What makes Entrepreneurship such a risky affair? One word answer to it is ‘Uncertainty’. When Mark Zuckerberg started Facebook, the biggest risk-taker was the man himself. Eduardo Saverin was the next in line. Peter Thiel came in at a later point and paid more for his share of investment when compared to cofounders. After IPO, a shareholder pays even more for a smaller portion of the company. Investing in a new project involves certain uncertainties associated with it and investors are paid for the risk if at all they get paid. As the market understanding improves, the company eliminates the uncertainties to some extent and the risk reduces.
Comparing with a traditional approach, say a franchisee of McDonald’s in Downtown Detroit. Investment is significant while uncertainties are fewer. The risk is still there but since there is a steady successful model in place, it is easy to recalibrate business decisions and assess with changing market. By reduced risk, the certainty of success improves drastically and return on investment reduces proportionally. Will the McDonalds work? Maybe. It might not work in certain segments but historical data can be used to make a pivot. Say beef burgers are not selling high, a manager can deduce that the location is probably demographically suitable for chicken-eaters. Instead of focussing on beef-based products, the manager can pivot to chicken based products.
Zuckerberg never had that luxury. Facebook hedged all the bets on the risk that community activity is commercial metadata. To make anything worthy of that idea, Facebook needed a huge community for starters. The business model was not sustainable until the online users were transactional. The possibility of user consumption become transactional also depended on the number of users. Nobody would have sold anything on a social media with 100 users. As the network of users increased, the risk reduced because even if e-commerce had failed, advertisements would have kept it floating. E-commerce did give a boost.
Chances of having a successful McDonalds franchise is high but you cannot become a billionaire selling burgers in one store. Chances of having a super-successful social media network are low but if it flies, you will fly in your private jet.