I found myself asking the question “Are entrepreneurs stupid?” in various ways as I pondered different business ideas. Following a systematic process revealed to me considerable risk buried in each idea. The worst kind of risk was of course complete failure with nothing to show for it. You can think of your favorite statistic such as “nine out of ten businesses fail”. A more subtle risk was opportunity cost. If you work on a certain business, your limited time won’t let you work on other possibly more attractive businesses.
Over the years, I’ve built a mental map of war stories from entrepreneurs, big and small, successful and unsuccessful. Then there’s my own mixed experience that’s seared into my memory. Finally, the risk taking involved in successful trading has taught me a number of lessons.
Prosperous entrepreneurs almost always appear smart and prescient. But that doesn’t mean the decisions they made to start the businesses were smart. Every entrepreneur believes in his bones that he will beat the odds. Yet the statistics of business failure don’t justify such rashness. Luck plays a bigger role in life than most people think.
So yes, most entrepreneurs are stupid, in a good way. Their risk taking helps the economy grow. Stupid or not, successful or not, every entrepreneur has my respect.
My focus however, is maximizing my own chances of success. Doing my bit to grow the economy comes later. And I have to admit I don’t always know what’d make the world a better place, unlike Elon Musk.
So I’ve chosen the following rules for businesses that I work on. I owe a big debt of gratitude to Nassim Taleb whose works have helped me refine my ideas here.
Treat a business as a series of options
The Real Option metaphor is very useful here. You don’t want to have a lopsided allocation to an option in a portfolio. Nor should you put everything you have into a single business. Said differently, you should be fine, emotionally and financially, even if the business fails completely.
Most options don’t amount to anything and have a limited loss. But the payoff can be huge when you’re contrarian and right.
Milk the optionality in a business for all it’s worth
If you have something that’s working well, go for the jugular as George Soros liked to say. You’re playing with house money.
Prioritize survival
This one seems obvious: if you don’t survive in business, you’ve lost. But it’s so easy to get seduced by the trappings of success and ignore the basics such as cashflow. Companies like Theranos and WeWork are a case in point.
