Georgia Investment Network


Recent Blogs


Pitching Help Desk


Testimonials

"Our small, early-stage company recently signed up for your service. We got numerous inquiries, several of which we are pursuing, and hopefully will find an investor partner as a result. It is almost impossible for young companies to attract investment capital in the current financial climate, but you managed to bring a number of qualified and interested parties to the table. I would recommend your service to any early-stage company seeking capital. Bruce Jones, CFO "
Bruce Jones

 BLOG >> Recent

Entrepreneurial Risk & Uncertainty [Entrepreneurship
Posted on May 2, 2016 @ 09:18:00 AM by Paul Meagher

Dennis Patrick Leyden is a Professor of Economics at the University of North Carolina who studies entrepreneurship and innovation. He published an interesting article called Entrepreneurial Risk and Uncertainty in the Concise Guild to Entrepreneurship, Technology and Innovation (2015).

The concepts of risk and uncertainty are central to the current definition of a startup and what it means to be an entrepreneur. Risk and uncertainty, however, are not the same. If you have no basis in prior experience or logic to measure the degree of uncertainty involved in a situation, then you can't assign a level of risk to it. Insurance companies and banks deal with uncertainty in the form of risk whereas startups and entrepreneurs often deal with unquantifiable uncertainty. The distinction between risk and uncertainty gives us a way to think about how entrepreneurial companies might evolve over time from uncertainty-based ventures to risk-based ventures and possibly back to uncertainty-based ventures if they decide to reinvent themselves. Here is a passage from Professor Leyden's article that discusses the relevance of the distinction:

Although the entrepreneurship literature has increasingly come to accept Knight's view that entrepreneurial action takes place under conditions of uncertainty, that view is far from universal. For those who take the view that the entrepreneur lives in a world of (quantifiable) risk, it may be reasonable to think of entrepreneurial opportunities as objective phenomenon waiting to be discovered, albeit with risk. But under an uncertainty-based view, entrepreneurs do not so much discover profit opportunities as create them. As Alvarez and Barney note, such creativity is the result of the entrepreneurs' own organizing efforts in the face of uncertainty. However, because the condition of uncertainty may change over time, the bases for organizing entrepreneurial firms are also likely to change. As a result, entrepreneurial (that is, uncertainty-based) firms over time may be transformed into non-entrepreneurial (that is, risk-based) firms once the probability distribution of outcomes associated with uncertain exchanges is learned through experience. Based on this reasoning, Schumpeter's notion of creative destruction can be thought of as including not just the replacement of older firms by newer firms, but also the transformation of entrepreneurial firms into non-entrepreneurial firms over time. Such transformations, which Schumpeter saw as common, imply a continual need for new (or reinvented) firms that, through their decision to be entrepreneurial, enter willingly into a world of uncertainty and creativity. ~ p 72

The valuation of a startup may also be based upon whether its prospects are completely uncertain or whether it has received enough feedback that it can start to quantify some of its operational uncertainty. For example, when a startup first starts to market its products there may be no clear relationship between its marketing efforts and the number of new customers that effort produces. After awhile, however, it might start to see that certain types of marketing produces better results than other types of marketing. Once it can start to quantify some marketing relationships (even if the relationship still has alot of variability) it can leverage that risk information with investors to potentially achieve a higher valuation. Investors are generally more comfortable dealing with risk than uncertainty and may be inclined to agree with higher valuations when there is less uncertainty involved.

Permalink 

 Archive 
 

Archive


 March 2020 [1]
 February 2020 [1]
 January 2020 [1]
 December 2019 [1]
 November 2019 [2]
 October 2019 [2]
 September 2019 [1]
 July 2019 [1]
 June 2019 [2]
 May 2019 [2]
 April 2019 [5]
 March 2019 [4]
 February 2019 [3]
 January 2019 [3]
 December 2018 [4]
 November 2018 [2]
 September 2018 [2]
 August 2018 [1]
 July 2018 [1]
 June 2018 [1]
 May 2018 [5]
 April 2018 [4]
 March 2018 [2]
 February 2018 [4]
 January 2018 [4]
 December 2017 [2]
 November 2017 [6]
 October 2017 [6]
 September 2017 [6]
 August 2017 [2]
 July 2017 [2]
 June 2017 [5]
 May 2017 [7]
 April 2017 [6]
 March 2017 [8]
 February 2017 [7]
 January 2017 [9]
 December 2016 [7]
 November 2016 [7]
 October 2016 [5]
 September 2016 [5]
 August 2016 [4]
 July 2016 [6]
 June 2016 [5]
 May 2016 [10]
 April 2016 [12]
 March 2016 [10]
 February 2016 [11]
 January 2016 [12]
 December 2015 [6]
 November 2015 [8]
 October 2015 [12]
 September 2015 [10]
 August 2015 [14]
 July 2015 [9]
 June 2015 [9]
 May 2015 [10]
 April 2015 [10]
 March 2015 [9]
 February 2015 [8]
 January 2015 [5]
 December 2014 [11]
 November 2014 [10]
 October 2014 [10]
 September 2014 [8]
 August 2014 [7]
 July 2014 [6]
 June 2014 [7]
 May 2014 [6]
 April 2014 [3]
 March 2014 [8]
 February 2014 [6]
 January 2014 [5]
 December 2013 [5]
 November 2013 [3]
 October 2013 [4]
 September 2013 [11]
 August 2013 [4]
 July 2013 [8]
 June 2013 [10]
 May 2013 [14]
 April 2013 [12]
 March 2013 [11]
 February 2013 [19]
 January 2013 [20]
 December 2012 [5]
 November 2012 [1]
 October 2012 [3]
 September 2012 [1]
 August 2012 [1]
 July 2012 [1]
 June 2012 [2]


Categories


 Agriculture [71]
 Bayesian Inference [14]
 Books [15]
 Business Models [24]
 Causal Inference [2]
 Creativity [7]
 Decision Making [15]
 Decision Trees [8]
 Design [37]
 Eco-Green [4]
 Economics [12]
 Education [10]
 Energy [0]
 Entrepreneurship [63]
 Events [2]
 Farming [20]
 Finance [25]
 Future [15]
 Growth [18]
 Investing [24]
 Lean Startup [10]
 Leisure [5]
 Lens Model [9]
 Making [1]
 Management [9]
 Motivation [3]
 Nature [22]
 Patents & Trademarks [1]
 Permaculture [36]
 Psychology [1]
 Real Estate [2]
 Robots [1]
 Selling [11]
 Site News [15]
 Startups [12]
 Statistics [3]
 Systems Thinking [3]
 Trends [7]
 Useful Links [3]
 Valuation [1]
 Venture Capital [5]
 Video [2]
 Writing [2]