Calculated risk-taking

By RAMANA NANDA ET AL

The fundamental importance of entrepreneurship has not been the subject of substantial research and is more-or-less absent from standard textbooks. Over the last decade, however, entrepreneurship has flourished as a research topic within economics. As entrepreneurship emerges from the shadows, questions linger: how should we define entrepreneurship? What are its key aspects?

We assert in this paper that effective entrepreneurship builds upon a process of experimentation in deep and nuanced ways, because the knowledge required to be successful can’t be known in advance or deduced from some set of first principles. As Friedrich Hayek (1948) put it, "The solution of the economic problem of society is …always a voyage of exploration into the unknown."

For entrepreneurs, it can be virtually impossible to know whether a particular technology or product or business model will be successful, until one has actually invested in it. Here’s an interesting example: in 1999, the venture capital firms Sequoia Capital and Kleiner, Perkins, Caufield and Byers each invested $12.5 million in Google, a brand-new start-up that claimed to have a superior search engine.

By the time Sequoia sold its stake in 2005, that investment was worth over $4 billion, returning 320 times the initial cost. The staggering success should not obscure a key point: Google was by no means a sure-shot investment in 1999.

From "Entrepreneurship as Experimentation"