Risk management for entrepreneurs and startups

Even savvy entrepreneurs have a few common blindspots when it comes to risk management:

• They believe that maximizing each year’s performance will also maximize their career’s performance,  but this is false. Maximizing yearly performance misleads one to take risks that are optimal over a one-year time frame but are suboptimal for a whole career. Similarly, maximizing one’s career requires taking actions that feel inefficient over the short term but are fundamental for long-term success – such as training one’s team.

• They overestimate the chances of success of their strategy “because everyone smart who used this strategy succeeded and I am smart,” neglecting that smartness can only be truly known post-hoc, so they do not know yet how smart they truly are.

• They consider strategy risk and finance risk but not other kinds of risk, such as doing business with a bad partner or neglecting their health or marriage.

• They study the successes of others but not their failures. Knowing how to win is insufficient, at the net of survivorship bias; one also needs to know what mistakes to avoid.

• They see risk management as a burden to growth instead of as an enabler. Just like car brakes are not to go slow but to enable going fast, proper and reasonable risk management enables faster growth over the long term.

Of course, plenty of other risks are relevant to entrepreneurs, but those five are some of the most important yet under-discussed ones.

There is enough to say about risk management for entrepreneurs to fill a book (and, in fact, I wrote two: “Ergodicity” and  “Winning Long-Term Gtames”), but here are a few tips:

1. 1. Do pre-mortems: imagine you suddenly find yourself with 50% lower growth overnight. What could have happened, and what can you do today to prevent it?
   2. Do pre-mortems, but for risks other than financial losses. Imagine you get sued. What could be the most likely reason, and what can you do today to mitigate it? More examples in this one-minute exercise to derisk your life.

• Think about what risks your models might have left out. What do others worry about that you do not?

• Think about how other entrepreneurs failed. Learn from the mistakes of others before they become yours.

The author, Luca Dellanna, is a senior risk manager with over ten years of experience helping organizations worldwide manage risk. He also teaches risk management and related subjects at the University of Genoa as an external lecturer and has published a few books on the subject, including “Ergodicity”, “Winning Long-Term Games,” and “Best Practices for Operational Excellence.”