How to Make Risky Decisions

Lately I've been reading quite a bit about how entrepreneurs are actually relatively risk averse, which somewhat contradicts my previous belief that entrepreneurs are people who enjoy risk and take on risk often.

Generally speaking, I've always believed that this is down to academic, economic theory: the bigger the risk, the bigger the potential reward.

Reading Reid Hoffman's article about taking risks intelligently ultimately kickstarted my own paradigm shift with regards to risk-taking.

This line of thinking was initially a bit of a surprise to me, because I've always seen myself as someone with a swing for the fences-kind of mindset to business and life. I'm quite impulsive, enjoy making intuitive decisions and have never shied away from risk. In fact, I can identify quite a few risky decisions in my life thus far:

My wife & I got engaged, married and fell pregnant within about 14 months after we started dating. We obviously didn't have all of the answers and neither were all the checks & balances in place, but it felt right. (And still does.)
Back in 2008, I quit my 2-month old corporate job (and ultimately, career) to pursue WooThemes full-time. This was just as a worldwide recession hit and everyone was clawing to their existing jobs like there was no tomorrow.
When my wife & I bought our first house, we ended up purchasing something that was about 20% more than we had initially hoped / planned to spend. But we saw this house, fell in love with it and believed that we could make it our home.

Yet if I think about any of these decisions, I didn't particularly enjoy the consideration of the risk. I easily suffer from a bout of analysis-paralysis and before I make decisions like these, I almost always feel suffocated when thinking about all the what-ifs.

It is however on that backdrop that I've learnt how to make risky decisions in a way that plays to my own strengths. And it's within that framework that I recently made one of my riskiest decisions yet.

How to Make Risky Decisions

In January of this year, I realised that it was time for me to move on from WooThemes. I subsequently made the decision to pursue passion (instead of money) and in May I stepped down as CEO of WooThemes to work on PublicBeta.

In that transition, I stepped away from a significant, C-level monthly salary and I invested $100k of our personal savings to fund PublicBeta.

I have a 2-year-old kid and we have a mortgage to pay too. So on the surface that looks really risky, especially within the context of startup success rates and the odds that I have of succeeding here. But in my head and heart, this turned out to be one of the least risky decisions I have ever made.

There's one reason for that: I made the decision only with the worst-case scenario in mind.

There were no multiple what-ifs to consider; only what would happen if we ever reached worst-case scenario. And worst-case was very simple too: PublicBeta fails and I lose $100k in personal savings (along with the opportunity cost of having sacrificed a great salary).

That is obviously a real risk and the odds of getting to worst-case scenario are statistically (and on average) pretty good. To hedge against that risk (and enable myself to make the decision), this was my thinking:

If PublicBeta fails, could I find another job (at a corporate or a startup)? How long would it take me to find a job? What would that job pay me?
Could I possibly start something new and get funding from investors? How long would that take me? Would I have other viable ideas to pursue?
How much personal savings would we have left if PublicBeta failed? How much of a runway does this afford us if I didn't earn any income in that period?

The summary answer to these questions were:

I'd have at least a six month runway before pressure would start piling on.
I have loads of friends and would definitely be able to find a pretty cool startup job.
I have a good reputation and if I decided to pursue another startup (instead of a paid, employment gig), then I should be able to convince investors to back me.
I have too many ideas; so that would never be an issue.

Looking at that, worst-scenario doesn't seem to suck too much. Don't get me wrong; I would hate for PublicBeta to fail and to lose $100k. In fact, that fear of failure is one of the primary motivators for me in working hard to beat those odds.

But even if I can't beat those odds, I can definitely progress beyond the worst-case scenario.

And that's how I'll be making (perceived) risky decisions in future: if I can handle worst-case scenario, then it's (generally) a good idea to take the plunge.

I don't like risk, but it is part of my life and part of my pursuit of uncomfortable zones.