As an entrepreneur, you’ll be tasked with making a number of decisions for your business, from finalizing a tagline to hiring customer service reps and planning a marketing strategy.
Your job is to evaluate which decision is stronger, and in many cases, there will be a clear victor—for example, you may choose to hire someone with more experience, a better attitude, and a more reasonable salary request.
Unfortunately, the majority of your decisions won’t be that clear. Your choice may come down to two highly similar options, or two very different options that offer conflicting and complementary advantages or risks.
How are you supposed to proceed?
Advantages and Disadvantages of Hedging
One option is to hedge your bets. In the investment world, hedging refers to the process of counterbalancing your positions with opposite positions, such as taking stock in U.S. currency futures and investing in overseas markets at the same time.
As RJO Futures puts it, hedging is designed “to manage and lessen the risk of adverse price movements in an owned asset.” You may see less of an overall return, but you won’t feel the effects of an extreme loss.
Applied to entrepreneurial decision making, hedging may include investing and working in two different directions, rather than one, such as developing two products simultaneously or hiring two people for the same job (at least temporarily).
There are some advantages and disadvantages or pros and cons of hedging:
- Protection from extremes: First, hedging your decision means you’ll protect yourself from extreme loss. If there are two marketing directions to choose from, and not enough information to determine which is better, pursuing both at the same time will protect you if one turns out to be a total failure. Investing everything in one strategy puts your investment at greater risk.
- Protection from unknown variables: In your decision analysis, there’s no possible way to understand everything. There will be variables and unknowable factors that you can’t fathom or calculate. Hedging protects your decision from the encroachment or revelation of these unknowns. For example, what if you create a new product, but one month later, a competitor emerges on the scene with a version of that product that outcompetes yours? You couldn’t have factored that arrival into your decision, but it’s enough to retroactively make it a poor decision.
- Steadier growth: According to Startup Genome, the biggest reason startups fail is “premature scaling,” or growing too quickly before they have the resources, experience, and stability to support that growth. Hedging your decisions means you’ll artificially control that growth, holding onto a steadier curve.
- Limitation of potential gains: Of course, the flip side to this is that hedging will limit your potential gains. If you split your investment 50/50 into two new products, and one skyrockets in popularity, you’ll limit your potential gains with that product by 50 percent. There’s an advantage in taking risk. In the professional world, the most successful individuals tend to be the ones unafraid to take big risks for big gains.
- Customer and employee confusion: If you try to do two things at once, you may end up confusing your customers, or even your employees. How will they know which one represents your business best? What if those two directions offer contradictory visions of your brand? You can mitigate the negative side effects here by leaning toward decisions that fit closer to your brand image, or ones that cause the least amount of disruption. If two potential choices outright contradict one another, hedging may not be an option.
- Practical feasibility: Of course, it’s not always possible to hedge your bets; some decisions force you to choose only one option, with no possibility to protect yourself against its failure. Similarly, going in two directions at once often means spending twice as much money, and many startups have limited capital to work with. You’ll have to weigh the costs of pursuing multiple strategies simultaneously against the benefits, making sure you have ample resources on hand to carry out your plans in each direction.
Examples of Hedging in a Startup
How could this work in a practical environment?
- Hiring two people for one position: You could hire two people for the same position if you’re unsure who to keep, at least temporarily. Evaluate their performance, see how they work together, and ultimately keep the best candidate—just be sure you’re honest about this arrangement before you bring them on. Some candidates, understandably, won’t be willing to enter that kind of competitive environment, so if one bow out, the decision will be made for you.
- Running two marketing campaigns: You could also run two marketing campaigns, or variations of marketing campaigns, at the same time to see which one performs better and to protect yourself against a devastating loss. This is a popular practice, often referred to as AB testing, and is especially important in new or experimental strategies. Consider it a “survival of the fittest” style test in which you gradually incorporate new elements, and keep only those that perform best. Eventually, you’ll try a little bit of everything—rather than investing in only one direction—and you’ll see better results by the end of the campaign.
- Expanding in two different directions: You could also expand the business in multiple directions by investing in two new products at once, or by targeting two different new audiences. Again, you’ll expend more resources up front, but you’ll have more practical information about how each option performs, and you’ll be able to make a more effective long-term choice.
Related Read: Scaling-up vs Profitability: The Billion Dollar Question
Ultimately, hedging can be an effective way to protect your business from unexpected developments and consequences, but it’s not without its disadvantages. If you use hedging as a cheap way to get out of making a tough decision, it’s going to do you more harm than good.
Instead, focus on understanding the problem as thoroughly as possible, imagine how hedging can spin the situation to your advantage, and only proceed if it’s both practical and profitable to do so.
Startup Grind is a Silicon Valley-based organization that educates and mentors entrepreneurs through monthly business events and speaking series in cities across the globe