Different types of risk and risk tolerance

Lesson Details:

Video Transcription – When you talk to people they're like business is risky but that's such a surface statement let's actually talk about in a little bit more structured way what is business risk and there are actually lots of different kinds of risks you can take let's go through them market risk that's when you're creating something new and you don't know if the customers will want it like before uber got created there was a market risk for uber like people the founders didn't know they just assumed that hey this is a good idea it seems like it's gonna work but the market had to say you know the people the users had to be like yes we're gonna use it or like no we hate it luckily for the uber people liked it and that worked but a lot of new innovative technology ideas carry a lot of market risk if it's new it's risky whereas if you have a cleaning business there's no market risk because well you know it's in high demand it's a no-brainer now another kind of risk is product risk that's really common for tech businesses let's say that your business is really hard technically to create if you're doing something in virtual reality robotics anything that mixes hardware and software or has complicated software that has product risks means that it's gonna take it because it takes a lot of money and time or time to create the product you might just get bogged down with the creation and never launch so you got that layer of risk added on top of it so that's why there's Steve blanks customer development that's why there's Eric reese's lean startup they are trying to decrease your market and product risk now there's financial risk it's a very different kind of risk okay that's just for you as a founder you're not only gonna risk money that you might put into your company but chances are you might quit your job and so there's the revenue salary that you didn't earn a lot of people will also say I'm putting my time and effort into it okay those are okay those are good things to risk because you'll always learn and you'll grow from that so experienced entrepreneurs or investors they they're okay talking about financial risk product risk market risk they're not okay hearing people complain about the time they put in and an effort they put in and especially a lot of first-time entrepreneurs have this common problem that they say well I've put in a thousand effort of a thousand hours of my time that means it's $50,000 that I invested into it no you put into it you're valuing your time as maybe you know like if you had gotten if you was work for a job yeah sure but here you're just a founder your time and effort are a given and that's free so it doesn't count like you're putting actual money into it it doesn't count the same and that's more or less expected from you so those are the kinds of risk typically that you can think through and in your case whatever your business idea is your job essentially is to think through like what you're okay with because every person has a different level of risk tolerance for all of these maybe you're okay risking a thousand dollars of your own money but not five thousand dollars of your own money or not twenty thousand dollars of your own money maybe you're okay spending a month on this but not a year on this so it's up to you to understand what the risks are is that are associated with your idea after looking at the five of these think which apply to your situation and think are you okay with this and if not you'll have to augment your idea a little bit to make it less risky in the way you cannot tolerate and maybe more risky in the way that you are okay tolerating these are just thinking points when people say risk risk tolerance now you have a little bit of it's a little more granular and explained what the risks are?