THE BLOG
02/04/2013 04:23 pm ET Updated Apr 06, 2013

Adjusting for Risk: The Problem of the Individual Actor

Occasionally a company is born that creates immense value, generating hundreds of jobs and even transforming multiple communities. At Venture for America, we are looking to find the people who are capable of helping found or build these companies.

One reason why entrepreneurs are admired is that they often take on a degree of risk in launching a new business. There's reputational risk; your name is on the line to your friends and family who know what you're doing (and they really should know). Then there's financial risk; at a minimum you're devoting time with uncertain reward, and presumably forgoing some form of income and/or putting your own money in to get the business off the ground. If a business doesn't achieve its goals, the founder(s) often experience significant personal consequences.

How do we increase the odds of individuals taking on the challenges of starting a new business?

One of the quandaries is that many of the people who would have the most to offer as a founder or inventor have other appealing options. Let's say that you were to line up 100 brilliant 21-year-olds that might have the potential to start a company someday. You tell them, "Okay, you have two choices. You can commit to being an entrepreneur. There's a 10 percent chance that you become extraordinarily successful, wealthy and create hundreds of jobs. There's a 30 percent chance that you're a modest success. And there's a 60 percent chance that you toil in obscurity for years and have some good stories to tell. Alternatively, you can commit to a high-paying career at a well-regarded company, and there's a 95 percent chance you'll succeed by most conventional standards."

What would the 100 brilliant 21-year olds do? Most of them would probably opt for the latter path, because they only have one outcome to consider -- their own. They have one life to live, and with the first option, both the chances of failure and the consequences may come across as unacceptably high. These individuals have often been successful at whatever they've put their minds to up to this point, which may make taking on risks unappealing. Plus, their parents may have invested considerable resources getting them to this point, increasing the pressure to ensure a return.

What would happen if you were to line up the same 100 21-year olds and give them the same choice, but with this change: "You will all sign a contract that if you become an extraordinarily successful entrepreneur, you will share the financial and reputational rewards with the other 99 people here in this room by hiring as many of them for your venture as you can." Would this change anything? Now, each person's downside would be significantly reduced as long as someone in the cohort does extremely well. Taking on the risky path could become a much more reasonable bet for each as a result of the collective understanding.

One way to get more of our most talented young people to embark on the higher-risk, higher-reward path is to create a community and network. It might be a lot easier to take risks if you're part of a group who will look out for one another.

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