Entrepreneurship: Risk for the Love of Your Passion

Goodday....

It is axiomatic there is no meaningful reward in life without risk. Human beings are generally risk adverse for self preservation reasons. It would simply be too stressful for a person to make the riskiest choice every time an opportunity presents itself in the hopes of obtaining the maximum reward (i.e., investing in only penny stocks on margin, foregoing all insurance to save on premiums, committing crimes, asking only super models out on dates, etc.). More likely than not, if a person makes all the aforementioned risky decisions on a constant basis, the likely result is he will be broke, in debt, feeling rejected/depressed, and in jail.

We hedge our risks in life and rightfully so. Volatility and the accompanying stress it brings is detrimental to our mental and physical health. Studies have shown, if all things were equal and the results were proportionately calibrated, the rewards of risk do not make up for the negative impacts of failure. We experience our failures much more strongly than we experience our successes. Therefore, people may make a small risky decision here and there, but people tend to avoid taking big risks. And in a capitalistic society like ours, there are few bigger risks than starting a business and putting one's career on the line.

In starting a business, the risk is significant. The entrepreneur is foregoing a steady paycheck, thus paying an opportunity cost, and furthermore the entrepreneur is likely investing her own money into the business while recurring liabilities pile up. If the business opens, and only crickets and tumbleweeds enters its doors, the entrepreneur is in trouble. Unfortunately, start up failures are not an uncommon occurrence. According to the Small Business Administration (SBA), 30% of start up businesses fail within two years and 49% fail within five years. The U.S. Bureau of Labor Statistics states 65% of start up businesses will fail within 10 years. Likewise, the general rule of thumb amongst venture capitalists is that roughly 40% of start ups fail, 40% yields a return on investment, and 20% will produce substantial profits. What is more certain is that in a population of entrepreneurs, a majority of them would have been better off financially if they had worked for somebody else.

In light of these depressing statistics, why would anyone want to be an entrepreneur? Why take the risk to build a new business instead of just joining an established company? Some may say it is an American virtue, that it is a patriotic endeavor akin to that of our freedom of expression. Others may argue about the statistics, such as the fact statistics are only meaningful in populations and each entrepreneur participant in that population experiences only his or her result (think about the flipping of a coin where it's supposed to be 50-50 heads-tails but you may get 5-6 heads in a row; each flip is independent of the population's 50-50 statistics), that niche markets are different, or the individual entrepreneur is unique in ability and different from the average entrepreneur. I will put all that to the side. Let's presume the dismal probability entrepreneurship will yield a negative return relative to entering the workforce with only a small chance of reaping significant gains. My position is entrepreneurship is still worth pursuing for the intangibles.

People who start new companies tend to actually like what they're doing in two respects. First, they like the substantive areas they work in. That is because they have a choice in what they do; they have control. As a lawyer, I work in the practice of law. I enjoy crafting legal arguments and going through the logical deduction process both in and out of the courtroom. The impact my work may have on my clients, both negative and (hopefully) positive, are personally meaningful to me.

Second, and more importantly, entrepreneurs take pride in the process of building up a business. They turn nothing into something. They create something which reaches others and is more than just beneficial to themselves. The desire to build and expand one's sphere of influence is both innate and fundamental, whether for better or for worse. From the innocent baby who grows up to be a family man with growing investments for his kid's college tuition to the more cynical scene of an infantry soldier who becomes a dictator desiring to invade foreign land, everybody wants to build a legacy. They want to feel as if they had made an impact along the way. Entrepreneurs create jobs for others which in turn facilitates the economy (over 66% of the US economy is fueled by consumer consumption). From this perspective, entrepreneurship is both self-serving and communal. Like Adam Smith's Invisible Hand had taught us, you cannot have one without the other. I, however, would like to believe the self-serving interests of the entrepreneur is perhaps arguably a bit more virtuous than for just the love of money. I focus on the self-serving interest of pride. There is psychological merit to building, maintaining, and/or expanding one's business independent of financial rewards. After all, there is a point of diminishing return in terms of happiness and the efforts necessary for the accumulation of wealth (some studies have even pinpointed this to be around $78,000/yr for an individual). Great joy is experienced when one goes from starvation to eating a burger. Less joy is experienced when upgrading from the burger to a filet mignon steak. The thrilling experience of coddling your "baby" business, nurturing it, watching it grow, and knowing it will have a lasting impact on others is much more meaningful in my opinion.


Cheers...