Starting a company is risky business. Roughly one-third of small businesses fail within two years. So why do people do it? What in the world are these risk-takers thinking? What’s the psychology that separates successful entrepreneurs from everyone else? Decades of research has yielded a pretty clear three-part answer:
Successful entrepreneurs tend to be reasonably self-confident, more risk-averse than you might think and extremely passionate about their ideas.
“Many entrepreneurs are fully aware of the risks in launching a business, but they believe their idea is important enough that it’s worth trying anyway,” said Travis Howell, PhD, an assistant professor of strategy at the University of California, Irvine’s business school. “Even if there is a minimal chance of success, they won’t be happy doing anything else.”
Figuring out whether you have a healthy entrepreneurial mindset—along with knowing the type of leader you would be and which specific business-owner skills you possess and lack—can help you decide if, and when, to take the plunge.
Why people strike out on their own
Any perception of entrepreneurs as money-hungry, shoot-from-the-hip gamblers willing to risk it all is simply false, according to several researchers who study business startups and the people that drive them.
“The most successful entrepreneurs are motivated to solve a problem, right a wrong or help a certain market segment,” said Neil Kane, MBA, an entrepreneur and educator at Michigan State University’s Burgess Institute for Entrepreneurship & Innovation. “Rather than taking huge risks, I think what characterizes the entrepreneurial mindset is a willingness to bet on yourself. And the best entrepreneurs are great at managing risk, not piling it on.”
In fact, research suggests the average entrepreneur is more risk averse than the general population, said Olav Sorenson, PhD, director of research at UCLA’s Anderson School of Management.
But here is where things can get tricky: Perceived risk is not always the same as actual risk.
“When asked hypothetically whether they would prefer a risky bet to a sure thing, entrepreneurs are not more likely to pick the risky bet,” Sorenson told CO—. “People may start businesses not because they see the risks and accept them but rather because they do not fully appreciate the risks. If you’re not aware of the risks, you probably will not manage them well.”
Rather than taking huge risks, I think what characterizes the entrepreneurial mindset is a willingness to bet on yourself.
Neil Kane, MBA, an entrepreneur and educator at Michigan State University’s Burgess Institute for Entrepreneurship & Innovation
The myth of ‘risking it all’
Perceptions could help explain why entrepreneurs may seem like the type to “risk it all,” but their motivations are often much more mundane.
“Most people do not quit good jobs to start companies,” Sorenson said. “Instead, they find themselves unemployed or stuck in a job that they do not like, so starting a company seems like a better alternative. Either that or they have an idea that they really believe in.”
Indeed, the simple, practical calculus of a person’s wage or salary versus debts and family obligations can quash startup urges, or it can inform the approach to launching a business, said Michael Goldberg, MBA, an associate professor of design and innovation at Case Western Reserve University’s Weatherhead School of Management.
Avoiding risk, and avoiding loss of income and prestige, motivates most entrepreneurs more than any love of risk, one study found. Women entrepreneurs, according to another study, are driven less by money than by the social impact of their ventures.
Whatever motivates them, budding business builders don’t necessarily flip a switch and take on the risks of a startup all at once, Goldberg points out. Instead, many treat their passion as a side hustle, working nights and weekends on an idea, a product prototype, or perhaps a low-key launch. Goldberg, who is also an entrepreneur and a venture capitalist, agrees that money-making is rarely the sole motivator.
“If you're only focused on financial success, but you're not really solving anybody's problem, that’s probably a bad place to start,” he said.
Just enough confidence
If any mindset epitomizes successful small business owners, it’s confidence, experts say. But too much can backfire.
“Studies that have looked at the long-run success of startups have found that more overconfident and more risk-tolerant entrepreneurs have less profitable businesses on average and ones that are more likely to fail,” Sorenson said.
Confidence in moderation, however, is necessary.
While fear of failure (or success) can quash entrepreneurial dreams, Kane thinks the real showstopper is a feeling of imposterism, a lack of self-confidence that often develops when people rise to a significant level of responsibility or take on new roles they don’t think they deserve, and they no longer feel as qualified as others perceive them to be. More than eight in 10 small business owners struggle with this imposter syndrome. The wise ones know how to take some of the load off their own shoulders.
“The best entrepreneurs recognize that building a company is not a solo journey,” Kane told CO—. You can overcome your fear of success or failure, uncertainty, and anxiety, by surrounding yourself with good people.”
Howell, the UC Irvine researcher, studies founders. He does not think everyone is cut out to be one, but notes that a little self-evaluation can help a person figure that out.
“When you own a business, the buck stops with you, and you have to be the type of person who can handle that,” Howell told CO—. “People who have lived most of their lives doing what other people tell them to do are often not cut out for this. On the flip side, people who are accustomed to taking initiative and solving problems on their own are more likely to succeed and enjoy the process of launching a business.”
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
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