officer at Embroker, I have the privilege of speaking to founders every day, and each one has a different approach to risk. I put risk at the forefront of any conversation so they’re better able to acknowledge how different risks will impact their businesses today and moving forward. By learning how risk averse or risk prone founders are, they can understand their behaviors as a business owner and individual, as well as create strategies to keep their organizations successful. To help founders gain a better sense of their own risk profile, we recently launched a Risk Archetype Quiz

Regardless of where founders fall, it’s critical they know what kind of risk-taker they are in order to learn how to calculate business risk for their organization. Of course, it’s also important to understand which of these different risk archetypes they fall into. This helps to inform how they might approach mitigating and transferring risk in addition to the way they analyze and weigh their risks for growth-driven business decisions. 

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Risk Profiles for Founders

No startup — or startup founder — is the same. Our Risk Index report found that when asked directly about risk, 63 percent of founders consider themselves to be “risk-averse.” An even greater majority, 65 percent, also admit that risk is a necessary part of doing business and growing.

With Embroker’s Risk Archetype Quiz, our team found that there are many different profiles that encapsulate different founder archetypes, ranging from the seemingly fearless to the most risk-averse, conservative mindsets: 

6 Risk Profiles for Startup Founders

  • The Rebels: Not afraid of risk and never will be. This is likely not their first startup.
  • The Gamblers: Risk means opportunity and they look for it on a regular basis. It is how they grow their business.
  • The Researchers: Expect and prepare for risk. Risk is inevitable and they know what the consequences are and plan for any risks that may come their way.
  • The Sages: Taking on risk is a balancing act. Not afraid to take on risks but they need to have an adequate response should a risk occur.
  • Status Quos: Don’t know yet as they’re a first-time founder. Want to grow but don’t know if they’re prepared to handle all these risks.
  • The Protectors: Stay away from risk as much as possible.

Because each startup founder is different, the sooner they are able to understand their individual risk profile, the better it is for their business. Rebels may be more willing to take bigger risks with their businesses than Sages, who require more preparation and tend to only take calculated risks. 

One good example is that as a Gambler, it may be important to surround yourself with steady ships. A staff that can rationally consider and help you take calculated risks is infinitely valuable to a Gambler. While they might seem like they are holding you back, don’t take them for granted. 

As a Researcher, you’re able to understand that knowledge and information are the most effective tools for managing risks. You should surround yourself with a team that understands the rules and knows the consequences of any risk-taking decisions that are made. Not every challenge that a business will face can be anticipated by research, and in those situations, it is important to work with people who thrive in riskier environments. 

In an ever-changing risk landscape, there is no better time than now for founders to look inside themselves and acknowledge what’s causing them stress and what kind of team members best balance out their tendencies. As founders enter 2023, it’s important for them to understand and embrace where they fall along this spectrum. This can help them learn how to balance both internal and external risks to strategically grow their business while protecting their bottom line, even as new and evolving risks surface. 

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