Everyone knows reward is proportionate to risk.

When everyone knows something, it’s usually wrong. And there’s usually a bit of truth in it. Maybe the wrong bit comes from the fact that for everyone to know something it usually has to be dumbed down a lot. But I dirgess.

The fallacy in believing that reward is proportionate to risk is that you’ll believe the more risky something is, the more reward there should be. Not true. Another way to say it is that every reward is associated with some degree of risk. But not every risk has any reward associated with it at all.

The truth is entrepreneurs don’t like risk. Sure they tolerate it, but they like to minimize it. They often see ways to do this that others don’t so they appear to take more risks than they actually do.

The biggest risk in running a company is that customers won’t do what you want them to (buy your stuff at a high enough price point) and they won’t do it fast enough (before you run out of money). Your exposure to that risk is compounded if you don’t track what they do and how quickly they do it. And if you make up reasons for their actions or see patterns that don’t jibe with reality.

Takeaways:

• A good business model (not a business plan) is the best tool I know to minimize risk.
• The CEO’s job is to chart the company’s progress through the “right” amount of risk.

[tags]small business, entrepreneur, business model, risk reward, CEO [/tags]