Myths Of Entrepreneurship: Tim Folta at TEDxPurdueU

A favorite book my wife and I used to read our kids is titled Friendle by Andrew Clements. Some of you may know the book. It's a priceless story about a fifth grade boy who's inspired to get his own word in the dictionary. You see, his teacher had just explained the social process of how words gradually get incorporated and accepted in the language. And he decides that friendle will become a word for pen. His quest begins one day at a convenience store when he asks the cashier for a friendle. Seeing her confused face, he points, I'd like that friendle there behind you. Well, his classmates take up this quest and incorporate friendle into their language. And many, many years later, the little boy's dream becomes a reality, and friendle gets added to the dictionary. So I'd like your help with my own quest. I don't have a word to invent, but I would like to revise the definition. The word is entrepreneur. This is the perfect cohort to help because this is TEDx. We all care about the future of tomorrow. And it's entrepreneurs that are going to play a key role in taking us there. So I'm a faculty member at Purdue. I study entrepreneurs. And I can tell you they've long been associated with the concept of risk. Some of you may know that many definitions include the word risk. Some of you probably also have stereotypes of entrepreneurs as risk seekers. I've heard policymakers and even university presidents advocate that we need more entrepreneurs. We need more risk takers. I'd like to ask you to reconsider that stereotype and even suggest that we withdraw risk from the definition entirely. It's not that entrepreneurship is devoid of risk. The high rates of venture failure suggest otherwise. What I am suggesting is that an inherent link between entrepreneurship and risk is problematic for three reasons. First, it turns out to be wrong. Research has shown that a typical entrepreneur is not any more risk-seeking than a typical manager. Let's just be clear about what risk-seeking behavior represents, so play along with me here, would you please? If I were to offer you a million dollars or a coin flip with a chance at either two million or zero, which would you take? I'd take the million dollars too, but a risk seeker would take the coin flip. Now, I know many entrepreneurs that would argue vehemently that they are not gamblers. In fact, I like to describe them as clever risk managers. They seek to mitigate risk. Venture capitalists and angel investors, before they invest, they evaluate whether entrepreneurs perceive the relevant risks in a venture and have taken steps to mitigate it. Let me give you some examples. Some of you may drive Zipcars. It's a car-sharing service, it's even here on campus. Prior to business launch, to mitigate business model risk, the founder of Zipcar experimented with several different pricing structures to see how customers would respond. It turns out that the average entrepreneur changes business models six times prior to launch. Technology entrepreneurs, including students who launch ventures out of my biomedical entrepreneurship course, seek to mitigate product risk through patent searches and filing applications for patents to protect competitive advantages tied to technology. Many other entrepreneurs manage management team risk by hiring key employees or building potent advisory boards. So entrepreneurs don't seek out risk, they don't prefer it. They try to manage it through thoughtful experiments and leveraging resources. A second reason why entrepreneurship, by linking entrepreneurship and risk, may be problematic is that it implies that there's something at risk if the venture fails, and that's not necessarily the case. Perhaps an individual may lose his financial resources. In fact, many people rack up thousands and thousands of credit card debt or have second mortgages, but many others get financial investors to shoulder the majority of the burden. It might be argued that an individual's time is at risk if an opportunity with a job is foregone. In a study of 40,000 Swedish men, we found that over half of those that started new ventures did so while retaining their job, and they switched to entrepreneurship fully if the venture took off. You might argue that an individual's reputation is at risk, but these days, I think people view entrepreneurial failure as a badge of courage. So it should not be assumed that resources are at risk. Perhaps the most troubling element about associating entrepreneurship with risk are the potential social implications. What if fewer people try their hand at entrepreneurship because they believe they don't fit the risk-seeking typology? What if Steve Jobs was too intimidated to found Apple? Or what if Jane Chen, a graduate student, didn't invent a medical device to keep low birth weight babies warm in the event the electricity in her hospitals and clinics fails, a common occurrence in developing countries? Losing these marginal entrepreneurs may be catastrophic if they're the ones who revolutionize an industry or save a life. At the other extreme, if our friends and policymakers are encouraging us to take a risk as an entrepreneur, might we be more willing to follow our hunches? If we don't conduct the due diligence required for enduring success, it might lead us into trouble. I heard a funny story recently about a therapist who was convinced that a hot dog stand outside his office was what his clients wanted. It turns out that wrong hunches tend to be the norm. In a Purdue study of 4,000 entrepreneurs, 95% felt that their business would succeed even though over half end up failing. It seems that they're systematically overestimating their likelihood of success. They're overly optimistic. In my opinion, a key purpose of entrepreneurship education should be to temper cognitive biases like overoptimism through rigorous analysis that's objective and that weeds out the weak ideas and inspires revisions creatively with their concepts. So I'd like to purge the myth that entrepreneurs are risk seekers because I believe entrepreneurs manage risk really well because entrepreneurship is not inherently risky and that this misperception may inspire people to act with overly risky behavior or it may discourage important inventions. So here's my proposed redefinition. I offer it with the utmost respect for entrepreneurs because after all, it's they who are going to take us into this future that has so much potential. So thank you and I hope you help me spread the word.