When it comes to business decisions, are you better safe than sorry? When in doubt, is “don’t” the smartest choice? Can you be too careful?
What we’re talking about here is risk.
“The concept of risk can be a paralyzing thing for some people,” said Rex Kurzius, CEO of asset-management software maker Asset Panda. “Everything in life is risky — some of it we understand to be risky, and some we don’t understand to be risky.”
5 Ways Risk Aversion Hurts a Team
- Bored employees
- Stifled innovation
- Stagnant growth
- Missed opportunities
- Missed perspectives
Kurzius, an entrepreneur, knows what it’s like to be paralyzed by risk. Years ago, in the few months after launching his first venture, an IT staffing company, Kurzius felt “euphoric” that he had actually started a company. Instead of making decisions and growing the business, though, 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 uncertainty, including the known and unknown,” said Jay Jung, founder and managing partner at Embarc Advisors, a strategic consulting company for startups and small businesses.
He explained further: Some risk is calculated, meaning it’s a risk you can control for and make a conscious risk-return tradeoff. Risk you can’t control is often called luck. “Both play a big role in business,” he said.
An appetite for risk can change over the course of a career. When Jung was in his 20s, he quit an internship at a giant consultancy to launch a network solutions startup. The year was 2003, right after the dot-com bust. While that might have not been an ideal time to start a tech company, Jung started it anyway, figuring that at the very least, he’d gain experience and learn a thing or two. “My view was that the worst-case scenario would be that I would fail. It was a risk I was willing to take.”
It did fail, and the experience made Jung more risk averse, he said.
The risk pendulum swung the other way after a few years in a safe, lucrative and wholly unsatisfying career at big investment banks. “I realized in an effort to control my career and financial risk I was trading off my happiness,” Jung said. With his wife’s emotional and financial support, Jung took a risk in starting Embarc so he could forge a career that fulfilled on all fronts.
How Do You Calculate Risk?
The two businesses are different: Embarc was a new player in an established industry, giving him the leisure of building a firm foundation slowly, he said. With Evixar, a network solutions startup, “speed is key,” he said. “You need to be first to market and continue to innovate.”
His reminder to clients: “Everything is a risk-return tradeoff, and if something looks too good to be true, it usually is,” he said.
“Everything is a risk-return tradeoff, and if something looks too good to be true, it usually is.”
Ray Duggins, chief risk officer at New York-based fintech company Octane, defines risk as an unexpected, detrimental event. “I go by the rule of ‘no surprises,’” said Duggins, who examines the risk potential of a decision’s every factor, from credit to market to talent, to make sure the company encounters no unexpected surprises.
Assessing risk means weighing potential outcomes: Big-bang rewards call for a higher acceptance of risk, while small rewards, not so much. “There’s always a high appetite for risk when you are small and having nothing to lose,” said Mike Dushane, chief product officer at Octane. “It’s hard to maintain when you are big and have more to lose.”
To calculate risk, Octane leadership multiples the value of success by the likelihood of success and divides that by the cost of the project. That calculation yields a risk-adjusted product multiple of return, Dushane said. In other words, the higher the chance of success, the lower the reward needs to be, but if the chance of success is low, the reward needs to be greater. Octane accepts a mix of risk, both high-reward and low-reward, across the business, he said.
How Risk Aversion Hurts a Team
Risk aversion takes on a life of its own in an organization. It shows up in procrastinating on decisions, overwhelming rejection of new ideas, overthinking decisions (sometimes called analysis paralysis), decisions made by committee and ideas flattened by an avalanche of questions, some relevant, some not.
Risk aversion, more than acceptance, is the norm in American business, posit the authors of a 2020 Harvard Business Review article. “In theory, companies create value for stakeholders by making risky investments,” the authors wrote. “In current practice, however, executives in large corporations are reluctant to propose and advocate for risky projects. They quash new ideas in favor of marginal improvements, cost-cutting, and ‘safe’ investments.”
Why? Corporate compensation packages tend to reward safety rather than risk, so managers take the safe route to protect their careers, the authors said.
Managers might be safer with low-risk decisions. “Rather safe than sorry” moves, however, put other factors at risk, ranging from employee happiness to revenue growth. “When you’ve got that aversion, it limits your ability to grow,” said Amy Spurling, founder and CEO of HR tech company Compt, based in Tampa, Florida.
