Is entrepreneurship only for rich kids?
The controversial claim has been made that our entrepreneurial adventure here in Silicon Valley is not built on the back of special risk taking entrepreneurs, but in fact it’s just a bunch of rich kids with little to lose by taking risks. The article makes some interesting points and has some data to back it up, and is worth reading. At the core, I disagree — I think it’s right but incomplete — and lay out my thinking below.
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The author claims the common characteristic for entrepreneurs is not an uncommon tolerance for risk, but rather the financial wherewithal to do startups without actually taking any real risk. Basically, entrepreneurship is a rich kid’s sport.
I don’t entirely agree with this. There is an element of truth, but I think that in Silicon Valley, the landscape is changing.
Startups fail. Choosing a career as a founder exposes you to the risk that, in a year or two, you will be out of a job. Who takes this risky path?
- People with a higher tolerance for risk (risk seekers)
- People with an average tolerance for risk, but who have a lot of money, so the effective bankruptcy risk for them is not significant
- People with an average tolerance for risk, but who are bad at calculating or understanding the risk they are taking
As you can see, I think “rich kids” have always constituted a part of the founder population. I saw this in 1999 when I was a founder, and as a VC who looks at a ton of pitches, you definitely see it as a portion of the founders. Some portion of founders clearly have a big safety net that underlies their choice.
But it’s not a huge portion today, and not in my view a big negative on any given deal. It also seems like it impacts these founders early and they have developed the habit of starting things from when they were very young. Some of these people make great entrepreneurs.
I experienced this myself: I do not come from wealth, and I was really a category 3 when I started Flutter (now Betfair). In 1999, it didn’t seem risky to found a company (a year later, it seemed beyond risky.)
But on my first startup, I made money. My second startup turned out to be an acquisition: we bought a defunct website and rebuilt it. The purchase price was tens of thousands of dollars— not a lot of money for a professional investor, but a lot when it’s coming out of your bank account. My 1999 self could never have ponied up that money, or if I scraped it together, I would have nitpicked the deal until it traded away. My 2004 self had enough in the bank to write that check knowing it could (painfully) go to zero, and that difference was life changing.
So a financial cushion can turn a person of average risk tolerance into an entrepreneur.
As a VC, we see plenty of entrepreneurs who have zero safety net behind them, and who pursue this difficult path because they are just wired differently than ordinary folks.
One of the reasons I may have a different view than the story cited is that the key piece of research in the article was done in 1998, and things have changed in Silicon Valley. Specifically:
- A bias towards capital efficiency has lowered the amount of capital risked to validate startup ideas, lowering the overall risk
- Entrepreneurship has become more of a science: there is abundant information and education on how to start a business, which has lowered the risk of founding by increasing the chance of success
- Abundant seed capital allows founders to do more of a startup with “other people’s money” earlier in the life. No longer do you need rich “friends and family” to get out of the gate (although it’s still a viable path)
To my eye, lowering the risk to founding and opening the tent to more entrepreneurs is a great thing. I am forever grateful to have chosen the startup life — thanks my frequently cited Irv Grousbeck, who pushed me there, and also to Alex Nigg (our first investor) and Mark and Vince, my co-founders. I think I am more risk tolerant than the average person, but not by a huge margin, and the shove of all these other folks (plus a crazy 1999 that made the career seem less risky than it really was) all pushed me over the edge. And success on the first try (along with the support of Benchmark Capital, who made me an EIR when Betfair was successful but not liquid) gave me the financial stake to continue the life for a second run.
If you have a safety net, and the desire to be your own boss, I think entrepreneurship can be a great career. If you don’t, but still have the desire, keep your oveheads (in life) low, and do it while you’re young.