The pattern · Risk
Risk tolerance: the trait of those who start businesses
Entrepreneurs accept more risk than managers, a meta-analysis shows. But good risk is calculated risk. The research, a real example and how to train it.
Starting a business means accepting that you don't know how the story ends. That's why risk tolerance shows up on almost every list of founder traits. But research makes an important distinction: those who build something big aren't the ones who risk anything at all. They're the ones who accept the uncertainty that comes with a new idea and, at the same time, work to reduce it.
What the research shows
In 2001, Wayne Stewart and Philip Roth gathered the studies that compared the risk propensity of entrepreneurs and hired managers. The meta-analysis, published in the Journal of Applied Psychology, concluded that entrepreneurs have a higher propensity for risk than managers. The difference was even larger among entrepreneurs focused on growing the business than among those seeking income for their family (Stewart and Roth, 2001).
The question isn't settled. In 2004, John Miner and Nambury Raju used other measures and found entrepreneurs more cautious than expected, and the authors debated the results in the same journal (Stewart and Roth's reply).
The reading that brings both sides together: entrepreneurs are willing to step into uncertain situations, but they don't like losing for nothing. They take the risk and, right after, try to control the risk they took.
Who lived it
In 2008, Elon Musk had both his companies close to collapse. The first three launches of SpaceX's Falcon 1 rocket had failed. Tesla was facing the worst economic crisis since the Great Depression. He had what was left of the money he made from the sale of PayPal and had to choose: save one company and let the other die, or split everything between the two.
He split it. In September 2008, the fourth Falcon 1 launch reached orbit. In December, SpaceX closed a contract with NASA, and Tesla's funding round closed on Christmas Eve (CNBC). It could have gone wrong. That's the point: risk is risk.
In Bairo's journey
Bairo Leandro Gonzalez Martinez made two risky decisions that changed his story.
The first came after the events and the digital printing. With the capital he had saved, he decided to play a different position: instead of founding, investing. He came in as an investing partner in a company. The business wasn't what it seemed and didn't hold up. It was the deepest fall. He says fifty people depended on him.
The second came right after, and it was the most improbable. Instead of familiar ground, he chose the unknown: building a currency, a bank and a network, things he had never done. It went wrong the first time. He kept going. To an outsider, it looks reckless. To him, it was the same logic as always: if no one does it, someone has to.
How to develop this trait
- Define how much you can lose. Before taking a risk, decide the limit: money, time, assets. Risk without a limit isn't courage.
- Protect the essentials. Never put your family's basic livelihood at stake without a plan for it.
- Take risks in steps. Test small, learn, raise the bet only when there's a sign it works.
- Read the contract and know your partner. Many risks aren't in the market, they're in people and paperwork. Ask a lawyer or accountant for help.
- Separate fear from warning. Fear is natural in every new decision. A warning is when the numbers or the people tell you something is wrong. Learn to tell the two apart.
- Have a plan for the worst case. Knowing what to do if it goes wrong reduces fear and improves the decision.