Entrepreneurship Doesn’t Always Deserve the ‘Risky Business’ Reputation That It Is Assigned

Most of us are aware of the state-wide efforts underway to jumpstart the Connecticut economy by inspiring entrepreneurship. As we consider these efforts, it is worth contemplating how it is that the entrepreneur does what she does.

What particularly interests me is that entrepreneurship is often associated with the concept of risk. I have heard many policy makers, and even university presidents, advocate in the same sentence that we need more entrepreneurs… we need more risk-takers.

To be clear, entrepreneurial ventures, particularly those making the greatest impact, are often very risky. Indeed, high rates of venture failure are evidence of risk. However, I suggest that the link between entrepreneurship and risk is problematic for two reasons.

First, it turns out to be wrong. Research undoubtedly shows that the entrepreneur is not any more risk-seeking than the typical manager. Let us be clear about what risk-seeking behavior represents. Consider you have two alternatives – (a) receive $1 million, and (b) a coin toss with a chance for either $0 or $2 million. The risk-seeker would prefer alternative (b) every time.

None of the entrepreneurs I interview have described themselves as gamblers. Rather, they prefer to characterize themselves as clever risk managers, seeking to mitigate risk. This is consistent with the emphasis by venture capitalists and angel investors to evaluate entrepreneurs on whether they perceive and attempt to mitigate the relevant risks (e.g., management risk, product risk, business model risk, financial risk, market risk).

It is also consistent with the recent wave of enthusiasm within funding agencies, such as the National Science Foundation and the National Institute of Health, encouraging entrepreneurial experimentation to reduce market and business model risk.

Healthcare entrepreneurs seek to mitigate product risk through patent searches to assure freedom to operate and product competitive advantages tied to technology. Many other entrepreneurs manage management risk through the hiring of key employees or building potent advisory boards.

So, while entrepreneurs are not afraid of risk, they do not seek it out. Rather, they try to manage it though thoughtful experiments and leveraging resources.

A second reason a link between entrepreneurship and risk might be problematic is that it implies something is “at risk” if the venture fails. While entrepreneurs may lose their own financial resources, it is often the case that venture investors have the most at risk.

It might be argued that an individual’s time or employment opportunities are at risk. But, in a study of over 40,000 Swedish men, our research found that over half started a venture while retaining their current job, and switched to entrepreneurship only when the venture growth accelerated. Perhaps venture failure might harm a person’s professional reputation, but in many cultures entrepreneurial failure is considered a badge of courage. So, it should not be assumed resources are at risk.

Of course, it is often the case that entrepreneurs do not perceive the risks underlying their venture opportunities. In fact, one survey discovered that entrepreneurs drastically overestimate their likelihood of success, with over 95 percent believing their venture would succeed.

In my view, a key reason for entrepreneurial education is to temper over-optimism through objective analysis and experimentation that inspires creative revisions to business models. Such programs are a key element to the entrepreneurial infrastructure and accentuate efforts to accelerate effective entrepreneurship.

Timothy Folta
Professor of Management, UConn School of Business
Professor Tim Folta holds the Thomas John and Bette Wolff Family Chair in Strategic Entrepreneurship at the UConn School of Business. He also serves as the faculty director of the Connecticut Center for Entrepreneurship & Innovation.
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