Entrepreneurs as predators, not risk-takers: Malcolm Gladwell’s The Sure Thing

Malcolm Gladwell in high school trackAnother classic article from the Gladwell archives.

Gladwell argues that the conventional view of entrepreneurs as hot-headed risk-takers is wrong. The most successful entrepreneurs are actually cold-blooded, calculating predators. From Ted Turner to John Paulson to Sam Walton, Gladwell arrives at the conclusion that the most successful entrepreneurs aren’t taking risks at all – they simply see an opportunity that others miss or undervalue, and consistently minimize chances for failure along the way.

Full article here.

The write-up below is included in my 1-Read-A-Day newsletter.

Highlights from the article

Gladwell starts by explaining how Ted Turner bought a local broadcast station and built it into TBS – against the advice of everyone around him:

“We tried to make it clear that—yes—this thing might work, but if it doesn’t everything will collapse,” Mazo said, years later. “Everything you’ve got will be gone. . . . It wasn’t just us, either. Everybody told him not to do it.”

[Turner] was a drinker, a yeller, a man of unstoppable urges and impulses, the embodiment of the entrepreneur as risk-taker. He bought the station, and so began one of the great broadcasting empires of the twentieth century.

The character portrait is a romantic one, but inaccurate. Turner had significant advantages from day one: the billboard company he inherited from his father gave him plenty of cash and excess inventory to advertise the new network.

Further, Turner paid a reasonable purchase price and didn’t put a penny down.

The truly successful businessman…is anything but a risk-taker. He is a predator, and predators seek to incur the least risk possible while hunting.

Examples of other risk-minimizing entrepreneurs include:

  • Giovanni Agnelli (the founder of Fiat) who kicked out his initial investors to gain majority control
  • George Eastman (the founder of Kodak) who shifted early financial risk to his wealthy friends
  • Ingvar Kamprad (the founder of Ikea) who had his furniture built in Poland instead of Sweden – at half the cost

Then there’s hedge fund manager John Paulson. By 2004, Paulson was managing $2B and was,

“Zuckerman writes, a “solid investor, careful and decidedly unspectacular.” The particular kinds of deal he did were “among the safest forms of investing.”

In the housing boom of 2004-2005, Paulson began shorting subprime mortgages – to the tune of $25 billion dollars (!).

Most people thought the trade was too risky; they believed Paulson was crazy. But Paulson – through meticulous research – saw an something they missed.

“There’s never been an opportunity like this,” Paulson gushed to a colleague, as he made one bet after another. By “never,” he meant never ever—not in his lifetime and not in anyone else’s, either…In 2007 alone, Paulson & Co. took in fifteen billion dollars in profits, of which four billion went directly into Paulson’s pocket. In 2008, his firm made five billion dollars. Rarely in human history has anyone made so much money is so short a time.

Paulson and Turner are PREDATORS. They’re not braver or crazier than the rest – they’re MORE ANALYTICAL. They see opportunities that others miss and they act immediately and aggressively.

In Turner’s case, he even became physically sick when his family purchased a competing billboard firm, a deal he considered too risky:

It was a good deal, not a perfect one, and that niggling imperfection, along with the toll that the uncertainty was taking on his father, left Turner worried sick. “During the first six months or so after the General Outdoor acquisition my weight dropped from 180 pounds to 135,” he writes. “I developed a pre-ulcerative condition and my doctor made me swear off coffee. I’d get so tired and agitated that one of my eyelids developed a twitch.”

When you look at the winning hedge funds in the subprime mortgage collapse, they all shared the same behavior: predators who did their homework, found a marketplace anomaly, and made a big, calculated “bet”.

You could even argue that the entrepreneurs who take the most risks are most liable to fail.

Taking over an existing business is always the best bet; failed entrepreneurs prefer to start from scratch. Ninety per cent of the fastest-growing companies in the country sell to other businesses; failed entrepreneurs usually try selling to consumers, and, rather than serving customers that other businesses have missed, they chase the same people as their competitors do. The list goes on…a good many of these risks reflect a lack of preparation or foresight.

And some science to back it up:

When the sociologists Hongwei Xu and Martin Ruef asked a large sample of entrepreneurs and non-entrepreneurs to choose among three alternatives—a business with a potential profit of five million dollars with a twenty-per-cent chance of success, or one with a profit of two million with a fifty-per-cent chance of success, or one with a profit of $1.25 million with an eighty-per-cent chance of success—it was the entrepreneurs who were more likely to go with the third, safe choice.

Gladwell’s a tremendous writer, social theorist, and story-teller. Highly recommended article.

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