Myth of the Fearless Entrepreneur
Thursday, May. 22, 2008 By KEITH MCFARLAND Images.com / CorbisArticle ToolsPrintEmailReprintsSphereAddThisRSSYahoo! Buzz What distinguishes an entrepreneurial leader from the rest of the pack? Most people would tell you it is a tolerance for risk, and most people would be wrong. Having studied 22 years of performance data on more than 7,000 growth companies, I discovered that the idea that entrepreneurs are, by definition, risk takers is a myth. Curiously, many entrepreneurial leaders actually lose their nerve as they become successful. That may sound like a reasonable trade-off, but this tendency can hurt a firm's chances for long-term success and growth.
When calculating the entrepreneurial risk involved, people often get the math wrong. Take starting a business, for example. Some might say Scott Cook, co-founder of Intuit, took a huge risk when he left a successful career at Bain & Co. to help start the company. But Cook figured otherwise. "The worst thing that could happen to me is that I would spend a few years paying off credit-card debt. To me, it looked like a risk-free decision," he said.
Like Cook, most people who start businesses don't take big risks because they don't have a lot to risk when they're getting started. Consider the history of the U.S.'s fastest-growing firms: 73% of them were started with less than $100,000 in capital. That's clearly in Cook's "go back to work, and pay off the credit card" range. And contrary to what most people imagine, most new businesses are not started with risky, new-to-the-world ideas like those of eBay and Google, which promise to transform the way we buy things. Cook reported that when his company launched its Quicken software program, there were already 46 similar products on the market--causing him to joke, "We enjoyed 47th-mover advantage." Columbia University business professor Amar Bhidé found that only 12% of growth-company founders surveyed attribute their success to an "unusual or extraordinary idea"; 88% reported that their success was due mainly to "exceptional execution of an ordinary idea." There's a lower risk in getting the details right.
So if entrepreneurial leaders are not, by definition, big risk takers, just what is the relationship between a willingness to take risks and the long-term success of a business? There is a relationship, but it is not one you would expect. The evidence suggests that as entrepreneurial leaders become more successful, there is a tendency for them to become more risk averse--a concept called "loss aversion" made famous by Israeli psychologists Daniel Kahneman and Amos Tversky, who studied behavioral economics. Kahneman and Tversky found that people don't always behave in the rational manner that the classical economic models predict. When they get ahead in the game, they may begin to get conservative--playing it safe even when the odds say a big wager is likely to pay off.
One of the factors that separate breakthrough companies from their competitors is the tendency to continue to up the ante as the stakes in the game increase. Polaris Industries left the safety of its snowmobile niche to battle the Japanese in the ATV business and later took on the gang at Harley-Davidson in the motorcycle business. The Staubach Co., the commercial real estate broker, pushed to expand nationally before other tenant-rep firms did. Intuit faced down Microsoft twice, in the personal-financial-management-software business and in the small-business-accounting business. In each of these cases, competitors chose to play it safe and consolidate their winnings rather than double down in a market. They learned the hard way that the only safe bet in business is the one in which a firm continues to play aggressively as the stakes of the game increase.
McFarland is the author of The Breakthrough Company: How Everyday Companies Become Extraordinary Performers
No comments:
Post a Comment