The Stupidity of Entrepreneurs

Giff Constable startups

I was hanging out tonight with a bright young man who said, “A great entrepreneur always bets on themselves.”

Context: we were talking about hedging. I asked the question: what if founders could hedge themselves against other startups so that if your company failed, you still had a chance for upside?

He disagreed. He felt that a great founder would always choose equity in their own company rather than equity elsewhere.

I get the perspective, and agree that the bulk of a founder’s equity should be in their own company. I certainly understand the emotional turmoil of giving up some equity in your own company, where you have perfect information, for equity in others, where you have highly imperfect information.


That mentality is why entrepreneurs are the dumb money. The LPs and VCs are the smart money. They take a portfolio approach. They know that only a few companies will make the fund and that most will fail, no matter how awesome things seem at the start.

All entrepreneurs have to believe that they will be the ones to beat the odds. Yes, that is true. And necessary.


If you live in the SF Bay area long enough you realize this fact: on your left is founder A, and on your right is founder B. Both insanely smart. Both worked hard. Both had big visions. Both recruited great talent. And yet one is quite wealthy, and one still needs a paycheck.

Why? All other things being equal (and high quality), luck and timing still play a huge part.

It’s not cool to say. It smacks of weakness. But it’s true.

Now of course, all things are not equal. Startups differ by team and execution effectiveness, by vision and strategy, by funding prowess and more. But an awful lot of the time, good people and good teams fail. That’s the game we play. We try to get just ahead of the market (win!) but not too far ahead (dead!).

I stand by my line that founders are too often the dumb money. Believe me, I include myself among them. Entrepreneurship is *not* a rational endeavor. Even in heady times like today, there are far more failures than there are successes. (thankfully there are also a lot more successes than in the dotcom bubble because the markets are finally big enough)

It’s the mythology that bothers me. It blinds us.

My belief: if you exclude the frothiest of times, most entrepreneurs don’t start companies because of the money. Sure we dream of riches, but we start companies because we need to change the world in a particular way, we feel a need to build something new, and because we are kind of broken for normal jobs. The upside excites us and motivates us, and the downside scares us, but neither defines us.

So where does this concept come from that entrepreneurs need to have their entire life’s worth tied up in a single high-risk venture? Is this concept not helping fuel some self-destructive behavior among founders? Is that really what we think drives the best of us? I veer more towards Dan Pink’s view of what drives creatives.

I think entrepreneurial motivations, once the initial “foolish dreamer” stage is past, are more closely tied to a deep drive to succeed, competitiveness, team camaraderie (not to be underestimated), sheer determination, and sometimes just a damn anger to prove the naysayers wrong.

All this said, there aren’t very many ways for founders to hedge today. Not in a way that ensures relatively equal levels of quality in terms of ideas, teams, and execution. It would take a lot of trust in the vetting team, but it should be doable.

Finally, I spent this morning getting advice from an experienced startup lawyer and successful angel investor. The secret to angel investing, they said, was keeping at it through good times and bad. You build a portfolio, and you keep building a portfolio, and some things will hit.

I think it’s a shame that great entrepreneurs can’t benefit from that thinking a bit more.

Follow up: The Challenge of a Hedging Model