Accepting Risk

Over dinner tonight, I had a very interesting conversation.  My guest was telling the story of a family that seemed to have the Midas touch – the parents had founded several companies.  Of the three children, one was always at the top of her classes in the very best schools and became a very successful professional, one was an early employee at a hugely successful tech company, and the third founded a tech that was acquired, producing immediate wealth.  We wondered – did these three siblings learn something while growing up as the children of successful entrepreneurial parents?  Also, why did it turn out that the most successful student, who was certainly successful in a traditional way as a professional, was the least successful in terms of wealth generated?

Then it hit us – there were two things that had significant impact on those three people.  First, they learned from their parents’ examples that success comes from hard work and taking risks.  The oldest child (the great student and successful professional) was constantly working hard to achieve.  She succeeded at everything in her life so when she built a thriving professional practice it was no surprise.  But she had no reason to walk away from that success to try something riskier.  Her siblings had less to lose by taking risks and were willing to do so.

Which brings up the second thing that we realized – someone from a wealthy family is free to take more risks.  If the risk pays off, then the person wins big.  But if the risk does not pay off, then the family is still wealthy.  Someone who was not from a wealthy family might have shied away from joining a very risky young startup company, but the brother in this family was able to join the company because it seemed like an interesting thing to try – and it paid off big.  The youngest sister founded a company because it looked like fun to her, and it paid off the biggest of all (since she was the majority stockholder of the company when it was acquired).  If she had been worried about feeding her family, it would have been much more difficult to leave a paying job to found a startup.

The point is that entrepreneurship is built on a willingness to take risks.  Different people have different tolerances for risk, but all of us can structure our lives to allow us to accept more risks if we want to do so.

If we want to be entrepreneurial, we need to take risks – and that may mean making the changes in the structure of our lives to all us to do so.

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4 responses to “Accepting Risk”

  1. John Burnette says :

    This post should be stapled together with your post from May 12th. There is a power of being the default, but there is also a great handicap – the fear of overly changing the “magic formula” which defines you as “the default”. Look at it this way, when you are on the top of a hill and wish to go higher, you actually have to come down before you go up again.

    Only the rarest of companies blessed with magic of being momentarily the market leader have the courage to risk upsetting the market. Even Apple, our favorite example of an enlightened company, had to fight a holy war to walk away from the Apple IIe. Thank goodness they did, but it was a market risk. After all, for every iPod, there’s a Newton. Just because you’re an awesome company doesn’t mean the marketplace will agree with you.

    Lastly, I really wonder if entrepreneurs even think in terms of risk – I think they do what they do simply because they are driven to do it. I really don’t think the best of the best are motivated by the eventual market success, much more, I think, they are driven to give voice to their creative sides. When you see companies attracting creative people, either as employees or as users, a la NeXT, I think that’s where the magic happens.

    Ah, NeXT. The world’s most successful failed company. Well maybe Elio motors will have a chance to take over that title. We’ll see.

    • Graham Burnette says :

      Beautifully written, John – and I completely agree.

      The best entrepreneurs do not embrace risk – they are driven (sometimes by internal demons) to proceed in spite of the risks. But risk does have a way of cutting down competition.

      • John Burnette says :

        We’re at the end of the year at my school so we have more than our share of rambling conversations. The conversation with one of my stats students made me think of this point: While it’s true that entrepreneurs face greater risk, the marketplace does reward them amply for that risk (if they are one of the lucky ones who wins). Thus the expected value of their path is greater, even if they have less of a chance of success. Startups face the prospect of “betting the company”, many times with only a 10% chance of success.

        Here’s what we didn’t get, why do established companies, when they get the funds to be in a position to make 10’s even 100’s of risky but rewarding bets, why don’t they do that? After all, if you make lots of bets, the central limit theorem will pretty much guarantee that they’d win enough to end up with a larger reward.

        So, we’re left wondering, is there something in the entrepreneurial spirit that NEEDS that all or nothing threat of ruin/promise of huge reward? Why is it so rare for large established companies to continue to act as entrepreneurial?

      • Graham Burnette says :

        I think it has to do with the desire of established companies to look successful. Thus, they don’t ever want to be seen as failing at something.

        But to be entrepreneurial means that they have to accept fauilure at least 50% of time time.

        So, when entrepreneurial ideas are considered inside an established company, at some point someone says that it is too risky and if the idea fails it could negatively impact the rest of the company.

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