Just How Risky Is Entrepreneurship, Really?

Just How Risky Is Entrepreneurship, Really?(blogs.hbr.org)

47 points by hellacious 14 years ago | 14 comments

jpulgarin 14 years ago |

Very risky: For the average founder, the expected utility of starting a VC funded company is around -$200k.

http://www.nber.org/papers/w14219

dreamdu5t 14 years ago | |

Founders aren't necessarily the ones putting up the cash. I haven't seen any statistics on the percentage of "startups" that are founder-funded, but in my personal experience the majority are not - even if the money is borrowed from family. Not considering opportunity cost, the founder isn't out $200k, the investors are. IMHO founders usually have the best position in a startup. They get paid to possibly reap the benefits of ownership, but if it fails they are out of a job like any other employee. They assume similar costs as their employees, but stand to gain much more.

seiwyn 14 years ago | | |

The point isn't that the founder loses 200k out of his pocket, it's that the founder loses out on a potential of 200k by taking a lower salary working on the startup instead of working at a company.

didgeoridoo 14 years ago |

"In addition to the psychic merits of working on the personally meaningful, in an economy where low-wage, high-skill overseas workers and no-wage machines encroach ever more rapidly, it is essential to compete both in input and output."

I think the importance of these points completely dwarfs the rest of the argument.

Set aside the fact that the psychic value of working on your own project can, for many people, offset much of the higher expected monetary value of a steadier job. Crucially, starting and running your own company rapidly develops your executive, decision-making and management skills, largely independent of financial success. These are skills that aren't going to machines or offshore, at least in the near term. Entrepreneurship IS long-term risk mitigation.

scottkduncan 14 years ago |

> "First, entrepreneurship is not riskier than working at a big bank or law firm, a fact vividly underscored by the de facto nationalization of the banking sector..."

We might have to rewind the tape here - I think I must have slept through this part.

superprime 14 years ago | |

Yeah.

I'd say working for a big bank or law firm is much more stable (less risky in terms of job security/steady career trajectory), although less stable than other sectors.

On the other hand, it's also arguable that it's harder to go big if you're working at a bank or law firm (more risky in that you're less likely to be able to retire young, and not just because of your extravagant fatcat mcbankster lifestyle).

jstanderfer 14 years ago |

There is a flaw in this argument.

First they say that 56% of companies started in 2004 were still in business in 2010. Then they reference the VC rule of thumb that 4 of 5 companies will flounder and dismiss VC companies as being "riskier". But then for their argument on making "real money" as an entrepreneur they reference the same VC companies that they already dismissed as being riskier and having a failure rate far higher than the 44% the article led off with.

jpdoctor 14 years ago | |

> First they say that 56% of companies started in 2004 were still in business in 2010. Then they reference the VC rule of thumb that 4 of 5 companies will flounder and dismiss VC companies as being "riskier".

The fact that having VCs lowers your chance of success seems lost on them.

It is perhaps due to a conflict of interest: Harvard is invested in several VC funds.

ef4 14 years ago |

While it is risky, I think that the average person overestimates the risk of entrepreneurship and underestimates the risk of being an employee. There's a cultural inertia that still hasn't caught on to the fact that the equation has shifted.

Entrepreneurship is still risky, but it is much less risky today than ever before because the costs (of coordinating people, promoting an idea, distributing information and products, even manufacturing, etc) are lower than ever.

Meanwhile the risks of being an employee are higher than ever. Job security is steadily eroding for many people because of rapidly evolving technology and globally integrated markets.

I'm not saying everyone should be an entrepreneur, but I do think everyone needs to learn to think like an entrepreneur. Even an employee is a business of one, and they'll sink or swim based on how well they choose their market (employer), tailor their product (skills) to that market, and promote their brand (reputation).

(Also keep in mind that "entrepreneurship" is a much bigger category than the typical hacker-news-worthy startup. There is a wide continuum of risk and reward.)

rbojanowski 14 years ago |

Interesting article but it really only addreses part of the risk function. The part that's missing is what, as an entrepreneur, are you putting on the line.

As a long time entrepreneur, I can tell you I was putting a lot less on the line 15 years ago when I was right out of college. And I suspect it will be different 15 years from now.

Are you putting your mortgage at risk? How many dependents do you have? What's your tolerance for risk?

If I hadn't enjoyed being an entrepreneur so much, perhaps I would be married with kids living in a house with a white picket fence in the burbs. But then again, perhaps my wife would be sleeping with a retired hockey player and my kids would be jerks. Who knows?

My advice is to do it if you love it. If you're not enjoying the ride, get off.

Duckpaddle2 14 years ago |

If entrepreneurship is such a force for good in our society, why doesn't the government promote the small business interests more? What I am speaking of is the truly overwhelming amount of paperwork and taxes that must be satisfied from day 1. Just to beat a dead horse, the requirement for the 1090 forms for all, including corporate payees, would have absolutely choked most small businesses. And woe be unto those who through ignorance or arrogance didn't file. My plea is to all readers, think before you vote this year. See who is really promoting a better environment for small business, and vote for them. Let us reduce the risk for entrepreneurs and build a better society!

Yhippa 14 years ago | |

It is in the best interest of corporations (which are made of people like you and me) to relentlessly lobby the government to continue to make laws favorable to their existence at the expense of others including SMBs which could eventually threaten their business.

If I run a large bank it might be in my best interest to push for laws that mirror my company's current practices to make competitors play catch-up and to shut out upstarts.

superprime 14 years ago | |

You are presupposing that the general social interest is well aligned with those of government/bureaucrats/legislators.

Ex-PraliteMonk 14 years ago | |

Truly overwhelming amount of paperwork and taxes that must be satisfied from day 1?

I can form an LLC in my state online in 30 minutes for less than $200. You could just fill out a "Doing Business As", but the LLC takes the place of that. Once that is done, then open a business checking account using the LLC name. Do you live in California or New York?