Is Entrepreneurship a Gamble?
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I was recently talking with a colleague about the growth of entrepreneurship in the United States over the past 4 years. I asked if he ever considered being part of an entrepreneurial venture. As an experimental economist, he always has a methodical and insightful way of analyzing every situation.
"No", he said flatly. I was greatly surprised by his quick answer.
You see, he has many of the skills that are valuable to startups: computer programing skills, research ability, finance and accounting knowledge, etc. With this much ability, I was surprised that he never considered dedicating his talents to creating a new business venture.
After some prodding, he reluctantly answered my inquisition of, "why not?"
In summary, he saw entrepreneurship as a gamble. He didn't like the risk associated with failure - given the amount of effort required to successfully build a new business. Admittedly, I was a bit defensive at first hearing the statement.
I immediately began to defend small business ownership and new venture creation, citing specific numbers supporting the proposition that entrepreneurship is the lifeblood of the US economy and the vehicle for innovation in modern society. It wasn't until later that I began to ponder his position on the merits.
His opinion was based on the amount of effort required to establish a successful venture. He pointed out that if an individual were to put that much effort into his or her work at an established organization then the likelihood of reaching a senior (and likely high-paying) position is almost certain. Individuals seeking a more certain outcome would be better suited to put their full effort into an employed position.
My immediate response focused on the risk-return argument. That is, the perceived higher risk of the entrepreneurial venture is compensated by the potential return on investment (time and money). An employee may one day become a senior officer of a large business, but an entrepreneur could become the next Bill Gates, Richard Branson, or Mark Zuckerberg. In sum, the potential return more than adequately compensates for the risk of failure.
Well aware of these points, my colleague acknowledged my argument but supported his position reaffirming his personal preference for a more certain outcome. Later that day I began to revisit the earlier conversation with my colleague. Our conversation demonstrated an important divergence between the statistical probability of a baseline understanding of success and the varying types of incentives that motivate individuals.
Anyone who has ever constructed a decision tree knows that the rational decision between two choices is the one that produces the highest value when multiplying the probability of occurrence by the potential return (value - generally in currency).
Unfortunately, this simplistic decision model fails to incorporate the other forms of value that the individual would receive from a given choice. Entrepreneurs often seek forms of value other than the authority and salary associated with a position in a larger firm. Commonly, they may seek the enjoyment of working for oneself, creating a new product or service, employing others, creating value for clients or customers, etc.
These are types of remuneration that an employment position may not be able to offer. Even in ventures that ultimately fail (for any number of reasons), they often provide benefits or incentives to the entrepreneur that outweigh the certainty of a salary.
What do you think? How do you weigh the certainty of an employment position against the value received from undertaking a new venture?