Why Do We Take Risks?

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Risk is an integral part of being an entrepreneur or a venture capitalist.  A friend said that I take too many risks and it led me to wondering why do we take risks?  I am not going to focus on whether risk is inherently good or bad but why we take risk (if you do?) & what purpose it serves.

“The trouble is, if you don’t risk anything, you risk even more.” Erica Jong

In startups there are a lot of risks & Marc Andreesen sums them up in an archived blog post The Pmarca Guide to Startups, part 2: When the VCs say “no”:

Founder risk — does the startup have the right founding team? A common founding team might include a great technologist, plus someone who can run the company, at least to start. Is the technologist really all that? Is the business person capable of running the company? Is the business person missing from the team altogether? Is it a business person or business people with no technologist, and therefore virtually unfundable?
Market risk — is there a market for the product (using the term product and service interchangeably)? Will anyone want it? Will they pay for it? How much will they pay? How do we know?
Competition risk — are there too many other startups already doing this? Is this startup sufficiently differentiated from the other startups, and also differentiated from any large incumbents?
Timing risk — is it too early? Is it too late?
Financing risk — after we invest in this round, how many additional rounds of financing will be required for the company to become profitable, and what will the dollar total be? How certain are we about these estimates? How do we know?
Marketing risk — will this startup be able to cut through the noise? How much will marketing cost? Do the economics of customer acquisition — the cost to acquire a customer, and the revenue that customer will generate — work?
Distribution risk — does this startup need certain distribution partners to succeed? Will it be able to get them? How? (For example, this is a common problem with mobile startups that need deals with major mobile carriers to succeed.)
Technology risk — can the product be built? Does it involve rocket science — or an equivalent, like artificial intelligence or natural language processing? Are there fundamental breakthroughs that need to happen? If so, how certain are we that they will happen, or that this team will be able to make them?
Product risk — even assuming the product can in theory be built, can this team build it?
Hiring risk — what positions does the startup need to hire for in order to execute its plan? E.g. a startup planning to build a high-scale web service will need a VP of Operations — will the founding team be able to hire a good one?
Location risk — where is the startup located? Can it hire the right talent in that location? And will I as the VC need to drive more than 20 minutes in my Mercedes SLR McLaren to get there?
Founder risk — does the startup have the right founding team? A common founding team might include a great technologist, plus someone who can run the company, at least to start. Is the technologist really all that? Is the business person capable of running the company? Is the business person missing from the team altogether? Is it a business person or business people with no technologist, and therefore virtually unfundable?
Market risk — is there a market for the product (using the term product and service interchangeably)? Will anyone want it? Will they pay for it? How much will they pay? How do we know?
Competition risk — are there too many other startups already doing this? Is this startup sufficiently differentiated from the other startups, and also differentiated from any large incumbents?
Timing risk — is it too early? Is it too late?
Financing risk — after we invest in this round, how many additional rounds of financing will be required for the company to become profitable, and what will the dollar total be? How certain are we about these estimates? How do we know?
Marketing risk — will this startup be able to cut through the noise? How much will marketing cost? Do the economics of customer acquisition — the cost to acquire a customer, and the revenue that customer will generate — work?
Distribution risk — does this startup need certain distribution partners to succeed? Will it be able to get them? How? (For example, this is a common problem with mobile startups that need deals with major mobile carriers to succeed.)
Technology risk — can the product be built? Does it involve rocket science — or an equivalent, like artificial intelligence or natural language processing? Are there fundamental breakthroughs that need to happen? If so, how certain are we that they will happen, or that this team will be able to make them?
Product risk — even assuming the product can in theory be built, can this team build it?
Hiring risk — what positions does the startup need to hire for in order to execute its plan? E.g. a startup planning to build a high-scale web service will need a VP of Operations — will the founding team be able to hire a good one?
Location risk — where is the startup located? Can it hire the right talent in that location? And will I as the VC need to drive more than 20 minutes in my Mercedes SLR McLaren to get there?
“If you’re not a risk taker, you should get the hell out of business.” Ray Kroc
Wow that is a lot of different types of risks, no wonder risk takers are attracted to becoming entrepreneurs.  ScienceDaily documented a study on risk ‘No Risk, No Fun? People Who Take Risks More Satisfied With Their Lives’
Tall people are more prepared to take risks than small people, women are more careful than men, and the willingness to take risks markedly decreases with age: these are the findings arrived at by researchers from the Institute for the Study of Labor (IZA), the University of Bonn and the German Institute for Economic Research (DIW) in Berlin. For their study they evaluated more than 20,000 interviews with people from all over Germany and additionally confirmed the findings by experiment. What is particularly striking is that people who enjoy taking risks are more content with their lives.
