The Entrepreneur’s Essentials #6: The fallacy of risk in entrepreneurship

Brett A. Hurt
Austin Startups
Published in
9 min readMar 2, 2019

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For this lesson from The Entrepreneur’s Essentials, I’m going with recency bias yet again. I was having conversations with an entrepreneur and then a group of high school students this week about the ridiculous myth of entrepreneurs being risk-takers that “just jump off the cliff and build their wings to fly on the fall down”. The more entrepreneurs we back and the more I practice entrepreneurship myself, the more I realize that this myth just needs to be excised from the world. Yes, of course entrepreneurs are brave as I wrote about in #1: The soul of entrepreneurs — you change the world. But that doesn’t mean they don’t work really hard to mitigate risk, including before they even start their new business. The intensity of your research period at the beginning can dramatically reduce the risk of your startup if done right. Speak with potential customers, speak with industry experts, speak with potential partners — validate your idea while you also use your own judgment about market timing. As Bill Gross spoke about at 2015’s TED conference, market timing is the single biggest factor for startup success (a worthy watch). I’ll talk about how we did it at the beginning of data.world later on in this lesson.

So here we go with this lesson from The Entrepreneur’s Essentials. It was first shared at Lucky7 on June 12, 2013. I made very few edits to the original post, mostly in the area of readability and grammar (not in substance of content):

Spurred on by my recent Lucky7 post on how capital efficient Bazaarvoice was on its path to IPO, two friends sent me great posts this week on entrepreneurship and risk. And I guess it seems appropriate that I’m writing this post from Edinburgh, Scotland here at TED Global. Edinburgh is, after all, one of the birthplaces of capitalism. Adam Smith, author of The Wealth of Nations, and other prominent figures were born here. And speaking of capitalism, George Papandreou’s, the former Prime Minister of Greece and the poster child for the European economic crisis, TED Global talk is already live. I found his talk sobering and, for all the controversy surrounding him, it felt rawly authentic to me.

First, a little bias here — I’m a very risk adverse entrepreneur as a result of bootstrapping my first three businesses, almost failing on the fourth (Coremetrics) due to market timing (I was too early and didn’t predict the dot-com bust) and its overcapitalization, and being a mostly customer funded and very capital efficient on the fifth (Bazaarvoice). I’m also a product of bootstrapped entrepreneurs — my parents, who took little risk. As I wrote about my father in my tribute to him, he turned down Walmart when I was 10-years old when they wanted to sell his product in all of their stores nationwide. He was already happy with his life and he didn’t want to take on the complexity and risk. But even though my parents took little risk, I saw them go through the inevitable ups and downs in business and the humbling experience of earning your own living through entrepreneurship. Entrepreneurship is never “easy” but can be highly rewarding — both financially and psychically. If you are considering taking the plunge for the first time, read #3: New Year’s advice for middle-aged people to get centered and real about what it is going to “feel” like.

The first post was sent to me by Josh McClure, the co-founder and CEO of Real Massive, who I first referenced in my Lucky7 post about Lola Savannah. It is about the damning nature of an overcapitalized business. I saw this movie in Silicon Valley — where I lived for four years — play out over and over again, especially at the apex of the dot-com boom. You would be wise to read and internalize this PandoDaily post about “startup drugs” by Andy Dunn, co-founder and CEO of Bonobos. One of my favorite excerpts:

Prior to a lobotomy I just underwent which removed shiny new object syndrome (SNOS) from my brain, I was both an asset and a threat to my own company. The company is trying to do one thing, and I would come up with another. I can’t tell you how dangerous this is. If the founder doesn’t know what the company is doing, the company won’t either.

In some cases the shiny new object you come up with saves the company. In other cases it sinks it. If it’s the former, they will call it a pivot and hail you as brilliant. If it ends up being a distraction or taking the company off-course, they will call you delusional and un-focussed.

I lived this at Coremetrics, and eventually got some sense (my parents helped me when they thought I had lost it). I had six projects going at Coremetrics at once and was overly ambitious to say the least. This drove nearly everyone in the company crazy and our foundational product — the retail-focused Web analytics that we eventually became well known for — was failing. I realized that nothing would matter if we didn’t get the core of Coremetrics fixed — and fast. I flew to Austin to spend the month with the R&D team and launched “Stand & Deliver”, where I immediately worked with them to kill all extraneous projects. As a result, we delivered for ourselves, our investors, our clients, and our families by shoring up the core of Coremetrics. Most of the extraneous projects never saw the light of day again. I’m convinced that if I hadn’t made the decision to “Stand & Deliver” and focus, which is so important for a startup to do, Coremetrics would have failed in 2001 and almost no one reading this post would have ever heard of the company.

