How Founders Around the World Perceive Risk

Global entrepreneurs have to weigh the potential costs of failure.

Posted Apr 07, 2020

Photo by Touann Gatouillat Vergos on Unsplash
Source: Photo by Touann Gatouillat Vergos on Unsplash

One of the hardest decisions for any entrepreneur to make is when, and if, it is time to start their own company. The decision can cause so much anxiety that, for some, the time never comes.

Many would-be entrepreneurs dream of success but never start, because they have no idea how to succeed and are intimidated by the likelihood of failure. This critical decision rests on myriad factors, including individual sensitivities to risk, about which much has been written in the academic theater.

One explanation is that many entrepreneurs around the world simply have much more to lose. Outside of the bubble of Silicon Valley, or other major startup ecosystems, in a place we call “the Frontier,” the cost of failure for founders is considerably greater from a social, psychological, and financial perspective. Starting a business in an emerging ecosystem tends to require an assumption of great personal risk.

It can take many years for a company to gain access to venture capital funding, and, in the meantime, salaries don’t come in and fees pile up. In many markets, debts are not forgiven in bankruptcy and can follow you for the rest of your life. In other places, bankruptcy can even be illegal.[1]

Unlike Silicon Valley, there is a limited safety net for founders at the Frontier. If things don’t go well, the company likely won’t get absorbed by a larger player; that’s because the culture of “acquihires” (acquiring a company only for its team, giving founders a face-saving exit and an attractive stock option package in the new host company) is much less prevalent. Failing often means really failing—firing all the employees, killing the product, and going bankrupt.

In many markets, failure can be a lifelong black mark on careers. As the New York Times once wrote about Europe’s entrepreneurial ecosystem, “Failure is regarded as a personal tragedy.”[2] Failure is much more financially and personally painful at the Frontier. Accordingly, it is not flaunted as a battle scar, but hidden as a blemish.

In some countries, founders even have to worry about success. The entrepreneurial culture needs in North Korea, for example, are completely different from those anywhere else on earth. One of the founders there, Geoffrey See, explained, “In many markets, the risks to starting a business overwhelm the dream of the potential of the business. In North Korea, paradoxically, success can also be a big risk. Entrepreneurs are worried that the business will get confiscated. Therefore, in the past, they were motivated to take cash out of it and not reinvest in growth.”[3]

However, times are changing, and those on the front lines of that change are entrepreneurs themselves, who are helping to shift the psychology and narrative of risk.

Geoffrey See is an extreme example. Over the last nine years, he has offered targeted workshops to teach business, economic policy, and law in North Korea. Of course, given the political situation in North Korea, Choson, the company he started, operates in narrow segments. It provides critical training for a burgeoning market-oriented system where households engage in trade activities and small business. Choson Exchange focuses on training young entrepreneurs and has already trained hundreds of men and women, and established the country’s first startup incubator. He partnered with North Korea’s State Academy of Sciences (SAS) and attracted over 20,000 researchers who are interested in commercializing their ideas.

Yet this movement to help ease the culture of fear of failure and teach the next generation of entrepreneurs how to stare down risk is on the rise. In Mexico, for example, where the startup culture has a distinct aversion to failure, a small group of founders led by Pepe Villatoro found themselves discussing past business mistakes and defeats over a few bottles of mescal. Each of them came to understand that, by communicating openly about failure, they left energized to imagine their next companies, and the group began to meet monthly for honest discussions about risk and failure.

The idea went viral, and so “F*ckup Nights” (FUN) was born. Pepe and his friends created a platform for others to replicate similar events in their own startup communities. The objective was for participants to share stories of their professional or personal failures, all while creating a culture that accepts risk taking and the failure that may ensue. Over the next few years, FUN organically and unpredictably turned into a global platform for entrepreneurs to share their stories of defeat and reflect on what they had learned, thereby helping others learn to avoid the same mistakes. FUN redeemed failed projects and startups by putting their stories to use.

Later, FUN launched the Failure Institute, which collects and analyzes data on entrepreneurial failures in cities, tracking rates of failure by location, industry, and startup type and calculating trends in the development of resilience in entrepreneurial communities. FUN recently launched academic chapters to de-stigmatize failure in the education system and is working with more than 200 corporate partners to help change their cultures and mindsets.[4] FUN has scaled rapidly around the world. Its events have been hosted in more than 330 cities in 90 countries. More than 10,000 people have told their stories to more than 1 million people.[5] It has become a leading distributed entrepreneurial social movement.

Like Pepe and his friends, these Frontier Innovators shape cultural perceptions of risk. They may also impact regulations (e.g., punitive bankruptcy laws), decreasing the real costs of failure. Over time, Frontier Innovators can foster a culture that accepts entrepreneurship as a viable profession, supports entrepreneurs in taking risks as they scale their businesses, and enables them to commit fully to one venture.

Of course, these changes will take time. The shift in attitudes will be further catalyzed by the creation of successful role models. As Chris Rogers, an investor with Lumia Capital and co-founder of Nextel Communications, reflects on the recent sale of Careem to Uber for over $3 billion dollars, the largest exit of its kind in the Middle East, “As the region’s first unicorn and now its first multi-billion-dollar exit and largest acquisition by over a factor of five, […] Careem’s exit is sure to motivate top talent in the region to more aggressively pursue entrepreneurial endeavors. Already we see Careem alumni building the next generation of exciting regional startups.”[6] The direct and indirect impacts of this enormous exit are predicted to have an incredibly far-reaching impact in the region.[7]

Acceptance and celebration of failure is a time-honored Silicon Valley tradition. However, entrepreneurship is on the rise outside of California. Startup ecosystems are popping up all over the world, with more than 480 hubs worldwide, from Detroit to Bangalore to Puerto Rico to Nairobi to Sao Paulo.[8]

Success will be amplified by entrepreneurs—usually scarred veteran founders—who help change the culture and mindset around risk and failure at the Frontier, to lower the mental hurdles and inspire the next generation of entrepreneurs.

This post is an adapted excerpt from my book, Out-Innovate: How Global Entrepreneurs — from Delhi to Detroit — Are Rewriting the Rules of Silicon Valley.

References

[1] “Global Restructuring & Insolvency Guide 2016,” Baker McKenzie, 2016, p. 236, http://bit.ly/3a5Ug17.

[2] James B. Stewart, “A Fearless Culture Fuels U.S. Tech Giants,” New York Times, June 18, 2015, https://www .nytimes.com/2015/06/19/business/the-american-way-of-tech-and-europes html.

[3] Author interview with Geoffrey See, August 19, 2018

[4] Author interview with Pepe Villatoro, June 20, 2018.

[5] “Stories About Failure,” F-ckup, 2019, https://fuckupnights.com/; and author interview with Pepe Villatoro, June 20, 2018.

[6] Chris Rogers and Peter Weed, “What Careem’s $3.1 Billion Acquisition Means for the Middle East,” Forbes, Apr. 2019, https://www.forbes.com/sites/valleyvoices/2019/04/17/what-careems-3-1-billion-acquisition-means-for-the-middle-east/

[7] Noor Shawwa, “The Success And Multiplier Effects That Careem's Acquisition By Uber Will Have On The Middle East's Startup Ecosystem,” Entrepreneur, April 2, 2019, https://www.entrepreneur.com/article/331568

[8] “Global Startup Ecosystem Report 2017,” Startup Genome, April 2018, accessed October 23, 2018, https://startupgenome.com/reports/2018/GSER-2018-v1.1.pdf