However, the authors of the study are wary of interpreting their findings. It is precisely the link between a willingness to take risks and being satisfied which is difficult to interpret. ‘It’s a classic chicken and the egg problem,’ Professor Falk comments. ‘Are people who are satisfied more optimistic because they are satisfied and thus more ready to take risks? Or is someone who is not afraid of risks a person who takes their life into their own hands and shapes it the way they want to?’
Incidentally, the willingness to take risks also seems to influence the choice of occupation. The Bonn results show that self-employed people are less cautious, whereas people working in the public services are more concerned about security.
“Progress always involves risk; you can’t steal second base and keep your foot on first.” Frederick Wilcox
Well that certainly vindicates me & other entrepreneurs – we are obviously having more fun than others?  While Time have an article blaming it all on Dopamine titled Why We Take Risks — It’s the Dopamine By Alice Park:
A new study by researchers at Vanderbilt University in Nashville and Albert Einstein College of Medicine in New York City suggests a biological explanation for why certain people tend to live life on the edge — it involves the neurotransmitter dopamine, the brain’s feel-good chemical.
Dopamine is responsible for making us feel satisfied after a filling meal, happy when our favorite football team wins, or really happy when we use stimulating drugs like amphetamines or cocaine, which can artificially squeeze more dopamine out of the nerve cells in our brain. It’s also responsible for the high we feel when we do something daring, like skiing down a double black diamond slope or skydiving out of a plane. In the risk taker’s brain, researchers report in the Journal of Neuroscience, there appear to be fewer dopamine-inhibiting receptors — meaning that daredevils’ brains are more saturated with the chemical, predisposing them to keep taking risks and chasing the next high: driving too fast, drinking too much, overspending or even taking drugs.
These all got me thinking but a Discover Magazine article Why We Take Risks really left me feeling vindicated indicating that risk taking may spring out of handicaps and further the species by increasing social status (who knew?):
When it comes to evolution, survival of the fittest is only half the story. The handicap principle holds that humans make showy and sometimes dangerous displays of courage to increase their status and attract mates.
Zahavi’s handicap principle holds that animals and humans alike prosper not in spite of our riskiest and most extravagant behaviors but because of them. These behaviors are the way we advertise how prosperous, how fit, how fearless we are. And because the world is a jaded, cynical place, we have to incorporate a significant cost, or handicap, in our advertising to make it persuasive. Thus antelopes really are indulging in a dangerous waste of energy when they stot in front of a cheetah. But their willingness to risk it is how they tell the cheetah: “Don’t even bother trying.”
He argued, for instance, that a baby screaming for attention at the nest is actually blackmailing its parents, in effect saying, “Fox, fox, come and eat me. My parents don’t care.” Children on the sidewalk screaming at an unresponsive parent do the same thing, he added, and this is why, when they run away, they often run toward danger rather than away from it. Suicide is also an instance of the handicap principle, he said, a bid for help that we take seriously in direct proportion to the individual’s actual risk of death. Indeed, Zahavi’s own conversation seemed like a prime instance of the handicap principle, a contra dance at the edge of the unlikely. He summed up his big idea in a phrase: “Something can be good because it’s bad.”
In the narrowest Darwinian terms, acts of charity make no sense. Giving away food or other resources represents an apparent reduction in Darwinian fitness, a loss in the donor’s own ability to survive and reproduce. So altruism should long ago have disappeared from the gene pool. But seemingly selfless acts are commonplace in the human and natural worlds. Other biologists have tried to explain this awkward fact through mechanisms like kinship selection (the idea that it pays to get your nephew Louis a job because he’s carrying a quarter of your genes into the next generation) and reciprocal altruism (“You scratch my back, I’ll scratch yours”). But Zahavi looked at the question from a radically different angle. “I have turned the tables and said altruism isn’t loss of fitness,” he said, triumphantly, “it is a gain in social prestige.”
Venture capitalists have a love/hate thing with entrepreneurs as they are not really risk takers because they get a good fee but entrepreneurs have to be risk takers so vcs get to live out this fantasy through entrepreneurs.
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Pemo Theodore

Pemo Theodore is a Media Publisher & Event Producer and a great people connector.. She is Founder/CEO Silicon Valley TV which has served the San Francisco Bay Area for 11 years! She has produced Silicon Valley Events for Investors & Startups for 9 years. Pemo loves to video interview venture capitalists & founders to engage the human behind the success stories.. She has been Executive Producer of FinTech Silicon Valley for 5 years, organizing twice monthly FinTech talks & panels in San Francisco & Palo Alto. She believes in learning through a great discussion with experts in the domains. Pemo has a talent to bring the right people together and is an incredible networker. Pemo's events have been seen as supporting Venture Capitalists & Angels in sourcing great deal flow from startups who attend her events. Many founders have received funding through meeting investors at her events. Her favored medium is audio & visual media and she has built up a great body of work of podcasts & videos of panels & interviews in Silicon Valley.startup ecosystem.

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Written by Pemo Theodore