Entrepreneurs Define Risk Differently

 Entrepreneurs Define Risk DifferentlyMost people think entrepreneurs are willing to take on more risk than the average person. I’ve often wondered if that’s really true. After almost three decades of working with large corporations and entrepreneurs, I’ve developed a theory.

Now, this theory hasn’t been vetted with controlled experiments and testing. It is based solely on experiential and intuitive data drawn from my life experiences. For instance, I have 12 years of working with entrepreneurs as an early-stage venture capitalist; 19 years working for a large corporation (Bell Labs & AT&T) and consulting to their multi-national, multi-billion dollar customers; 10 years of mentoring entrepreneurs; and created a carve-out start-up within AT&T.

Here’s my theory: most entrepreneurs aren’t more risk-o-philic than anyone else — they just define risk differently.

For some I’ve known, the risk of losing autonomy and control of one’s “destiny” was far riskier than losing “guaranteed” income and benefits. Working for someone else’s company, reporting to a boss, and living under rules they weren’t sure made sense were a lot riskier than creating their own business. The risk of not pursuing their passion, of not making a meaningful and significant impact on the world around them, feels much riskier than starting their own venture.

For them, risk isn’t as defined by losing tangibles (e.g., income, benefits, “stuff”) as it is by losing intangibles: fulfilling a passion that won’t let go, defining their own sense of purpose, sating their own curiosity, looking themselves in the mirror.

The difference here is between risking outputs and outcomes. Outputs (such as products, profits, etc) are necessary and good, but they have their most profound effect when driving significant, palpable outcomes — like reducing chronic pain, creating a prosthetic leg for an Olympic runner, or inventing an app that eliminates a time-consuming task. Most of the entrepreneurs I’ve worked with would gladly risk a few outputs for an outcome they believe in.

For many entrepreneurs, another critical risk worth taking is making themselves vulnerable in order achieve the outcomes they envision. As John Hagel has said, the risk of embarrassment, ridicule, skepticism, perhaps even humiliation is much less than the risk of not putting oneself out there to try. Anthony Tjan astutely summarized it this way: “The willingness to be vulnerable isn’t driven by the desire for exposure, but by the possibility of what that exposure might lead to — be it a meaningful role, the possibility to affect change, and, of course, greater financial gain.”

I’ve seen, heard, and felt so many entrepreneurs’ intense passion and purpose for the outcomes they want to create. It is what defines who they are and why they’re here. I know that risk-reward equation. While food, shelter, education, and health matter a lot, I need to see outcomes when I look my children, husband, friends and clients in the eye, not just outputs. If I don’t see a positive, wonderful impact on their lives and the lives they are responsible for and encounter, then my life was just a series of outputs — maybe even large ones — but not outcomes; and I will have failed tragically.

While this is a theory ripe for a more scientific validation, I’m pretty confident it will prove out, at least in some great part. The risk of not pursuing that passion, of not fulfilling that purpose, of having lived a life of stuff without also living a life of significance, is the greatest risk of all.

image credit: etftrends.com

Are Entrpreneurs Really More Comfortable with Risk? was originally published in Harvard Business Review


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Why am I a VC?Deb, founder of Mills-Scofield LLC, is an innovator, entrepreneur and non-traditional strategist with 20 years experience in industries ranging from the Internet to Manufacturing with multinationals to start ups. She is also a partner at Glengary LLC, a Venture Capital Firm.

This entry was posted in Culture & Values, Entrepreneurship, Innovation, Leadership, People & Skills, Strategy and tagged , , , , . Bookmark the permalink.

24 Responses to Entrepreneurs Define Risk Differently

  1. Most entrepreneurs start their own bussinesses because they’re unemployable, not because they have a special calling, so it’s not surprising that most of them fail to be able to support their families. The united states is an extremely risk-aversive society.

    • Glen says:

      … Don’t feed the troll… Don’t feed the troll… Don’t feed the troll….
      Dang it… Can’t help myself.

      @chiefhuntingbear, that is about the dumbest thing I have ever heard as to why entrepreneurs start businesses.

      No, wait… I was wrong. That IS the dumbest thing I have ever heard.

