Myth: Starting a Business Involves Lots of Risk; Truth: It May Not Be as Risky as You Think
- Jun 11, 2008
- Why It's Difficult for People to Quit Their Jobs and Start Their Own Businesses
- Make an Objective Decision About Starting a Business by Setting Aside Anxieties About Risk
- Determining What You Want Out of Life
- Having a Good Sense of What's the "Worst Thing That Can Happen" if Your Business Fails
- Researching the Business Opportunity
If you ask people with traditional jobs why they have never started their own businesses, a very common response you'll get is that starting a business involves too much risk. It's a natural response. In general, people are risk-averse, particularly when it comes to losing something they own or possess. For most of us, there are few things that are more important to our security and sense of self-worth than our jobs. As a result, it's not surprising that people are protective of their jobs and almost instinctively see leaving their jobs to start their own businesses as a risky proposition.
The problem with these sentiments is that they are overly protective and unnecessarily deter people from starting their own businesses. There are many people, some of whom you met in Chapter 1, who have successfully transitioned from traditional jobs to self-employment. The general notion that starting a business involves a great deal of risk is simply not true. The often battered about figure that 9 out of 10 business fail in their first few years is an exaggeration. According to Brian Headd, an economist for the U.S. Small Business Administration, 66% of new businesses are still operating after two years, 50% survive four years or more, and 40% survive six years or more. Additionally, about one-third of all businesses that close or are sold are considered to be successful by their owners.1
It's also important to place starting a business as an alternative to traditional employment in its proper perspective. While starting a business involves risk, working for a traditional employer is not risk-free. Between 70,000 and 80,000 corporate employees are laid-off every month, about 30,000 more per month than in the early 2000s. In addition, in many industries, pension funds, health insurance, and other benefits are being trimmed or eliminated at a rapid pace. This is a trend that is occurring in many countries around the world.
A misconception related to the myth that starting a business involves lots of risk is the often expressed sentiment that business owners themselves are risk-seekers. This idea stems largely from the impression that people who start their own businesses are willing to risk their careers, life savings, family relationships, friendships, and emotional well-being on chancy new businesses that might or might not succeed. While starting a business does entail risk, researchers have found that business owners are "moderate" rather than high-risk takers.2 There are two explanations for this finding. First, rather than plunge blindly into a new venture, business owners tend to take well-informed calculated risks. They also try to accurately discern the degree of risk involved through the techniques we talk about in this chapter. As a result, most business owners don't tend to perceive starting a business as being as risky as you and we might see it. Second, in many cases, business owners redefine the meaning of risk and see their businesses as secondary or acceptable risks in their lives. This scenario played out for Kenny Kramm, the business owner introduced in Chapter 1. Recall, Kramm worked feverishly to find a way to help his infant daughter, Hadley, take her medicine, and as a result, started Flavorx, a company that makes additives that help medicines taste better. For Kramm, the biggest risk in his life was his daughter's health, not the business he was starting. Similar examples include mothers or fathers who start home-based businesses so they can be home with their kids and people who start businesses to pursue passions that are particularly important to them. It's not that these people are reckless or are predisposed to accept higher risks than nonbusiness owners. It's just that they don't see their businesses as high-risk or are willing to accept some additional level of risk, given the other opportunities their businesses allow them to pursue.
If people are in general risk-averse, what type of people, then, are able to set aside the natural tendency to protect their jobs and maintain the status quo and start their own businesses? What set of attributes motivate someone to learn enough about a business opportunity to make a well-informed decision about whether it's a good opportunity or not? Or what set of qualities gives a person sufficient drive to quit her job or work hard enough in her spare time to start a business to accommodate a higher goal, like Kenny Kramm did when he started Flavorx?
Before addressing these issues, we'd like to briefly explain the nature of risk and why it's difficult for people to quit a job to start a business. The very nature of risk inclines people to protect what they have, whether it's a job or another asset, rather than make a dramatic life change like starting a business. After looking at these issues, we'll articulate the attributes that allow people to set aside their aversion to risk and start their own businesses.