Are successful founders simply lucky?
The other evening my colleague Mike Mills and I gave a quick Zoom talk with the MBA candidates at our alma mater, HEC Paris. A question was brought up by one of the participants about luck in startups. In other words, the participant was questioning whether successful founders (and their investors) are mostly by luck, and confirmation bias leads people to believe that they’re better founders than others.
I know there are many “researches” about the role luck plays in one’s career. Most of them draw the convincing conclusion — at least convincing for the smart and introspecting folks — that luck plays a huge part in the success of people. For Christ’s sake I myself have a friend who’s a professor at a prestigious business school in UK whose research field is exactly this. And if you’re like me an avid reader of Nassim Taleb, you’re most likely led to believe that luck determines the 99% of the outsized outcome.
What is my view about this, the MBA candidate asked.
To the extent that our life is full of randomness, I answered, yes, luck is the most important among all factors that account for outsized success in a personal life, assuming you analyze that over a large sample with relevant “statistics”.
But even if you want to take the statistical results by the face value, this argument is only true (or statistically not false) conditioning on one taking on the extremely volatile path of life of a true entrepreneur. This volatile path includes outcomes such as bankruptcy, divorce, losing all your parents’ 401k savings, breaking up with a partner, losing a house that’s already refinanced twice, skipping the last 5 college reunions (out of inferiority), losing custody of the children of own blood, selling BMW for a 2nd-hand Nissan, losing custody of the children not of own blood, a 2nd divorce, not making it to see one’s father one last time due to fundraising roadshow, gaining 40 lbs in 2 yrs due to lots of late night pizzas delivered via Uber Eats, a 3rd divorce — and occasionally, becoming a billionaire.
Most people with decent education in an advanced economy never (need to) live such volatile lives. For most people volatility in life involves mostly the Dubs beaten by the sole Canadian(?!) NBA team and failing to achieve a 3-peat, or the newly bought iPhone 12 Pro Max Ultra Supra falling on the concrete doorstep 10 cm away from the wooden indoor flooring and breaking the screen.
Sure, divorces happen. So does losing custody. But in those situations mostly the reasons are attributable to personal behaviors, not by their day jobs.
So it’s not luck that determines the success of the entrepreneurs. It’s volatility.
Entrepreneurs take on this volatile life that leads to extreme outcomes, both positive and negative ones. In these highly volatile paths of life, luck can work its wonder and generate extreme outcomes, but so can un-luck.
In other words, people call extreme positive outcome in a volatile path as being lucky and extreme negative outcome as being un-lucky. But they’re actually the same thing, just with different signs.
Lucky and unlucky are the same volatility, just with different signs.
One can take a sample of 1,000 new government employees in Japan and run Monte Carlo analysis on their career paths over 20 years. The outcome will be extremely narrow, assuming all of them stay in government jobs instead of becoming politicians or corporate consultants. The luckiest of them might become a high secretary in the Ministry of Finance. The most unlucky of them might end up being a senior manager at the National Archives. Their annual salaries would most likely not differ by more than 1X.
The most that luck could create in surplus in this sample space is therefore no more than 15M JPY in annual salary, which is roughly $140k in USD.
One can then take another sample of 1,000 founders in Silicon Valley and run Monte Carlo analysis on their paths over 10 years — 50% of that of the previous sample space. The outcome would include bankruptcy, divorce, losing all your parents’ 401k savings, breaking up with a partner, losing a house that’s already refinanced twice, skipping the last 5 college reunions (out of inferiority), losing custody of the children of own blood, selling BMW for a 2nd-hand Nissan, losing custody of the children not of own blood, a 2nd divorce, not making it to see one’s father one last time due to fundraising roadshow, gaining 40 lbs in 2 yrs due to lots of late night pizzas delivered via Uber Eats, a 3rd divorce — and occasionally, an Eric Yuan.
In this case, luck creates a surplus of $19B (as of today) between the luckiest and the most unlucky.
In short, to gain outsized payout, one has to take an extremely volatile path, so that luck can work its wonder.
But if that’s the case, why not just go to Vegas?
Well, because in a casino, the expected return is systematically negative due to the casino’s share. That’s their business model. They do not generate economic surplus. It’s pure entertainment consumption. It’s a negative sum game.
That’s not the case of entrepreneurship. Majority of the human economic surpluses come from the corporates created by successful founders. The money that comes out of these activities are more than the money that went in.
In a casino, luck determines who is less unlucky in a negative expected return system.
In entrepreneurship, luck rewards tremendous payouts to the successful ones while creating economic surplus to the society as a whole.
Next time you want to call a founder whose company just went public via a SPAC and who personally became a billionaire lucky, maybe you should look at the volatility you take on in your own career and see if the most extreme luck can take you to that level of personal wealth.
If not, maybe the guy didn’t become a billionaire simply because he’s lucky?