    • Would be difficult to contradict Glen and sorry chiefhuntingbear, your cause-and-effect analysis are simple added on assumptions. First of all, unemployment has nothing to do with an Entrepreneur. Translated to English Entrepreneur means Undertake or someone that does something. True that you need some time for that but never has unemployment been a condition for it. The path of being an entrepreneur is, as Set Godin would say, often long and only. Her I am not talking about “Freelancing”! And just because you follow necessary steps to create a.business from an idea, does not mean that it is a business. But for sure is that if ou would advise the world we would probably still eating only berries and fruits and sometimes through at each other stones. Sorry but Glen was right and please leave your fingers off such comment areas. It will be difficult to find another idiot like me to give you such a long feedback;-)

  2. Gavin Ryan says:

    We should also make the distinction between entrepreneurs (i) whose family background provides a safety net if it goes wrong and (ii) the others. Its usually more interesting to look at what they leave out of their story of how they did it than the propaganda.

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  4. jeh says:

    A few points to ponder:
    - most people have to work, they don’t WANT to work (unless you take the work away, then it becomes something most of them will crave, ha, ha).
    - we are trained to thing and work in a beehive manner: each is specialized in something and is basically unable and incompetent to do the whole business by himself. We answer to “what is your major?” and not to “what do you create AND produce AND sell?” In per-industrial times this was a bit different, where craftsmen as a rule were independent businesses. Some professions today work the same way: Goldsmiths, doctors and lawyers with their own practice, hairdressers, … but most of us go work in “factories” (industry, banks, transportation …) and do our specialized job.
    - entrepreneurs come in 90% of the cases from the product corner: a great idea, a great service, a great product (or not so great…) but have no inkling about creating, growing and running (and sometimes exiting) a business. This becomes a big source of hazard.
    - So, to ChiefHuntingBear, this is a moron statement as it stands. Why do people go the hard way and take on the entrepreneur’s way? Well yes, many times because they have to (see first statement above) and if they can’t get a “regular” job, then you have to look for alternatives. Why do entrepreneurs not always succeed? Well, not because they were unemployable, but because they are not prepared and lack the skills and profile for THIS type of work. Unfortunately, you see that only once you’re in it. Or, because they are cheated out of their invention. Or … Try to be more differentiated!
    - To Glen, It is a dumb statement – but what about it? Would be nice to hear your opinion on the subject.
    - To Gavin, I am not sure I understand what you want to say. Could you share some examples? It sounds like you have significant experience. The thing with the safety net – my experience is that it make a difference in being able to provide for your family, especially when times are tough, but not in the rate of success or failure as entrepreneurs. I think it has to do more with personality, drive and “mission”. But it would be interesting to learn more.

  5. maryam fallahpour says:

    The outcome is not garanteed. It just can be tru for your environment, maybe. I think the economical situation is more fluctuated than you see. The hard part of the work is the begining in that time the enterprenur really take high risks. Your experience is with the companies that found their stable situation.

  6. Hi Deb,

    Thanks for the article. I agree that entrepreneurs define risk differently and are motivated by different drivers.

    I recently just finished some research which covered entrepreneurship. In terms of your comment that this theory is ripe for more scientific validation, you might be interested in reading work published by Dr. Saras Sarasvathy and researchers involved in the Society for Effectuatal Action – http://bit.ly/TwpTZ. This is a link to an early article published by Dr. Sarasvathy – http://bit.ly/vHpGx3

    Cheers,
    Sharon

  7. Dimitar Popov says:

    You may be onto something here. Recent research continues to show that entrepreneurs really are wired differently http://thebrevetgroup.com/2013/05/inside-the-mind-of-entrepreneurs-and-what-it-means-for-sales/

  8. Elizabeth Burgess says:

    I guess, and given I’m one of those ‘fools’ trying to start a new company at the moment I may be biased here, I agree in part with the article, though I see it a bit differently. Like everyone else I think we try to maximise our personal economic ‘utility function’, we just have a different utility function to many others. For us we get greater ‘utility’ from those intangibles so one can analyse what we do and why in the same way as anyone else, once you take that into account.

    OTOH, given I also have a strong background in Finance and am used to thinking of ‘risk’ as variation in outcome rather than absolute level of outcome I would think though that we are probably more comfortable with higher levels of ‘risk’ than most other people, even if not what in finance terms I would consider really ‘risk seeking’. After all, a lot of what entrepreneurs is trying to reduce ‘risk’, viewed as variability in outcome, in the outcome of their new ventures.

