Are entrepreneurs crazy idiots?

I recently enjoyed Nassim Taleb's books after reading Stu Phillips’s thoughts about them. Taleb describes himself as a "skeptical empiricist", which means, among other things, he recognizes many difficulties of using past data to predict the future. A lot can change quickly and completely unexpectedly. An analogy he uses a lot is a turkey that gets a full meal every day and begins to think that it will always be comfortable and well fed - then Thanksgiving arrives and the turkey’s head comes off. In the financial world (Taleb is an "applied statistician and derivatives trader-turned-philosopher"), these "Black Swans" have shown up recently in a big way the credit markets. If only the CEO of IndyMac had read some of Taleb! He wouldn't have had to blame the ratings agencies for systematic underestimation of mortgage credit risk – or he at least would have been better prepared.

At the same time, though, I’m an entrepreneur. Entrepreneurship is about jumping off the cliff into the unknown (when Leo and I started Clickshift, right before his first child was due and after I turned down some low-risk opportunities, we named our first network "Two Lemmings"). Every investor meeting I go to is filled with all the reasons why the company won't make it. Statistics show the investors are probably right, since most companies fail. There is always more chance of failing than succeeding and no matter what we do, we can’t accurately predict the future from the past - but I take the leap of faith anyway. I’m even enjoying it a lot more these days while working on far and away the riskiest company I’ve ever tried. WTF?

As I get ready for my entrepreneurship class, I’ve been thinking about whether entrepreneurs are crazy idiots. Is there a way to be Taleb-loving rational, skeptical empiricist (a perspective I think you need to have to be a good entrepreneur, even if luck ends up as a major determinant of "success"), and then still jump off the cliffs anyway? Should we all go be dentists or lawyers or accountants and earn a nice living without all the risk? Being crazy or ignorant is certainly one path – it’s easier to jump off the cliff and in some cases, you’d get lucky enough after jumping that everything would work out. You’d be “successful” even though you’re really just crazy or stupid (or both) and lucky. I think that’s the pessimistic view of entrepreneurship, that only the crazy or ignorant people jump and then it’s all luck. Not even Taleb goes that far. No question luck plays a big role in any outcome, but that’s a bit unsettling for someone who makes a career in entrepreneurship. We’d like to think that we can do something to influence the company trajectory along the way. We want to be entrepreneurs, not just gamblers.

At a high level, gambling for a living is much less crazy than entrepreneurship. You can calculate the odds in cards and get your money in the pot when you have the best expected value. Especially after reading Taleb, it seems impossible to be even remotely accurate in assessing your chances of success as an entrepreneur. You have to jump, and the risk adjusted right choice on your first attempt will almost always be not to jump. (If you’ve been successful, whether by luck or otherwise on the first attempt, it can make sense to do it again – your financing options and odds of success are very different your second time around.)

In a few cases, jumping off the cliff can be the rational choice. As a student, for instance, you can take big risks, and if they don’t pan out, you just finish your degree (even if you dropped out of school to start the company) and have a normal career. Students can jump for free. So can some people with cushy jobs who can start companies in their spare time. You can also plan to jump more than once (unless your first one is a wild success and you end up on a beach somewhere). Chances are, any individual jump into entrepreneurship will fail. But the payoff can be quite large for the jumps that don’t. So like a venture capitalist who makes a bunch of bets, where some go to zero and some generate fund-making returns, a sensible entrepreneur needs to plan to make a portfolio out of his or her career. Instead of thinking to yourself as you step off the cliff "if this one fails, I'll get a real job", think "if this one fails, I'll take what I learned and swing for the fences again." If you're only willing to try it once, you're just buying lottery tickets. That can be fun, but it’s not rational.

You don’t have to be a crazy idiot to be an entrepreneur, but if you’re focused only on the outcomes, it rarely makes sense to take the leap. Do it because you love it and because you enjoy the process. As Taleb says about irrational things, do it for the aesthetics. Don’t do it for the returns.

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