Navigating career risk in startups

Jack Owen
Jack Owen
Nov 22, 2017 · 6 min read

I spend most of my time talking to individuals who are considering starting companies, and a lot of those conversations focus around risk.

In his now decade old blog posts on career advice, Marc Andreesen quotes the trader and poker expert Aaron Brown:

“What I listen for is someone who really wanted something that could be obtained only through taking the risk, whether that risk was big or small.

It’s not even important that she managed the risk skillfully; it’s only important that she knew it was there, respected it, but took it anyway.

This is what I think about risk, and how to make sure you see it, respect it and know when to take it.

Individual risk and company risk

Entrepreneurs are seen as risky because most companies fail. And because founders invest so much time and effort into their companies, it can be easy to equate the risk they take with the risk their company takes.

But an individual’s risk profile and a company’s risk profile are very different. If a company succeeds then a founder is unusually the main beneficiary of that success. But if a company fails, a founder’s career doesn’t collapse with it.

It’s worth noting that approaching risk in a way that splits individual and company risk isn’t just an insurance tactic that protects you against costs. The most significant outcome of this mode of thought is that it creates bigger, more ambitious companies that are doing unusual things. By mitigating against individual risk, founders can take much bigger risks with the companies they create. In order to build a company that will change the world, you need to have beliefs that no one else does and take risks to make your goals happen. This is why we grow companies with huge visions, like democratising access to space, underwater drones, and supercharging biochemical engineering. These are companies taking risks to do things that no one else has ever done before. When they get it right, the impact they have is extraordinary.

Your life has a risk portfolio

The mathematical psychologist Clyde Coombs first made the comparison between a career and a portfolio of stocks in the 1970s. He argued that individuals could view some of their decisions as low risk low reward and others as high risk high reward. As an individual makes multiple decisions in their career they build their own portfolio of risk.

If you were to invest all your savings on the stock market, a traditional strategy you might choose would be to pick a variety of stock types. Some of these stocks would be very safe and dependable, likely to increase in value slightly and very unlikely to dramatically decline. The rewards from these stocks would probably be minimal but it is very unlikely they will lose you much money.

Alongside these safe stocks you might also invest into some riskier options. These stocks might fluctuate much more dramatically and could offer either huge rewards or significant losses. This is generally seen as a safe strategy for investment; you give yourself the option of making huge returns with some wild card stocks, while simultaneously playing it safe. You can win big, but you can’t lose everything. This is a what we could call a balanced portfolio.

In his book Originals, Adam Grant argues that while great entrepreneurs and innovators are traditionally seen as wild risk takers, this isn’t actually the case. He cites the founders of several well-known companies as examples. Some of the best founders were able to balance their personal risk portfolio. Pierre Omidyar started Ebay in his free time and only started working full time on it 9 months later once it was making money. Bill Gates sold a software program in his second year at Harvard but still waited 12 months to drop out, even then mitigating this further by initially just applying for a leave of absence. Henry Ford only went full time on his automotive project 2 years after patenting his carburettor.

Entrepreneurs do still take great risks but the best ones also mitigate against them. “To become original you have to try something new, which means accepting some measure of risk.” Grant writes, “But the most successful originals are not the daredevils who leap before they look. They are the ones who reluctantly tiptoe to the edge of a cliff, calculate the rate of descent, triple check their parachutes, and set up a safety net at the bottom”.

Grant’s imagery is perhaps hyperbolic, but the emphasis on understanding risk is fair. So let’s break down what an individual’s risk normally looks like.

Breaking down risk

From my conversations most people have three types of risk.

· Financial risk

· Reputational risk

· Opportunity cost risk

You can mitigate these risks in different ways. Entrepreneur First’s entire model is designed about this mitigation.

When it comes to company-building, a whole industry exists to take on financial risk on the behalf of entrepreneurs; venture capital. At EF we take this mitigation even further, backing individuals financially at the earliest stage before they have an idea or a team.

At EF we partly mitigate reputational risk by credentialing our cohort. We select small numbers of exceptional people from a large pool of remarkable applicants . It’s hard to get in and everyone else who has been selected as a cohort member becomes part of an impressive group. But aside from just hanging out around people who have won lots of awards, one of the best ways of mitigating reputational risk comes from working on what you are already good at it. By maintaining momentum from your previous work you can create a narrative of continuity that preserves the best parts of your status. Researchers coming out of academia, for example, often make sure they are still publishing papers to maintain prestige in their field. Domain experts in finance build fintech companies that allow them to build on their previous reputation. Ideating like this isn’t just for prestige; building a company based on your strengths significantly improves your chance of success. We call it Edge-based ideation and we’ve written about it here and here.

But by far the most important risk I think most of the people I talk to is opportunity cost. They are normally working in high profile software giants, early employees at fast moving startups on strong trajectories, or finishing off research at some of the best academic institutions in the world. They have a lot of options in front of them and making sure they are in the one with the most impact is a difficult and important task.

At EF we deliberately put our cohort members under extreme pressure to find a team and a high impact idea within just a few months. This short fixed time period mitigates the risk of slow stagnation. As I’ve written elsewhere one of the biggest threats our founders face is getting trapped in something that doesn’t fulfil their greatest potential.

In addition to this if an individual doesn’t sucessfully build a company, they still almost always successfully advance their career. Going through the process of founding builds career capital in terms of skills, self understanding and network. I think EF’s network is often the most powerful for building careers- in fact over half our portfolio companies’ first hires come from other people who have been through our programmes.

When our cohort members leave jobs to join EF, they build bridges rather than burn them. And they can always go back to their old jobs. As Matt Clifford said in the pithily-titled article “You are not a lottery ticket; you are an underpriced option”, if you are qualified for a job now, it’s extremely unlikely that you will no longer be qualified for it in 6 months time.

In the extract of Marc Andreeson’s blog I opened this post with, Aaron Block is quoted further;

“Most people wander through life, carelessly taking whatever risk crosses their path without compensation, but never consciously accepting extra risk to pick up the money and other good things lying all around them.

Other people reflexively avoid every risk or grab every loose dollar without caution.

I don’t mean to belittle these strategies; I’m sure they make sense to the people who pursue them. I just don’t understand them myself.

I do know that none of these people will be successful traders.”

Andreesen bluntly adds an addendum “…or successful at anything important in life”.

At EF we have built an environment that deals with risk in a way no one else can. Focusing on individuals rather than preexisting companies has allowed us to become experts in high impact career growth. By abstracting away individual risk we allow ambitious people to make big bets on themselves to build incredibly important companies that would never have been built otherwise.

Entrepreneur First

Thoughts from EF

Jack Owen

Written by

Jack Owen

Manager at Entrepreneur First

Entrepreneur First

Thoughts from EF

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