    And now back to the company … break over.

  9. K. Sikdar says:

    I’ve been “working without a job” for more than a decade. You may call that entrepreneurship, or being self-employed, as you wish.

    A couple of comments/ questions that came to my mind after reading the above-

    1. From the perspective of a “job-provider”, people may seem employable or unemployable. What about the perspective of the “job-seeker”? Do I like the way the job-provider operates, the business he/ she is in, the ethics and the values thus represented? What if one were to classify jobs as “workable” or “unworkable”, how many jobs on offer would be worth taking up?

    2. It’s true family support, inherited wealth etc. allows one to make a choice in favour of entrepreneurship. But if an individual at some point in his/ her career finds the current job, and others on offer, “unworkable” then there is no alternative to taking the leap even if it seems like one in the dark. Would one call it a risk?

    So I would probably go one step further from Deborah, where conformists see a risk entrepreneurs sense an opportunity. Where one decides to stick to the safety of an ocean-liner, even when the going gets rough (sickening?), the other may decide to take his/ her chances in a lifeboat.

    Finally which one survives the rough seas and the tough times? Could we ask my mythical fellow citizen Pi Patel’s opinion on that:)

    Best wishes.

  10. Anand Varma says:

    Outcome is a purpose which may or may not get fulfilled, similar to producing a product or service which may or may not be accepted commercially. So, a little difficult to distinguish between an outcome and a product. However, risk in pursuing a business would be with an objective to decide how much risk need be taken to align with business goals depending upon available economic capital and secondly define your risk tolerance limit beyond which you shuld not put your capital to risk of loosing! Also, risk taking depends upon if an enterprenuer is risk averse or risk friendly.

  11. Thank you for the article which is a fruitful way to look at this hype of Entrepreneurs. But would be maybe good to make a difference between an entrepreneur and a freelancer. Both independent but for sure different motivations. The Entrepreneur builds something bigger than himself while the Freelancer just wants to be independent. Both cannot be put into the same basket.

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  13. Ramakrishnan says:

    As an entrepreneur I connected with the article. But the Challenge is Growth, Risk Apetite etc. I found myself lacking and not aggressive. Understanding various Tax laws in India is challenging and the entrepreneur needs to navigate and “Manage” without much support system. Due to ignorance my .Company got into a mess and the subsequent loss set me back by a couple years

    Most Entrepreneurs will need to external support system, a good sounding box if they need to evolve from small to SME to Large ! If this is in place we shall have more becoming Google and Facebook or atleast giving a sincere attempt.

    Otherwise many just give up as Finacially many are doing well and the Motivation for Growth in not there

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  15. stefan kirk says:

    I’d like to qustion the role of financial incentive in entrepreneurs. In my experience genuine entrepreneurs are motivated not by profit, but by the need to do things better than hereto; to make a mark.

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  17. Motivation appears to be a common theme and research suggests that entrepreneurs are more sensitive to reward than threat, and this reward sensitivity is a strong motivator of their behaviour. All rewards (and threats) are relative and depend on the individual’s perspective and their situation, some examples include: financial, reputational or intellectual. Motivation also relates to goal setting and self-regulation/control. My research on high potential leaders explains how this relates to entrepreneurs. It highlights the influence of working memory capacity over strong reward sensitivity resulting in heightened emotional reactions – passion or excitement in the case of many entrepreneurs – and impulsive behaviour, or risk taking. In some respect entrepreneurs are neurologically wired to pursue reward opportunities and their level of risk-taking behaviour is a combination of their sensitivity to reward or threat and their working memory capacity or self-control(see http://hipotential.com.au/?p=513).

  18. Yvonne Morales says:

    Completely agree, recently I left my job because I want to pursuit my own method to make things,I’m 40 years old, and what made me affraid the most was that time is passing and it was very probable I wasn’t going to probe myself. Excelent article.

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  20. danesh mehta says:

    ENTREPRENEUR Never thing he is taking Risk ,he always Try to prove him self.Becouse,he has THE Passion.Many people try their own bussiness but.. Those who never give up ,Try and Try is their moto become succesful ENTREPRENEUR.

  21. Pingback: Innovation Excellence | Top 100 Innovation Articles of 2013

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