Are Entrepreneurs Wild Risk-Takers?

When I wrote my post about What I Look For in an Entrepreneur, I did not include a gigantic appetite for risk on the list of desired attributes. Ben Smith recently wrote a great guest post on peHub suggesting that great entrepreneurs need to take big risks: Why Great Entrepreneurs Take Risks and Get Fired.  In it, Ben points out that thinking differently, taking risks and being unafraid of failure are the essence of entrepreneurship.  So what gives?

In talking about their sometimes checkered employment histories, Ben states:

…entrepreneurs get fired because they: ·Take risks the rest of us think are nuts. If they don’t they aren’t going to win; ·See things no one else does. If everyone did, they would be doing them; ·Break the rules – many times they don’t “get” why the rules exist in the first place; ·Are often more sure than they are right. Most importantly, though, they get fired because they don’t care.  I have never met a great entrepreneur who was afraid of failure. They have a huge need to win… It is so important that they don’t see the cost of failure the way others do. While economic theory has shown most people fear losses more than they value gains, entrepreneurs just don’t care as much as us mere mortals about failure…

Most of that sounds pretty good at first blush.  So, should I have included a big appetite  for risk and stubborn, reckless, heedlessness to the list in my original post?

I don’t think so.

Entrepreneurs definitely need to be original thinkers, seeing things others don’t.  They must have a strong bias for action.  They need to be skeptical about rules and othordoxy in order to visualize a different way of doing things.  They cannot be afraid of failure.  And for entrepreneurs, being certain often comes ahead of being right.

But being headstrong and impulsive and having an appetite for huge risks does not make you a great entrepreneur.  Great entrepreneurs are coachable.  They are masters of taking on all sorts of advice and data and and looking at the existing status quo and remixing things into something far better than came before.  They are masters of pragmatism.  They chisel away at something with determination until they have it in workable form.

Malcolm Gladwell captured this notion beautifully in a recent New Yorker article entitled: “The Tweaker – The Real Genius of Steve Jobs.”  In the article Gladwell looks at the question of why the industrial revolution began in England rather than, say, France or Germany.  His conclusion, based partly on a study by Ralf Meisenzahl and Joel Mokyr, is that England had a human capital advantage: specifically, more of these remix artists, whom Gladwell and the authors of the study call “tweakers.”

…Britain dominated the industrial revolution because it had a far larger population of skilled engineers and artisans than its competitors: resourceful and creative men who took the signature inventions of the industrial age and tweaked them—refined and perfected them, and made them work…

What Gladwell observes about Steve Jobs is that Jobs was less of an inventor, and more of a tweaker:

Jobs’s sensibility was editorial, not inventive. His gift lay in taking what was in front of him—the tablet with stylus—and ruthlessly refining it.

One sees echoes of this in the current focus on “lean start-ups.”  These are companies which work quickly and cheaply to ship a “minimum viable product” as quickly as possible and then tweak and reiterate it based on the market’s feedback.  This avoids undue time and money spent on products which aren’t going to work.  Careful protection of scarce resources?  Not exactly the behavior typically associated with massive risk-taking.

Which gets me to the main point of contention I have with Ben Smith’s excellent piece.   Unlike Ben, I don’t see entrepreneurs as massive risk-takers.  I see them more in the vein of careful calculators.  They can seem to be bold visionaries, but it is only an illusion.  In most cases they are reading and synthesizing data and signals others simply don’t see, hear, or take note of.  Or they are looking at things in a way others aren’t looking at them.  They are confident in their bold choices, but those choices are based on well-deduced hunches.

In a different New Yorker article, The Sure Thing – How Entrepreneurs Really Succeed, Malcolm Gladwell illustrates this notion well.  The key to being a great entrepreneur is not being a huge risk-taker, it is hedging risk well.  He cites a study by French scholars Michel Villette and Catherine Vuillermot which looked for patterns in business success, such as buying from people who undervalue assets, or selling to people who over-value them.  What they found was that entrepreneurial risks are not wild bets based on random chance; they are calculated risks that have been hedged by an insight or informational advantage.

The truly successful businessman, in Villette and Vuillermot’s telling, is anything but a risk-taker.  He is a predator, and predators seek to incur the least risk possible while hunting.

They have to place bets, of course, and put capital at risk, but they are trying to stack the deck as much in their favor as possible before betting. So if I were to revise or expand my original post, I might add something about having a bold visionary outlook as part of the ideal temperament,  but I wouldn’t add “likes to take huge risks.”

Comments, questions or reactions to this post? Leave a note below and I will respond to your questions.

If you enjoyed this, you might enjoy: What I Look For In An EntrepreneurWhy Angels Chase ElectronsPick Your Founder/Co-Investors Carefully & Reflections on the Nature of EntrepreneursTop 20 Dos & Don’ts with Angel Groups & Early Stage FinancingDelusional EconomicsThe OvertureThat Vision ThingThe Power of An Advisory BoardLoch Ness, Unicorns & The First-Mover AdvantageShould I Wait For A Technical Co-Founder.

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Comments

  1. Rick Harris says:

    Christopher, I agree, and I also think that labeling entrepreneurs as extraordinary risk takers is something that is done by people other than the entrepreneur. Some entrepreneurs will hedge the risk as you point out in order to minimize its potential, but others simply don’t experience entrepreneurial behavior as “risky”. It’s just what they do. Someone else looks at what the entrepreneur has done (refinanced the mortgage, relocated to an innovation hot bed, etc.) and pronounced the behavior “risky”.

    This point of view comes from personal experience. Many years ago I left a well established consulting firm to start a new firm with three other partners. One of my colleagues was dumbfounded; he couldn’t understand how I could take the risk. I had no sense of risk. It was what I needed to do.

    In case you’re wondering the new venture failed, but the learning was invaluable. Cheers.

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