The Relationship of Risk to Startup Culture

By Tim Dhoul Updated Mar 30, 2015

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Introduction
Waseda University points to Japan’s differing stance on startup culture
Government encouragement of entrepreneurship
Are search funds less of a risky business for MBA students?

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Plucking up the courage to go it alone in business is surely one of the biggest obstacles to eschewing typical corporate life and embracing startup culture. Indeed, despite the big success stories, the inherent risks associated with launching and sustaining a startup are plain for all to see.

In Japan, addressing risk aversion has been pinpointed as a means of getting back some of the vitality in its startup culture, something that has been lacking since the country’s economic stagnation began in the 1990s.

"The fact is, even if a guy wants to start his own company, it's often their wife, their mother or their wife's mother who stops them (sexism is also considered to be key battleground in the nation’s business landscape, by the way). They'll say it's too risky to quit their job. Somehow, we have to get them to think that not taking a risk is also a risk,” Yoshiaki Ishii, from Japan’s Ministry of Economy, Trade and Industry told the Los Angeles Times.

According to Ishii, just 5% of companies in Japan can be labelled startups – whereas it is roughly 10% in the US or UK. Worse still, is level of venture capital investment, which Ishii says represents 0.03% of GDP in Japan, as opposed to 0.17% in the US.

Waseda University points to Japan’s differing stance on startup culture

In the same LA Times report, Tadashi Takiguchi, head of the Entrepreneurial Research Unit at Waseda University – home to the sole Japanese entrant in this year’s Global 200 Business Schools rankings - points to the differing outlooks on startup culture held between those in Japan and those in the US.

“For Japanese university students, the no. 1 goal is still to enter a big company; no. 2 is to become a bureaucrat, or maybe a teacher. An entrepreneur is still seen as a much lower position. At Stanford or Harvard, the no. 1 goal is becoming entrepreneurs. It's totally different,” Takiguchi says.

Government encouragement of entrepreneurship

Japan’s government wants to encourage startup culture, and in so doing, may want to consider the level of state support available to would-be entrepreneurs measuring the element of risk.

In the US, the level of support on offer through governmental policies can go a long way to reducing the financial risks for those interested in entrepreneurship and instead, encourage people to pursue their ideas, according to a report in The Atlantic.

This report points to a change to state policy in France in 2001, whereby those receiving unemployment insurance were no longer cut off from payments if they founded their own enterprise, but able to continue receiving them for a stipulated time, with an additional assurance that they would be eligible once more if that business failed. The result was a 25% rise in startup creation.

Meanwhile, at the start of this year, a Wall Street Journal report found that entrepreneurship was actually at something of a low point in the US, particularly among those under the age of 30 – in spite of all the rises seen in business school provision and support for students interested in entrepreneurship.

This may be attributable to the effects of the Great Recession, as the report’s data dates back to 2013 – before the US turned a corner in its economic recovery – and we are likely to see an upsurge in entrepreneurship ahead – not just in the US, but elsewhere as well, as today’s MBA students and recent graduates get their new enterprises off the ground.

Returning to France, a new survey of over 8,000 HEC Paris alumni for the school’s first ‘entrepreneurship barometer’ testifies both to the growing strength of startup culture in France and to a business school’s role in providing the stepping stone to launching an enterprise that many MBA students are looking for.

HEC Paris found that the proportion of its students that had founded a business in the year following graduation rose from 9% among the class of 2004, to 25% among the class of 2013. This figure was even more pronounced among HEC Paris’ class of 2013 graduates of pre-experience master’s programs (19%) and executive education (44%) than the MBA (15%), but it’s a further reminder of the increasing appeal in entrepreneurship among the emerging generation of business leaders.

Are search funds less of a risky business for MBA students?

Founding a business is, however, not the only route into startup culture. Indeed, MBA students with a keen sense of risk assessment have found value in the approach taken by search funds. Search funds back individuals who are believed to have the potential to produce great things, rather than the startups themselves. It is a tactic that is certainly not without its risks, but is viewed positively by a number of investors and observors.

A professor at Stanford GSB, Peter Kelly, told the Financial Times that although roughly a third of search funds do lose capital after an acquisition, this is better than the survival rate of startups – and you are much less likely to lose all your money if a business goes bust, as you might with a startup.

The concept of search funds was conceived at Stanford GSB in the 1980s under the direction of Irving Grousbeck, with around 200 examples coming into being since, predominantly in the US and Canada. However, the FT concludes that it’s very much a niche attraction, even among MBA students, and one that isn’t going to replace the venture capital model of investment in startups any time soon – in spite of its promise of reduced risks.

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Written by

Tim Dhoul

Tim is a writer with a background in consumer journalism and charity communications. He trained as a journalist in the UK and holds degrees in history (BA) and Latin American studies (MA).