Risk in startups: why lawyers rarely become entrepreneurs

I was at an event recently in conversation with an entrepreneur, an early-stage investor, and a lawyer, who works for a largish law firm that supports small businesses.

The investor asked the lawyer, “do you ever imagine starting your own company or joining a startup?”, and his answer was “no, I’m not sure I’d be able to deal with the risk.”

The conversation made me think about how different people assess risk. It’s an idea that is central to the tech startup and investment sector but it means different things to different people and at different stages of their careers.

The level of risk is often equated with the probability of making a financial return. On this understanding, entrepreneurs who leave their current day job to start a business full-time before they have revenues coming in are at high risk; executives who work for large corporates or government and take a good base salary are at very low risk. This is the kind of calculus that the lawyer has in mind when he thinks about swapping his regular salary for equity in order to work in a startup, and the difference quickly becomes starker when there is a family and a mortgage involved.

But a lot of entrepreneurs don’t look at risk in the same way. Assessing risk to an entrepreneur is not just financial – I think it is also about control of your career. Let’s call this ‘career risk.’

Thinking beyond financial risk

In a corporate environment you are well looked after and well compensated, so you have a lower financial risk, but you have less control. You can be asked to go to work in an office on another continent, or moved to a different role in a new department. And then there’s the risk that everything collapses. Your industry is rendered redundant by new technology or your company is forced to shut down through no fault of yours.

Every UK public company has a section on risk in their annual report, which discusses all the risks that have been anticipated and none of the risks that haven’t. The unforeseen ‘black swan‘ events are the most catastrophic and therefore the most important risks but Lehman Brothers did not have a paragraph on how they are counteracting the risk of a global financial crisis. This is the kind of ‘career risk’ that can be significant in the corporate world, where people tend to stay in similar industries for many years, and reduced in the startup world, which is more fluid.

Being an early member of a startup gives you enormous opportunities to learn quickly in many different roles. You learn how to create something valuable with limited resources and you learn how to fend for yourself. And even if the startup fails you will move on to your next one with a lot of experience, which has value in the jobs market (both to startups and to corporates: experienced entrepreneurs and startup operators are quite attractive to a lot of large organisations as well). You have control over what you learn, how you develop, what personal network you want to build, and with whom you work. As entrepreneurship professor Steve Blank said in an interview recently, “failure in Silicon Valley is called experience.”

On the financial side, adhering to the lean startup movement should help you reduce the largest financial risk to you as an entrepreneur – that you make no money for a while then have to shut the company down, perhaps owing some money to investors or the taxman – by encouraging you to invest your time and money in the right way.

Why trust your success in people you don’t know?

One of things I like about small business is that you get to know the people that are responsible for the success of your business. You can see their strengths and their faults first-hand and you can make an informed decision about your ‘career risk.’

The entrepreneur’s viewpoint is that you’re always backing someone so why not back yourself and people you know instead of putting your job in the hands of high-up executives whom you will only ever meet for a few minutes at a time.

I recently read this quote from entrepreneur Uri Pomerantz, which sums it up well:

“I still remember my professor advising us that, at the end of your career, you’re unlikely to regret taking a calculated risk to achieve a goal, regardless of the outcome.”

The interesting thing here is that once you’re in the startup world the criteria for assessing risk seem to be different.