Entrepreneur’s Love Affair with Risk

When I hear the word Entrepreneur, the two phrases that ring a bell in my head are — problem solvers and risk takers. Let’s talk about the latter — risk takers.

Following is Google’s definition of an entrepreneur:

a person who sets up a business or businesses, taking on financial risks in the hope of profit.

And here is an excerpt from wikipedia’s article on entrepreneurship

organize and manage a business venture along with any of its risks to make a profit

You’ll rarely come across any content on entrepreneurship where the word ‘risk’ is not staring at you. If you’re anything like me, you’d think entrepreneurs embrace and enjoy risk. I recently started reading Originals by Adam Grant — a book that bestowed me with a new perspective on this subject. I’m excited to share some of those insights with my readers.

Imagine a scenario where you were invited to invest in a new online eyewear company with four founders, but the founders

• are still in college and have no plans to drop out to work full-time on this idea
• are planning to work on their idea in their spare time because they have accepted offers for full-time roles

Did you decide not to invest in them because you were not sure about their commitment?

Then, this article is for you. You just put yourself in the shoes of Adam Grant who made the same mistake and rejected a team that made $250 million in 2019.

Adam Grant recounts how they didn’t fit his mental model of successful entrepreneurs leading him to make a decision that he regretted. In his own words:

they lacked the guts to go in with their guns blazing, which led me to question their conviction and commitment

Ironically, all successful entrepreneurs seem to stick to their day jobs or education until they feel more confident about their new ventures — the kind of behaviour that does not fit our mental model of a successful entrepreneur. They all seem to be very risk averse, constantly hedging their bets. Sounds unbelievable? Keep reading.

• Phil Knight, Nike’s founder, continued working as an accountant until1969 even after having started work on his own shoe company in 1964.
• Steve Wozniak began designing the ‘Apple 1' computer in 1975, but stayed in Hewlett-Packard until 1977.
• In 1997, Lary Page and Sergey Brin tried to sell Google for $2 million because they thought it was affecting their research, but, luckily for them, it did not get sold.
• Bill Gates, known for dropping out of Harvard, spent one full year in college after he started selling software and dropped out only after taking a leave formally approved by the university.
• Henry Ford started his own company but continued to work for Thomas Edison for two full years thereafter.
• Sara Blakely of Spanx, one of the youngest billionaires, worked on her prototypes for two years while selling fax machines as part of her day job

In the book, Adam goes so far as to say that this holds true for most successful people in the creative domain by quoting the following examples:

• Guitarist Brian May of the ‘Queen’ band pursued his education in Astrophysics for 7 years after joining the band before he went all in with the band.
• Grammy winner John Legend released his first album in 2000 while working as a management consultant at Boston Consulting Group until 2002.
• Thriller king Stephen King worked at gas stations and other mundane jobs for seven years after writing his first story.

Adam Grant argues that this kind of hedging could give founders and creators the freedom to be original and craft their art until they get it right. This prevents them from succumbing to the pressure of launching half baked books, shoddy art or products without enough iteration.

If you’re familiar with financial markets, this is similar to taking a short trade to cover the risk of your long position. Similarly, by being conventional in some aspects of life, one can cover the risks of being original while experimenting with their interests.

Let’s look at a survey mentioned in the book that reinforces this idea. In the survey, entrepreneurs and employed adults were asked to choose one of the following:

1. $5 million winnings with 0.2 probability
2. $2 million winnings with 0.5 probability
3. $1.25 million winnings with 0.8 probability

Results showed that entrepreneurs were significantly more likely to choose the last option regardless of their wealth, gender, age, and education.

However, this is not to say that embracing risk to a greater degree is a recipe for failure, but, most successful entrepreneurs seem to be risk mitigators. To put this in the author’s words:

they tiptoe to the edge of the cliff, calculate the rate of descent, triple-check their parachutes, and setup a safety net at the bottom just in case

I hope my summary of an idea presented in Adam Grant’s book made you rethink some of your opinions. So, next time you have to evaluate an investment opportunity, I hope you take a step back and reconsider the weightage you give to the risk mitigating aspects.

That’s all for now, folks. But, if you’d like to hear more from me about the rest of the book, do let me know.

PS: All the insights are picked from the book and I do not claim any of them to be mine.