The Entrepreneur’s Risk Matrix

Paul Kedrosky recently had a post about the decline of the number of entrepreneurs. It generated a ton of comments, with a pervasive theme being that there would be more entrepreneurs if it weren’t so risky. This raises something that I’ve thought for sometime is a misconception. Yes, being an entrepreneur is risky, but is it that much riskier than the alternatives?

I’ve been an entrepreneur now for several years and have started a couple companies. I remember a conversation with my wife a few years ago in which I suggested that it must be hard to be married to me given all the risk and financial uncertainty associated with my career. She immediately said, “I don’t know that it’s so risky. Is it any riskier than going to work for a big company that can fire you anytime for any reason, many of which have nothing to do with you? At least you’re controlling your own destiny rather than relying on some else to not screw it up.”

She was right. Things can get just as bad if you’re fired from a “safe” job. A lot of people who took those kinds of jobs over the last decade are experiencing significant financial stress in the current economic climate, even if they haven’t been laid off. As an example, I overheard a conversation on a flight recently in which one of the flight attendants was lamenting that she makes about 30% of what she used to because of reduced hours, fewer and shorter routes and reduced salary. Ten years ago, that job probably seemed pretty safe compared to starting a business.

Moreover, entrepreneurs who do “fail” tend to be just fine. When I started my business, I had a mentor who made me outline the worst case, Armageddon scenario for the venture. The point was that I would be fine in the long run even if everything went to hell and the business failed. That tends to be the case most of the time, and many entrepreneurs cite failure as a deep learning experience.

Yes, starting your own business is risky, whether it’s venture-backed or not. But society likes to paint an extreme picture of entrepreneurs as somewhat crazy people who aren’t happy unless they’re living on the razor’s edge financially. Most entrepreneurs I know (and I know a lot) don’t act this way at all. They take financial and career risks, but those risks tend to be carefully considered and calculated. They win some and lose some, but they tend on average to be “up” at the end of the day, both financially and in terms of overall job satisfaction.

Most of the wealth in the country is held by those who started a business or who inherited money from someone who did (read The Millionaire Next Door). That’s what drives people like Mark Danuser, featured in a recent New York Times article, who founded Better Shredder in 1996 and bootstrapped the company with second jobs and personal debt, and who is now in the market to sell his company for $2 million or more. That payout potential is an important counter-balance against the risks of entrepreneurship, not only for web-startups but also for document shredding businesses and the like.

Being an entrepreneur isn’t always the best answer and isn’t for everyone. Some people wouldn’t enjoy it. For others, it’s not the right time in their life to explore starting a business as an option. It’s hard. Really hard. It takes passion, drive, intelligence and a bunch of different skills. Many good ideas require significant capital, which can be hard to obtain. It’s also a roller coaster ride emotionally. The highs are really high and the lows are really low, and they can come in fast succession. One of the results can be that entrepreneurs go through cycles of feeling rich, then broke, then rich again, often in the same week. But for all the reasons to potentially pass on an entrepreneurial endeavor, risk seems to be overblown. In many cases, it should not be the hurdle that it is made to be if it is analyzed compared to the alternatives and the upside potential.

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Paul Koenig is co-founder and managing director of Shareholder Representative Services (www.shareholderrep.com), which serves as a shareholder representative following the acquisition of a VC portfolio company.