Learning to Take Risk

This is a blog written by Kaustubh Deo // Guesswork Investing about acquiring & operating small businesses. If you are a new reader / new searcher, please start here.

A couple weeks ago, I wrote about how running a small business increases one’s exposure to failure…and that’s a good thing.

I argued that failure exposure is a key underpinning to personal growth — risk of failure isn’t something to be avoided, but rather a worthy pursuit.

But we didn’t talk about HOW to build comfort with being exposed to the risk of failure. On the spectrum of life risks you could take, buying a small business with a multimillion dollar, personally-guaranteed loan is certainly up there.

It’s not, say, as risky as taking a drug from a stranger in Ibiza (and the risk/reward there is much worse too). But it’s certainly scarier than writing a hot take on Twitter that might make you look dumb. It’s very reasonable to not want to start there.

If you’re a searcher who is understandably frightened by the prospect of buying a small business, let’s talk about how to build up some risk tolerance.

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Taking risks, like anything, is a matter of practice and repetition. If buying a business is doing a 200-lb bench press, what can you do today that’s the equivalent of just benching the bar?

And if starting with the bar is too hard, what kind of risk can you take that just gets you into the gym?

First, let’s categorize common forms of risk you could take:

• Community: Negative impacts on your reputation or position in your community.

• Relational: Negative impacts on important relationships in your life, like your spouse, kids, close friends, coworkers, etc.

• Financial: Negative impacts on your net worth, income, or financial situation

• Professional: Setbacks in your career progression and professional development

Second, we need to differentiate between four types of risk:

• Low risk, high reward potential: Rare, but should be done asap

• Low risk, low reward potential: Low stakes and worth experimenting with

• High risk, high reward potential: High stakes, these are the big swings that can be worth it if done thoughtfully

• High risk, low reward potential: Avoid!

I’d say buying a business is a high risk, high reward potential choice, along just about every risk category.

If it goes poorly:

• Community: Your team loses their jobs & the community may view you as a failure

• Relational: Your spouse may resent how much time & effort it takes away from you being a present parent or partner (they may resent you for this even if it does go well)

• Financial: You go personally bankrupt and lose a lifetime of savings

• Professional: You have to restart your career after a multi year absence from your prior industry

Pretty rough. I won’t dive into the potential rewards — if you’re reading my blog, you’re likely familiar with them.

So let’s start smaller — let’s identify some low risk, low reward potential along the various risk vectors.

• Community: Go do an open mic at a comedy club. Actually prepare and do your best, don’t do it as a lark where you have an excuse for if you fall flat on your face.

• Relational: Give a friend some honest feedback, in-person. Invest thoughtfully in the relationship while also opening yourself up to the risk they don’t take it well.

• Financial: Sell something — anything really. Create a very simple online service and generate $1,000 of revenue with less than $500 of dollar investment. Post about it on social media too for a little community exposure risk.

• Professional: Send cold emails/LinkedIn DMs to 5 people who would be interesting to have a 30 minute call with. Follow up at least 3 times each.

If you shy away from risk-taking, go do one of these. Take 30 minutes right now and make a plan for executing on one of these by answering the following questions:

• Which risk are you going to take?

• Why does it feel risky to you? What makes you most nervous about it? Is there any underlying psychological or identity-based fear?

• What’s the worst case outcome?

• What’s the best case outcome?

• What are your next steps to implementing the plan?

Helping people blow up their lives is one of my favorite hobbies, so I’ve thought up a few more risk-taking ideas if the above set was too tame for you. These are still lower risk than buying a small business, but definitely moving up the risk & reward spectrum.

• Community: Spend at least 2 hours working on a personal reflection of the past 3-5 years of your life. Once it’s done, share it — widely on social media, but also directly via email to at least 10 people in your life.

• Relational: Identify a friendship that has drifted but could be savable with some intentional effort. Reach out to that friend. Express that you’re bummed about it and want to put in the effort to rebuild.

• Financial: Plan a ticketed event. Book a speaker, comedian, local band, whatever floats your boat. Book a venue, get event insurance, book a bartender, the whole shindig. And then sell tickets priced such that if you sell out, you’ll generate a 20% profit on the whole thing. Then go sell!

  • Alternatively, you can get sponsors. I did this one recently — we flew in Jacob Hall from Texas to talk about self-funded search here in Seattle. I booked a space, got a bartender, got event insurance, and then got Northwest Bank and Treewalk (thanks Lisa, Sarah, and Avnit!) to sponsor. We were able to cover Jacob’s travel expenses and the whole bar tab for about 40 people.

• Professional: Request a meeting with your boss and ask for a raise. If you’re a freelancer/contractor, inform your clients that you are raising rates ~10%. (If you’re thinking about buying a small business, you’ll have to get good at handling salary discussions with employees and price negotiations with clients.)

I believe we all have a baseline risk tolerance baked into our personality. That baseline then moves up or down based on our life context — I don’t have kids right now, so I can afford to take higher risk than an equivalently risk-tolerant person who does have kids.

But I also believe that you can improve your capacity for taking risk through repetition & practice.

If you decide to actually try any of these out, please report back to me! You can even tell me what you plan to do to help create some accountability around it…

Just hit reply to this email.

Thanks for reading as always,

Kaustubh Deo // Guesswork Investing