Apex’s comment (risk, taxes and entrepreneurship)
Apex wrote the following:
You presume a level of risk calculation that almost no entrepreneur ever makes. There are two general kinds of entrepreneurs. One is the kind that simply wants to be in charge of his own business. he is not dreaming of vast riches, just making his own money his own way. If he does well he assumes he will do better than if he works for someone else but either way he will run things his way and make enough and that is why he does it. This by the way is most entrepreneurs. As time goes on if things go well they may try to expand and get bigger but they just want to get away from “the man.” These are restaurant owners, insurance agents, real estate agents, independent electricians, plumbers, handymen, beauty shop owners, wedding photographers (or any photographers), etc, etc, etc. There are 10s of millions of these people and very few of them are going to get rich and they aren’t thinking about it in those terms either.
The second kind of entrepreneur is the one who starts his own new business venture to create the next great product or service with visions of making it big. There are far less of these entrepreneurs but there are still quite a lot of them. These are the innovators 1% of whom will create new and amazing things and the rest will go broke. This is the risk you are talking about. But here is where you go wrong. Exactly 0% of these people ever do the risk analysis you are talking about. These people are high rollers, big talkers and even bigger believers. They see themselves as better than everyone else, smarter than everyone else, and destined for greatness. They would not do an analysis that determined their mathematical expectation based on a 100 million dollar payout and a 1% success rate. That kind of silly math experiment would never enter their mind. They are the kind to jump first and ask questions later. They would never even consider a risk analysis because that would presume some reasonable chance of failure for which they see almost none. If by some chance they were to do such an analysis their expected gain would be more like 1 billion and their chance of failure would be something like 1 in 2. Entrepreneurs in this category have a level of excessive optimism that defies all logic. They are also nearly clueless about tax law at the time they are even thinking about starting this business, so the idea that they would need to discount their gains by tax law would never enter their minds. This excessive optimism is actually critical to their success. Studies of successful businesses shows that those that succeed are the ones that believed they could and were successful in convincing everyone working on the projects of their assured success even in the face of obstacles that should have caused them to become defeated and give up. It doesn’t guarantee success by any means but it is necessary to end up in the 1% who do succeed.
I have been partnered with these second kind of entrepreneurs by the way so while I have read business books about this kind of entrepreneurial optimism, I have also seen it first hand. I know how these people think and they don’t think rationally. Unfortunately that appears to be a necessary trait for the few who will succeed wildly. We all know by know that Steve jobs for famous for it with what everyone around him referred to as his “reality distortion field”
Now as to Venture Capital and getting some wild hair brained idea funded, that’s an entirely different story. I can’t say I have much experience with that side of the equation. I assume that the risk calculations and tax consequences will be considered more heavily there. However the people we have been throwing around here like Gates, Jobs, Brin, Zuckerburg, etc, didn’t have to go get VC on a hair brained idea. They were able to boot strap it until they already had something worth investing in before they had to go get VC. They all did it out of garages or dorm rooms, and they didn’t do any risk analysis based on mathematical expectations of success discounted by tax rates.