Do Entrepreneurs Take Big Risks? Only the Poor Ones

On building low risk, high reward situations

Making big life choices is tough, because we almost never need to choose between good and bad. We usually choose between two good choices, from which one has the potential to turn out really-really well.

Is there a better job out there waiting for you, or should you stay put and be happy with your current position? Should you take a sabbatical and go back to school? And, most importantly for you reading this: when is it a good time to start working on a startup idea, to jump ships and become a full time entrepreneur?

We can’t predict the outcome of every branch in a decision tree, because life comes with its many twists and turns. What we can do however, is to assign risk and reward values to each option.

Keeping the old job is the low risk, low reward option: we already know everything about it. But how risky is it really to start a new job, or starting a new company? It depends.

Entrepreneurs are often seen as risk takers, but in reality, this can’t be further from the truth.

You surely heard the story about how Virgin Atlantic started many times. For a quick recap, Richard Branson was due to fly to the British Virgin Islands, when his flight got moved to the next morning. He was in a hurry, so he used his credit card to charter an aircraft, wrote “Virgin Airlines” on top of a blackboard, and started selling the seats to the other stranded passengers.

When starting a new company, it’s a good idea to test out the product. Is there a market for it? Can we build it? Note how this experience could have turned out both:

  • Branson charters the aircraft but can’t sell a single seat. The upside: he’s still on the British Virgin Islands. The downside: the ticket cost a hell of a lot more that he wanted to pay for it. Not great, but something a successful entrepreneur can live with.

  • Everything goes prettily, and Virgin Atlantic is born (with a great origin story)

This first experience testing the “airline” went well, so what could possibly go wrong? Surely, everything: the industry’s margins are infamously thin, the upfront investment is sky high and the competition is deadly. The risk was surely too high for it to be worth it.

But Branson found a way to reduce the risk. At a new airline, the biggest cost is the aircraft and its maintenance. He made a deal with Boeing: he buys a secondhand airplane, but if things don’t turn out well, Virgin could return it by the end of the year. Another example for two favorable risk-reward scenarios:

  • If things didn’t look so bright by the end of the year, much of the investment is gone — but at least the investment didn’t include shelling out for a complete airplane.

  • If the new company was to succeed, Virgin Airlines could keep all the winnings.

As an entrepreneur, our job is to create a situation where the upside is unlimited, and the downside is capped.

Before building your next product, see if you can test it in a small, controlled experiment. And if you need to start something real big, see how you can protect your investment first.