Why Trying an Entrepreneurial Venture May Not Be As Risky As You Think

by Lane Wallace on January 27, 2016

“Why Doesn’t Everybody…”?

For years, I have joked about this iconic question, usually posed by innocent people who do not have any first-hand experience with the (fill-in-the-blank) topic they’re asking about. Lane’s rule of thumb: If everybody doesn’t do something … whether it’s start their own business, renovate their own house, or own a polished-aluminum airplane … there’s a reason, and it generally has something to do with the risk, cost, or work involved.

Much as I love working for myself, I understand quite clearly why everyone doesn’t do it. And although I support any passion-inspired entrepreneurial effort, I’m also the first to caution that following that road is not the easiest option in life. According to a post I wrote back in 2009, some 70-85% of venture-capital-based entrepreneurial efforts fail. But a new study that’s just in the process of being published has a different–and far more encouraging–perspective on the risks of trying an entrepreneurial enterprise.

Gustavo Manso, Associate Professor at UC Berkeley’s Haas School of Business, used results from a 33-year longitudinal study of 12,686 people who were ages 15-22 when the survey started in 1979, to determine how much of a risk or cost those who had attempted an entrepreneurial venture really paid. (The group was interviewed annually up through 1994, and every other year since then. The last year they were surveyed was 2012.)

After “restricting the analysis to [a] nationally representative [group] of 6,111 individuals,” and then subtracting any people who did not work, Manso came up with a survey sample of 5,415 people. He then looked at the income differences of those who: a) worked a salaried job their whole careers, b) tried an entrepreneurial effort and then went back to a salaried job, and c) tried an entrepreneurial effort and remained self-employed. To try to make the comparisons as even as possible, Manso also tried to pair people across all three groups who had similar characteristics in terms of demographics, educational attainment, cognitive ability, self esteem, and belief in self-determination vs. external factors (chance, fate and luck), in terms of how their life would turn out.

The results were surprising … but then again, not surprising, once I thought about it a bit more.

Traditional thinking on entrepreneurial ventures is that they involve big personal, career and financial risks, and that people who pursue such ventures, therefore, do it for non-financial reasons and gains (fulfillment, personal needs, lifestyle, etc.). Manso, however, found that those in the longitudinal study who left salaried work to attempt an entrepreneurial venture ended up making more money over the course of their careers then those who stayed at salaried jobs the entire time … regardless of whether the venture succeeded or failed.

The increase in earnings of those who remained self-employed–who were, by definition, “successful” in their attempts at entrepreneurship–was higher than those who abandoned self-employment and returned to a salaried job. But Manso found that there was still a “premium” enjoyed by entrepreneurs who returned to a salaried position that made up for the typical drop in their earnings they sustained when they initially started their own businesses.

Why is that? In short, Manso believes that it’s because even if a business failed, the people who’d made the leap to self-employment learned important lessons through the experiment–lessons that benefitted them when they returned to a salaried job.

Important to note is that Manso classified “returnees” as those who returned to a salaried job within 2 years of leaving one. A full 52% of all those in the survey group who’d attempted an entrepreneurial venture fell into this group–which is consistent with all the stats on the difficulty of entrepreneurship. (While some who stuck with their entrepreneurial ideas undoubtedly failed at some later point, the overall income in the non-returnee entrepreneurial group remained higher than the salaried group–probably because the ones who succeeded as entrepreneurs had a big enough difference in their long-term incomes to offset those failures.)

The two-year mark for “returnees” is notable because it seems to indicate that those entrepreneurs recognized fairly quickly that, for whatever reason, their alternative path wasn’t sustainable, or desirable, and adjusted in a timely manner. Unlike Captain Ahab, they changed course when the one they were on didn’t seem to be panning out, so their lost income years didn’t accumulate into an unrecoverable disaster. This is an important point, because a key to successfully navigating uncharted territory or surviving uncertainty, as I’ve often said, is the willingness to evaluate every experimental step we take, and adjust if we don’t think it’s working out. Of course, there are also undoubtedly some in that longitudinal survey who took a salary cut to work for themselves, never made up the money, but kept working for themselves because of the other rewards that path offered. Money isn’t everything. But it’s still a notable point of evaluation.

Initially, the idea of a “win-win” proposition, of taking the leap to go work for yourself and ending up in a better financial position regardless of the outcome, seemed too good to be true. But once I thought about Manso’s findings a bit, I realized they make sense. Starting a business, like any uncharted adventure, is nothing if not educational. My own dad started a company with a partner when he was 40. The business failed within a few years. But a company he started with another partner, 15 years later, was very successful–and he often told me that the reason the second business was successful … and, indeed, why he’d been more successful at the salaried job he’d held in between … was because of all the things he’d learned through that first, ultimately unsuccessful, venture.

It’s not a given that any one of us will learn from failure. But we can. If we’re smart, we certainly try. Because if Professor Manso’s take on this research is correct, making the choice to try working for yourself, or starting that dream business, isn’t necessarily the irreversible leap off a cliff we often imagine it to be. It can be more of a detour from the main line train track. That detour might take you off into an entirely different direction, but it might also end up being akin to taking a couple of years to get an advanced degree, bringing you back to the mainline work force smarter and more equipped for new challenges.

To be sure, uncharted adventure is still hard. But if we prepare well, and proceed with an open mind to learning everything we can, good, bad, and surprising, Professor Manso’s findings only support what most adventurers already sense is true: that adventure, approached intelligently, can leave us better positioned for success in whatever we do next–no matter how any one adventure turns out.

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