Startups – what’s the risk for aspiring entrepreneurs

Posted: March 1st, 2010 | Author: | Filed under: posts | Tags: , | 1 Comment »

This is another post in a series from my recent talk about entrepreneurship. Originally presented at Drexel, I extended this for recent presentations at Penn State. The topic of risk is one that aspiring entrepreneurs often bring up, especially as they weigh job offers from companies versus doing something on their own.

Aren’t startups risky? Sameer Guglani, Founding Partner of Morpheus Venture Partners, recently wrote an interesting post on this and I’ve expanded on some of his points as I’ve discussed this with aspiring entrepreneurs recently.

“You had a great job, earning a nice salary, working for a brand name that people recognize. You traded that in for working all these long hours on this crazy product. Are you nuts?”

The risk element is a question people like to ask about startups. Especially people considering at some level putting (sleepless) years of their life into an interesting concept for a business. And the question isn’t without its merits. Startups fail at high rates. Of those that don’t fail, few become massive homeruns.

Does this make startups risky?

We should make the distinction between risk to the business model and risk to you, the entrepreneur.

For the business model, yes, startups can be inherently risky. The business model will change multiple times. (Ours changed about once a month in 2009.) You may throw it out and start again, from scratch.

For the entrepreneur, the risk is minimal. (Of course, we are assuming that pursuing a startup will not cause you to go without water/food/shelter/etc….) More specifically, there is very little risk to the entrepreneur’s career.

Dave Troy summarizes entrepreneurship researcher Saras Sarasvathy:

“Failure increases the odds of individual success. While the success rate of a typical individual venture might be quite low, an entrepreneur that sustains a failure is more likely to succeed in later rounds. Failure teaches the entrepreneur about affordable risk, suggests boundaries for over-trust behaviors, and offers hints about how to maximize opportunity. We should never stigmatize failure, but instead understand that it is part of the effectual process.”

Ok, so now that we’ve made the distinction between risk to the business and risk to you, the entrepreneur and your career, why is this?

The answer is embedded in another question: My friend recently asked me, if I had stayed in the corporate world, how long would it have taken me to pick up all of the different skills I’ve learned in the last 10 months of Three Screen Games as my full-time position.

As I’ve been explaining it, in a corporate job, for college new hires to progress upwards and gain new skills, you need to ‘check the boxes’. That is, the process is very rigid and structured in most cases. You need to spend 1-2 years in a role, demonstrate that you’ve acquired the skill/executed it again and again and again. Then, you can move on to the next 1-2 year skill building “block”. Maybe in a few years, you’ll be given the opportunity to manage some folks. And maybe in a decade or so, you’ll have P&L authority over a group, gaining some really core business skills there. Who knows… The point is, it’s out of your control. You’re in the process, and it’s up to the HR process to tell you where you’ll go.

Hmm. So, for skills in – core technologies, leading a agile technology team, product management, vendor management, financial management, running operations for a company, legal/financial planning for a business – how long would that be? Let’s say that it’s clear the units are different – months become years for certain. Maybe never.

Bottom line: You build skills that you would have to wait years to obtain in a corporate job.

There are a couple of other nuances to this:

    First, the skills your building are cutting edge. You’re not dealing with legacy systems. Processes that don’t make sense. You’re using technologies and tools that are too new for much of the mainstream corporate world.

    Second, you’re building skillsets that are important to you, personally. This is your startup – you’ve chosen the industry, what you’re going to create. Chances are very good that it’s core to your interests and where you’re interested in going with your life. (It had better be!) At a corporation, you’re building skillets that are important to your boss. If his interests don’t align with your career direction, better add on some more years to the number we came up with above.

    Finally, the contacts that you’re building are unparalleled. You never know when your contacts and connections will pay off. The person sitting next to you in class with a cool idea might be someone you work with down the road. Maybe not on this idea, but keep in touch with these folks. You never know where life will take you. As an example, I’m working with my present co-founder because we got to know each other while at Penn State, talked about working together then (though things didn’t materialize), but we connected on LinkedIn. Then, when he left his previous startup and “end-dated” his position, I pinged him to find out what he was working on next – that’s when it started to make sense to work together.

    Everyone talks about connections in regard to finding jobs. I like how Joel Spolsky illustrates this in one of his (excellent) posts on finding developers. He writes that the best job seekers email their resumes around maybe one or two times in their entire career. Because they have the connections where if their interests/circumstances change, they know where their next step is, because of their network. When you think about how people move between jobs in today’s world, I think this is very accurate.

In Sameer’s post, he ends his thoughts with the following passage, which I think adeptly summarize the point we are both trying to make:

No opportunity comes with surety. Even an MBA from a top B-School might not get the best returns. There are lots of bright ideas which never reap fruits. What is important is that you should be able to separate failure of your idea from your personal failure. Its very clear, if you choose to become an entrepreneur for the right reasons, have the right approach and are determined to give it your best shot for 2-3 years and create value in your venture, chances of failure are near zero. You will learn so much and get to know so many people that even in case of the worst outcome, you will come out way ahead and will be a much wanted resource.

The journey of entrepreneurship is the real value add for the entrepreneur. The result is a by product.

The key thing that separates entrepreneurs from non-entrepreneurs is we just go and get stuff done. Don’t wait for permission. The risk is negligible. Just go do it. The key is to get started.

  • Kke

    You have provided so many insightful and logical reasons for calculated entrepreneuship.
    I always tell people that: History has shown that individuals during economic recessions have turned the tide with small business startups.