McKinsey, the World’s Epicenter of Risk Aversion, Still Produces Entrepreneurs

Hence, entrepreneurship must not require as much risk-taking as people think. This is James Kwak's short, persuasive argument, with more substance of course. He's a former McKinsey consultant who co-founded a company, and he does a nice job poking holes in Malcolm Gladwell's latest piece (abstract only) about entrepreneurship and risk-taking while not disagreeing with its essence.

The talk about risk-taking and entrepreneurship is an issue of perception: people think to start a good business requires betting the farm, or that the personalities attracted to the game are sky-diving flame throwers. Not so.

But false perceptions aside, how the heck do we encourage more of the risk-taking that's good and calculated and leads to real innovation? Here Kwak says:

The best encouragements to productive risk-taking are measures that limit the cost of failure for people who are actually creating something new, and this is one reason why Silicon Valley has been so successful. The financial risks of starting a company aren’t that big, for most people. High-tech companies are typically started by people who could pull in low-six-figure salaries working for other companies, so they’re giving up a couple of hundred thousand dollars in opportunity cost; the rest is typically angel investor or venture capital money. More importantly, there is (historically, at least), little stigma attached to failure, so there’s little reputational downside to a failed startup. In a world full of risk-averse people, that’s very important.

I bolded the sentence that is most critical. It is America's secret cultural sauce.

6 Responses to McKinsey, the World’s Epicenter of Risk Aversion, Still Produces Entrepreneurs

  1. Borismsilver says:

    Great post. I’ve always felt very risk averse and many other entrepreneurs that I know are very risk averse as well. In my mind it comes down to the fact that my definition of risk is very different from most peoples. I think many entrepreneurs just take very calculated risks that simply are +EV bets. And the failure protection through bankruptcy is a free option that makes it even easier to take “risk” that’s not really risk at all.

  2. And culture is one of the slowest things to change. Which is why I’m skeptical about projections of India and China overtaking America as the world’s superpower.
    With entrepreneurship being the primary driver of economic growth in the decades to come, America still has the most fertile culture and a large window of opportunity to maintain dominance.

    Not that I care that much about nationalistic dominance. Where ever the best culture exists on city-state level, I’ll consider moving there.

  3. .bh says:

    As a race, the chinese has historically been on of the most entrepreneurial around. There is a common chinese saying “Where there is water, there will be Chinese”, reflecting the dominance of trade and business in the Chinese psyche. Walk around in Shanghai today and you will see how enterprising the young are.

  4. E says:

    My thought is that school teaches you the exact opposite of what you really need to get stuff done in the “real world”. In school, you aren’t awarded for getting good stuff out fast but are rewarded if you take a really long time make things “perfect”. In the real world, you’re really just wasting time. Some of the best intellectual in the world I know are extremely indecisive.
    I think school taught that bad habit.

  5. E says:

    Okay, my comment sounded a bit off topic :) . I meant to tie in that school teaches you to be risk adverse and take forever to do (really small)things…although I conveyed it rather vaguely :-p

  6. Ben says:

    I had a girlfriend who was a partner at mckinsey, she was extremely adverse to risk taking, in trying to start her own business, and the relationship as well, ha!

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