The second post was sent to me by Mitchell Green, the founder and CEO of Lead Edge Capital, who led our last round of funding at Bazaarvoice prior to our IPO. It is by Malcolm Gladwell, one of my favorite authors (Malcolm’s book The Tipping Point was an initial mantra for us and our clients at Bazaarvoice and I also loved his book Outliers). Gladwell’s post is about the risk adverse nature of successful entrepreneurs and was initially an article in the New Yorker titled “The Sure Thing”. One of my favorite excerpts:

The economist Scott Shane, in his book “The Illusions of Entrepreneurship,” makes a similar argument. Yes, he says, many entrepreneurs take plenty of risks — but those are generally the failed entrepreneurs, not the success stories. The failures violate all kinds of established principles of new-business formation. New-business success is clearly correlated with the size of initial capitalization. But failed entrepreneurs tend to be wildly undercapitalized. The data show that organizing as a corporation is best. But failed entrepreneurs tend to organize as sole proprietorships. Writing a business plan is a must; failed entrepreneurs rarely take that step. Taking over an existing business is always the best bet; failed entrepreneurs prefer to start from scratch. Ninety per cent of the fastest-growing companies in the country sell to other businesses; failed entrepreneurs usually try selling to consumers, and, rather than serving customers that other businesses have missed, they chase the same people as their competitors do. The list goes on: they underemphasize marketing; they don’t understand the importance of financial controls; they try to compete on price. Shane concedes that some of these risks are unavoidable: would-be entrepreneurs take them because they have no choice. But a good many of these risks reflect a lack of preparation or foresight.

Both Bazaarvoice and Coremetrics started from scratch, and I’ve also angel-backed companies recently that have started from scratch, like Compare Metrics, where I serve as the Chairman of the Board (note that Compare Metrics also recently completed their Series A with Austin Ventures as the lead). [Editor’s note: Since I wrote this, Compare Metrics was renamed Edgecase and was acquired by GroupBy in Canada. I served as Chairman leading up to the acquisition.] But I would argue in B2B SaaS (Software as a Service) businesses if you really know the market — and you make sure that clients will pay for your solution (ideally selling it prior to actually building it), you are not taking much risk. SaaS businesses are like an annuity and you should be able to both pre-sell and collect a good portion of cash up-front from your clients. In other words, as I write in my Lucky7 post on capital efficiency, you may be able to make your businesses mostly customer funded.

So that is the end of the lesson as I wrote it almost six years ago on Lucky7, with some edits and seemingly now extraneous omissions. You can see the original post here, and the comments thread below it. How did my co-founders and I apply this lesson at data.world? Well, we did a lot of market research prior to deciding on data.world as the idea we would run with. I did the same at Bazaarvoice with Brant — researching the concept for around six months prior to him and I incorporating it. At data.world, for example, I’ll never forget us meeting with Dean Allemang, co-author of Semantic Web for the Working Ontologist, and him validating both our platform approach and business model. Dean’s biggest compliment to us: “I want to get involved, you are doing this right.” And Dean became our first Advisory Board member of many. Adding terrific Advisory Board members can really help mitigate your risk and I spoke about how to treat them (as well as your investors) in #13: How to leverage advisors and investors as your extended team.

Today at data.world I look back on the many community member interviews we’ve done since the beginning to make sure we were both addressing their needs and improving our usability along the way. I smile thinking about how community member and customer centric we’ve been. Have we gotten it all right? Of course not. We’ve made many mistakes along the way, but the heartbeat of our community members and customers has always been our top consideration. What we are doing — with a mission statement to “build the world’s most abundant, collaborative, and meaningful data asset” — is very difficult and uber-ambitious. But we are having a blast and doing our best to mitigate our risk and maximize our opportunity.

Reflecting on Malcolm Gladwell’s article reference above, I would be remiss if I didn’t mention two other books of his that I read since writing this: What the Dog Saw and David and Goliath. Both are a lot of fun and informative. And his free podcast, Revisionist History, is really great for road-trips. I’ve loved most of the episodes and have listened to all three seasons (Season Four should start this summer if he follows the same publishing pattern). You’ll have to dig for lessons of risk in those books and podcast episodes, so consider this more of a plug on Malcolm Gladwell in general. I believe he’s one of the best storytellers of our time, and I just wanted to give credit where credit is due.

I would love to hear about how you have mitigated risk as an entrepreneur — or how you have seen an entrepreneur you worked for do it right. Please share your experiences in the comments for all of us to benefit from.

Image from TopMBA.com

The day after posting this lesson, I listened to Julia Hartz’s interview on Masters of Scale. She’s the Co-founder and CEO at Eventbrite. I recommend listening to it as Eventbrite had a “unique” way of mitigating their risk — listening to their customers, from the beginning and constantly. Why did I put “unique” in quotes? Well, because believe it or not this is actually a pretty rare trait. But most of the truly great companies do a terrific job at it. As I was texting with a fellow CEO and entrepreneur this morning, Sam Walton was a master at this and documented how to do it in his book Made in America. Note that I called out Masters of Scale as essential learning in #4: The importance of an Always Be Learning life.

Chapter 6 of “The Entrepreneur’s Essentials”, recorded in 2021 for Technion
Chapter 6 of “The Entrepreneur’s Essentials”, recorded in 2021 for Technion (audio only)

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CEO and Co-founder, data.world; Co-owner, Hurt Family Investments; Founder, Bazaarvoice and Coremetrics; Henry Crown Fellow; TEDster; Dad + Husband