Tuesday, July 2, 2013

Is America’s Aversion to Risk Threatening Entrepreneurship?

America is a nation that was born by people willing to take extraordinary risks.  The settlers who came here put their lives on the line and many paid the ultimate price.  Those who headed west did the same, creating the cowboy image of tough, independent, hard working people who lived a life of risk. While most took the precautions that they could reasonably take, they nonetheless threw caution to the wind against the daunting odds of achieving their goal. They took these huge risks seeking a better life, a better world.  It is those same spirits that caused the earliest American entrepreneurs to quit their job and go out on their own. To hang a shingle selling their own goods or services because they thought they could do it better and bring themselves a better life even though it exposed them to personal financial risk.  While American entrepreneurship is still the envy of much of the world, our nation’s growing intolerance for risk as evidenced in how we address safety in sports, in the emotional coddling of our children and in the need to protect people from their own decisions may put the very foundation of our entrepreneurship at risk. 

With respect to sports, all sports have inherent risks of injury – some more than others. While it certainly makes sense to seek better forms of protection and prevention to reduce the potential for injury, there has been a growing willingness to change the very essence of games simply to reduce the risk of injury. The NFL has grown so concerned over lawsuits from former players who made their own choice to be paid to play the game that major changes to rules have been made with the objective of reducing the potential for injury and with a growing willingness to do so even though some of these rule changes have fundamentally changed the game.
Even our President chimed in with his risk averse mindset publicly stating that if he had a son he might not allow him to play football.  I wonder if this means he would also prevent his child from the risk of being an astronaut, scuba diver or a rodeo star?  Risk averse leadership like this encourages the public to follow suit or at least to find in favor of a suit like when football helmet maker, Riddell, was ordered to pay damages, not because their product was defective, but simply because they didn’t warn users of their helmet about the dangers of concussions that the very helmets were purchased to protect.  I suspect next will be seat belt manufacturers getting sued because they didn’t inform you that driving a car could be dangerous and PC manufacturers because they didn’t warn you that typing can cause carpal tunnel syndrome.  Can you imagine what is going to happen to boxing soon? I’m envisioning 3-pound gloves and rules prohibiting hitting your opponent more than twice in a row!
There is a fundamental difference between improving preventative measures and changing the nature of a game. The former is why NASA had lots of tests and backup plans when they went to the moon. The latter would be equivalent to changing the goal of landing a man on the moon to that of landing a monkey there. 
Let’s move on to emotions. Yes, personal feelings. The world can be a tough place. The events, efforts and activities of life have the potential to lead to personal disappointment. In addition, people can be cruel and hurt another person’s feelings on purpose. It used to be that we endeavored to teach our children how to deal with disappointment and with bullies while also teaching them not to be emotionally cruel to others. Now we see youth sports leagues where they don’t keep score because we want to shield children from the disappointment of losing. We have schools eliminating academic honors so as to not hurt the feelings of those who did not achieve them. We see schools that have banned the simple act of declaring someone as your “best friend” because other kids that don’t have one might be hurt.  Other schools have banned the ability for students to invite children to their birthday party because those that don’t get invited might feel bad. If we protect our children against such every day emotional challenges, how can we even hope for them to grow up into entrepreneurs who will need to endure extraordinary emotional challenges in the course of trying to build a business?

Last, we have the risks created by individual decisions. The very essence of entrepreneurship and business itself is that of making decisions that result in significant risk. Yet, we have our nation’s largest city banning large soft drink cups to protect people from what Big Brother views as their own bad decisions.  San Francisco banned the inclusion of toys in the famous McDonald’s happy meal because apparently parents aren’t capable of deciding whether or not to feed their kids the meal when they beg for it because of the toy. While you may feel that organic raw milk is natural, California will confiscate it from your home. And the long-time entrepreneurial tradition of kids setting up a lemonade stand is under attack in many states. If we allow our children to grow up in a “nanny-state” then we are teaching them to look to the government for decision-making around risky behavior rather than learning how to weigh information and take informed risks like good entrepreneurs do. 
Life is filled with risks. People will always make some bad decisions.  If our nation is going to strive to protect people against the risks associated with their own decisions, protect them against having hurt feelings and tell them they shouldn’t play a sport because they might get hurt, we may soon be looking at a nation of followers rather than leaders and risk takers. And that will mean a decline in the number of entrepreneurs that have created much of the economic growth that our nation has enjoyed. In fact, it appears it may already be happening. In the last 30 years, the percentage of all U.S. businesses that were startups has declined fairly steadily and overall has dropped by about 35%.  
At Access Venture Partners our logo is a cowboy riding a bucking bronco. Riding a bronco is not for everyone. But the cowboy knew the risks and the rewards before he got on the horse and he chose to take the risk anyway -- just like the initial settlers and those that headed west. Just like entrepreneurs who risk their financial livelihoods.  As a society, we should continue to celebrate risk takers rather than worrying about protecting them from their own choices.      


Elizabeth Kraus said...

Good post David! I've been doing some research on how societal reactions to failure affect entrepreneurship and my hypothesis is that entrepreneurial success is both deterred and catalyzed by failure. You have to be comfortable enough with failure to get started, but if there isn't enough to lose, it is hard to keep going. A few interesting things I found:

1) The Global Entrepreneurship Monitor has identified cultural adversity to failure as one of the key indicators of a country's entrepreneurial potential. They have conducted a study to estimate the percentage of the population who view a fear of failure as a barrier to starting a business. The US falls in the middle of that scale, further proving my hypothesis: http://www.gemconsortium.org/key-indicators
2) In Sweden, their conformist culture is both a positive and a negative entrepreneurial force. It is not widely acceptable to be "different" and failure comes at a high social cost. However, once something starts to take off, their herd mentality makes it REALLY take off. Additionally, the country's generous welfare system reduces the feat of financial failure for entrepreneurs and enables them to make more financial risks.
3) A fear of failure is also a significant barrier to innovation within large corporations. This is also a plus and minus for startups. There are fewer opportunities to start a business within corporations, but corporations are likely acquirers because buying innovation allows them to innovate without taking the risk of early stage failure.

Just a few thoughts... Thanks!

Carl Lawrence said...

I find it interesting (confusing) that your blog supports greater risk taking, while essentially every venture funding source we know of is taking the opposite position, including yours. Granted, the reward must support the risk, but I am finding that investors are only interested in projects below a certain risk level, no matter the size of the reward. They appear to require the same level of risk going in to a project with a $25M exit as for a $2.5B exit. What metrics are used that actually take the proforma exit into account?
Additionally, the ROI for the seed investment can be better than ten times that of the series B investment, yet professional investors wait to later the later rounds. Why is that? Could it be that the risk is too high, although that risk might still be balanced with a higher reward?
Thanks for blogging about risk. (A couple of weeks ago I compiled a list of risks for our project and will soon be ready to share it with interested parties.)

David Gold said...


I can understand why you would have the perspective that you do regarding the level of risk venture funds are willing to take. But, speaking for Access Venture Partners, we are willing and have taken very high risk with many of our investments. For example, we invested in NexGen Storage (acquired by FusionIO) nearly 2 years before they got a product to market. But the earlier the stage of the company the more critical the size of the market and having a high probability (upon success) of exit valuations that are very high multiples of revenue. Along with this comes evaluation of how much capital will be required (too much and it get's out of our zone as a smaller fund) as well as the risk level with the team which is even more critical the early the company. So, it isn't quite that black and white. All of our investments are early stage... some earlier some a bit later but all very new companies and if you look I think you'll see that other VCs are still making very early stage investments as well (albeit not nearly in the volume that VCs make later stage investments).

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