In a VC finance course at Wharton, our professor said, “On a risk-adjusted basis, becoming an entrepreneur does not make financial sense — you are much better off as an investor.”
Many of us revolted — how could she say that? Aren’t entrepreneurs the richest people around? Why else would so many intelligent people become entrepreneurs?
Then our professor explained that for many entrepreneurs, the freedom, flexibility and not having a boss compensates for the lower financial return.
Today as an entrepreneur, I have to grudgingly agree with my professor. If you want to maximize your financial well-being, becoming an entrepreneur is not the greatest option, and here is why.
Let us assume a 5% chance of success in entrepreneurship.
So in 5% cases, you make a LOT of money (say $100 million). But the utility of your 100 million is just a little bit higher than a batchmate who joined the corporate world and made $2 million.
But in 95% cases, you go bust and lose a lot. That has a horribly negative utility. Yet, your corporate classmate will never be in that boat.
So as an entrepreneur, in 5% cases you are somewhat better off than your high-earning classmate, and in 95% cases, your classmate is infinitely better off than you (since you are broke and struggling).
This math may seem abhorrent, but it is true — I know this firsthand.
Then why become an entrepreneur? I guess for creative freedom, for escaping corporate bureaucracy, and not having a boss. 😊
Entrepreneurship makes little sense for a reasonable person. If you are unreasonable, then well — what can I say? 😂
PS: I am talking about high-risk entrepreneurship, not starting a services company or freelancing, which has lower risk and reward.
– Rajan