Companies plateau when everything is working smoothly but hasn’t been changed in a while. All business people who seek company growth, not just entrepreneurs, have to live in the future, hone the ability to see around corners, and take risks for that future. “If you don’t, you end up in a situation where things don’t really move,” said Kurzius. “If something’s been working great and has been for years, my first thought is, we need to break it and fix it.”
An example: Asset Panda started life as a company that helps consumers, not businesses, with insurance issues. Kurzius focused solely on that market for a year, not going after the business-to-business market out of concerns that it was too competitive and was not the best use of Asset Panda’s platform. “Once we understood how to attack that market, it basically melted away the concept of failure,” he said. “We should have done it earlier,” 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.”
Over his career, Kurzius said that avoiding risk has resulted in money left on the table, as well as money ill-spent. “We’ve made some mistakes where a half a million dollars would have been better off, you know, lighting it on fire and toasting marshmallows over it,” he said.
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. Missed opportunities also include not hiring a great candidate or hiring for present growth, not the future. “There’s lots of places where not taking risks really can inhibit growth,” she said. “It’s all about finding balance.”
In a recent Built In article, Netflix co-founder Marc Randolph wrote of being laughed out of the room when he and other executives proposed that a large video rental company purchase them for $50 million. The video company is now bankrupt, and some say passing on the Netflix deal is the biggest reason why.
Sticking to safe hires and avoiding new trains of thoughts means missing out on other perspectives. Spurling once belonged to a team she describes as “very analytical,” with everyone on the team thinking that way. “That made it difficult for us to work with creative types,” she said. Management avoided bringing in people who thought differently, either via perspective or the way they process information. “You can’t just do everything analytically, you need creativity as well,” she said.
If you’re not failing, you’re not trying, and innovation springs from effort. “If you’re too risk-averse, it’s almost impossible to innovate,” said Kurzius of Asset Panda. “It stifles the whole concept of it.”
Far removed from his days of doodling, Kurzius now urges his 50 employees to try, fail, learn from the failure and then move forward. “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, he added, may taste initial success by sticking to tried-and-true, but over time, lack of innovation will lead to failure.
For 2022, Octane set a goal of launching into five new verticals. To make the process navigable and mitigate risk, the teams set incremental goals: Get customer feedback, build a product, go into markets. By setting smaller goals, the company was able to see more quickly what wasn’t going to work, and it moved the teams working on those unsuccessful endeavors to projects that had more potential for success.
“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.”
The company successfully launched into three markets with a fourth on the way; the fifth turned out to be not a great fit for the company. Still, “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. “Risk is an exciting thing, especially for younger folks,” he said. “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 risk acceptance help teams? The flipside of what’s above: Employees will be happier, innovation will be brisker, growth a much surer event, and opportunities and perspectives gained. Here are three ways to encourage risk acceptance.
When Octane fails, it celebrates. Why? “If we don’t, then we’re telling teams that failure is unacceptable and that risk is unacceptable,” Duggins said. Teams pursuing risky endeavors could well become discouraged and think that their efforts aren’t worthy. Examining and learning from failures, plus applying successes (not every failure is a complete disaster) to future projects helps keep teams happy and productive, he said.
Kurzius frequently talks to his employees about the importance of innovation and how failure plays a role on the path to success. “I try to make a friendly environment with open, frank discussions and I’ll finish meetings with, ‘Okay, what worked and what didn’t,’” he said. He also publicly sets aggressive goals, ones that, due to their bigness, are bound to contain at least a modicum of failure.
That kind of transparency fosters a culture of risk acceptance and innovation, he said. “I talk about the hamster wheel of success: You have an idea, you implement it, you fail or you get constructive feedback, you adapt and then you succeed,” he said. “That’s how winning gets done. It’s not about being perfect. It’s about getting back up every time you’re not.”
Watch Your Language
Managers can spout risk-aversion language without even thinking about it. “No,” for starters, squelches risk, as does responding to a pitch with dozens of questions that likely don’t have answers. Amy Spurling of Compt calls this “throwing so many monkey wrenches into (an idea) that you end up with analysis paralysis.”
Positive language can encourage risk. For instance, Improv actors use the phrase “yes and,” which encourages an idea and prompts more thought on it.
Moving from risk aversion to acceptance can be, well, risky. Take those steps, though, and you’ll find yourself reaping the rewards of a powerful mantra: Nothing ventured, nothing gained.