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Is An Entrepreneur A Risk Taker, Predator Or Iron Chef?

In a piece in The New Yorker titled “The Sure Thing:  How Entrepreneurs Really Succeed,” Malcolm Gladwell lists a series of clever deals that allowed entrepreneurs such as Ted Turner to get into profitable ventures without having to make substantial investments of their own money.  Writing in an engaging and provocative way leads Gladwell into “buying” a thesis by French scholars Michel Villette and Catherine Vuillermot that successful entrepreneurs are “predators.”

Of course, predators sometimes become successful entrepreneurs.  But the issue of predation is a troubling one.  Predator entails prey.  Which means we are back to the old idea that one person’s profit necessarily has to equal another person’s loss.  Is it really possible to create the kind of viable and enduring ventures such as CNN without a lot of people becoming millionaires in the process, not to mention the creation of jobs and innovations that form the basis of robust economies?  Conflating the story of Wall Street speculator John Paulson with stories of entrepreneurs such as Turner further muddies the waters of the thesis.

Gladwell is correct in summarizing research that shows that entrepreneurs in general are not risk takers, whether measured in terms of psychological propensities or in terms of own resources invested.  But does that automatically make them predators?  Entrepreneurs clearly are not speculators, they do not make “bets” on things outside their control.  They do exactly what Ted Turner did.  They put together deals that often cost them nothing.  But most of the time, the deals cost others nothing as well.  They find new uses for unused or slack resources other people have; or even waste that people want to get rid of.   Sometimes, as in the case of WJRJ, the television station Ted Turner purchased for a song, they allow other people to get out of bad deals they want to get out of anyway, without having to incur more severe losses than if they made the deal with the entrepreneur.  Does this make them prey?  Or are these deals what most deals are — a matter of mutual convenience and differing preferences?

Research that my collaborators and I have conducted over almost a decade spells out how expert entrepreneurs think about investments in new ventures.  They do not try to predict the future and then make bets – whether using their own or other people’s money.  Their preference is to design new opportunities, not merely make bets on preexistent ones.  They like control and the chance they value the most is the chance to shape the future in ways that leverage who they are, what they know and whom they know.  The interesting question therefore is not whether they could “see” the sure thing ahead of time and exploit other people to win it; but whether the so-called sure thing would even exist if they had not put together the low-cost or no-cost deal in the first place.

Conventional wisdom not only spouts the myth that entrepreneurs are risk takers, but also portrays them as visionaries who can see things other people cannot.  Truth is, each one of us has a unique viewpoint and a unique set of resources that no one else has.  We can all be visionaries in that sense.  But unlike most of us, entrepreneurs actually act on these to create value for themselves and those who are willing to co-create it with them.  In doing so, they are less like gamblers and more like an “Iron Chef” who has the skills to bring together readily available ingredients, whether mundane or exotic, in delicious ways that make us want to pay more for a taste of the end product.

Our research into entrepreneurial expertise shows that in making investments, experienced entrepreneurs use a heuristic that we call “Affordable Loss.”  Instead of trying to calculate the odds of making lots of money and then risking the outlay needed to place the bet, they tend to look for deals that would allow them to achieve some type of positive return even if they lose what they are willing to invest.  This might seem like a paradox until you realize that resources invested need not consist of money and positive returns need not necessarily come from the first deal.  Instead the return you seek could simply be to position yourself in line to open up and achieve much better opportunities down the road.  In fact, asking yourself up front whether you would do the deal even if you lost what you are investing in it, forces you to (a) invest a lot less than you might if you are blindly focused on the upside and (b) choose venture ideas that have non-economic upsides that matter to you in special ways.  Of course expert entrepreneurs take this logic to its extreme by understanding that if you can get the deal done with close to zero resources invested, you literally have nothing to lose.  On the one hand, this allows you to fail and experiment and learn along the way.  And on the other hand, when you do succeed, it appears like a sure thing – after the fact.

Does all this mean that entrepreneurship is altogether without risk?  Of course not.  As Gladwell points out, sometimes what one risks is reputation, at other times it may be time, energy, emotion, even peace of mind.  But the real issues come up after you pull off the deal that gets you in the game in the first place.  For once you have bought that television station or the car factory through clever deals that don’t need enormous amounts of speculative investments, you have to get up day after day and deliver on the operational details that ultimately create the bottom line.  Experienced entrepreneurs will tell you that what keeps them awake at night is next week’s payroll; and the possibility that the car your factory produces might inexplicably accelerate; the thousand and one things and people that need your attention and (sometimes) tender loving care on a daily basis – maybe for years before you can see any positive cash flow, let alone a positive bottom line that actually endures over time.

Realistic stories of entrepreneurship are not about risks, they are about responsibilities.  And the latter, for sure, constitute the only sure thing about entrepreneurship.

Saras Sarasvathy, Isadore Horween Research Associate Professor
The Darden School
University of Virginia