Joe Johnson, Ph.D.
Entrepreneur. Investor. Startup Expert.
Entrepreneurs are generally regarded as risk takers. It’s practically romanticized – the struggling entrepreneur with an amazing idea who puts everything on the line to make it big. Digging deep into their own pockets, knocking on every bank door; I’m sure you’ve seen this character portrayed in books or movies. Somehow, the notion has taken hold that entrepreneurs are more likely than other people to take risks and it refuses to let go despite evidence to the contrary. Why is this?
Common Perceptions of Entrepreneurs
The glorification of entrepreneurs isn’t a bad thing – who doesn’t like to be thought of as a risk-taking original thinker? Still, that perception doesn’t lend the stereotype any actual validity.
T.S. Eliot is quoted as saying, “Only those who will risk going too far can possibly find out how far one can go.” This is wonderfully poetic and just what you might expect from a renowned poet and creator. Did he, however, actually follow his own risk-taking bon mot?
T.S. Eliot worked as a bank clerk and plugged away at poetry in his free time. After making a name for himself as a poet, Eliot continued to work a regular day job with a publishing house. The risks he took were with words, not with his employment or income.
And Eliot wasn’t alone. In a study published in 2014, Joseph Raffiee and Jie Feng investigated “hybrid entrepreneurs” – innovators who began companies while still working day jobs. That is, individuals who mitigated financial risks by ensuring the continued receipt of a steady paycheck while toiling nights and weekends to grow businesses.
What Raffiee and Feng found was surprising. While society applauds the “all in” mentality of going for broke to make a dream came true, they discovered that hybrid entrepreneurs had a higher success rate than those who left their jobs to focus solely on building their enterprises. Why might this be?
It appears that those who continued working were better able to hone their business models while mitigating their financial risks. Their success rate was 33% higher than those entrepreneurs who left jobs to start businesses.
In another study, Macko and Tyszka found that while entrepreneurs and would-be entrepreneurs (those interested in starting businesses) were not more prone to taking risks than non-entrepreneurs, they did have more self-confidence. In their study, Macko and Tyszka call the notion of entrepreneurs as risk-takers inconclusive and in need of further research, despite being popularly cited as conventional wisdom.
The Great Risk-Mitigators
It may be better stated that entrepreneurs excel at mitigating risks – at least, the successful ones do. Every risk that is mitigated can increase the chance of a payday.
Think about it: if you’re considering launching an eco-friendly laundromat in your city, would you quit your job, sign a lease, and start buying equipment? No, as an entrepreneur, you’d understand the importance of market research and creating a business plan.
Mitigating risk can be as simple as properly evaluating every idea and considering all possible scenarios. To get our eco-friendly laundromat off the ground, we’d start by identifying whether similar businesses already exist and whether there’s a need for a green cleaner. Every bit of research helps to minimize the potential downside of starting a business. If your city or town is saturated with laundromats catering to an environmentally-minded community, you may reconsider starting your business or pivot to fill a gap you found in service coverage.
Similarly, taking classes on entrepreneurship, writing a business plan, staying employed while starting your business, and investigating local SBA resources can all serve to mitigate risk by helping you line up resources and better refine your business model.
Hedging Your Risks
In his book Originals, Adam Grant mentions that many successful entrepreneurs hedge their bets by creating a “risk portfolio.” Much like a diversified stock portfolio, a risk portfolio functions on the notion of balancing risks. It’s not an actual, physical portfolio nor even something most entrepreneurs consciously do, but a way of minimizing risk by balancing one high-risk action with several low-risk actions.
As an example, Grant focuses on Warby Parker’s innovative eyeglass company to shed light on how hedging one’s bets can help to minimize risk. Why is this important? Simply because, if there’s too much risk, many of us would never open that first coffee shop or launch that innovative website. Too much risk can be overwhelming and the fear of failure may loom too large.
Grant mentions how Warby Parker’s four founders continued to apply for internships and jobs throughout their company’s creation phase and focused on completing their Wharton degrees. They were working with one huge risk – whether people would buy eyeglasses over the internet – and minimized that uncertainty by ensuring that there were failsafes in place, including a try-before-you-buy system and backup jobs in case the business never took off.
Thankfully for them, Warby Parker exceeded their expectations and left Adam Grant, an esteemed Wharton professor, wondering how he had missed the potential of their idea. Grant counts declining to invest in the company as one of his financial failures.
Clearly, there are some very big risk-takers out there, such as Richard Branson and perhaps even Elon Musk. However, even considering the large risks they accept in the course of attempting to change the world via their products and services, they aim to mitigate some of those risks in order to maximize their profits. Both Branson and Musk deal with ideas on a huge scale that most can only imagine while working hard (and hiring people who work hard) to do the necessary research, find financial backing, and limit the risks of their amazing work.
As entrepreneurs, we face real risks daily. Some are small and others can have major implications for our finances and reputations. Still, that doesn’t mean that to be a successful entrepreneur you need to enjoy taking risks or should embrace the biggest risk you can find. Being an entrepreneur is about how you deal with risks and continue to strive to make your vision a reality. It’s as much about limiting risk as it is about taking risks.
Entrepreneurs can be both risk-takers and risk-mitigators, but it’s clear that the entrepreneurs who better manage risk, who can gamble on the right risks and minimize others, are the ones with the greater chance of success.
Grant, Adam. (2016). Originals: How Non-Conformists Move the World. New York, NY: Viking.
Macko, A., & Tyszka, T. (2009, May 8). Entrepreneurship and Risk Taking. Applied Psychology: An International Review, 58(3), 469-487. doi:10.1111/j.1464-0597.2009.00402.x
Raffiee, J., & Feng, J. (2014, August 1). Should I Quit My Day Job?: A Hybrid Path to Entrepreneurship. Academy of Management Journal, 57(4), 936-963. doi:10.5465/amj.2012.0522
About the Author
Dr. Joe Johnson is an entrepreneur, investor, and startup expert. He is the founder and principal of GoodField Investments and the GoodField Foundation (www.GoodField.com).
Joe has a Ph.D. in Entrepreneurial Leadership and an MBA. He is the author of the upcoming book on The Science of Why Most Entrepreneurs Fail and Some Succeed.
Most importantly, he is the incredibly blessed husband of one amazing wife and father of six wonderful children. He resides in Bradenton, Florida. For more information on Dr. Johnson and his work, go to www.JoeJohnson.com.