Risk and reward

Reward is the benefit or positive outcome an entrepreneur hopes to gain from accepting a risk. The risk is the chance that things go wrong; the reward is the reason for putting up with that chance. Every decision about starting, running or growing a business involves both.

Why reward matters

The potential for reward motivates entrepreneurs to accept risk. Someone thinking about launching a business weighs the chance of losing their savings against the hope of profit, independence or business success. Without a reward worth aiming for, few people would hand over their money and time when they might get nothing back. Reward is not guaranteed, however — it is only what the entrepreneur hopes to gain.

Balancing risk and reward

Greater potential reward is often linked to greater risk, but a bigger risk never guarantees a bigger reward. A high-risk expansion might bring high profit, or it might bring a financial loss. Entrepreneurs therefore balance potential rewards against possible risks: if the risk seems too high compared with the likely reward, they may delay the decision or take a smaller step first.

Effects on business activity

Risk can discourage start-up or investment: if the chance of loss looks too great, an entrepreneur may never begin, and an investor may keep their money instead. Rewards do the opposite. They encourage enterprise, innovation and growth, because owners are willing to try new ideas, borrow money and expand when the payoff looks worthwhile. Successful entrepreneurs do not avoid risk altogether; they weigh the possible reward against the risk before going ahead.