By Luke Johnson, Financial Times
Are entrepreneurs really just gamblers at heart? I don’t believe so, but that view reflects my own prejudices. I have never enjoyed playing games of chance for money; when I gamble I prefer to be the house. So rather than bet as a punter, I have owned bookmakers, bingo halls, greyhound tracks and suchlike.
My attitude is partly influenced by my undergraduate degree, which included a course in statistics. That involved studying the laws of probability. Ever since, I have avoided financial transactions where the likelihood of losing appears high.
Yet some entrepreneurs undertake ventures at long odds. They back high-risk business ideas either because they are in denial about the hazards or because they are emotionally committed to the project. Gamblers wager because they feel lucky, for escapism, for entertainment, or because they lack the power to stop. The motivations are rather different.
I recently became chairman of a charity called Action on Addiction that deals mainly with substance abuse; but many experts also consider behavioural problems like pathological gambling to be an addiction too. And even though I don’t consider entrepreneurial speculation to be gambling, I do suspect that I am a compulsive capitalist – I cannot resist business opportunities. Plenty of serial entrepreneurs possess the same weakness.
Why do we do it? Boredom perhaps, a craving for stimulation, unslaked ambition, a new challenge, curiosity or simply habit – who knows? I suppose, like the parable of the scorpion who cannot resist stinging the frog carrying him across the river, it is just what we do.
My friends and wife sometimes despair: why yet another venture? Surely enough is enough. But it never is. And that might be why entrepreneurs who have already made it insist upon rolling the dice again – even when renewed perils cannot be rationalised. How else does one explain why Adolf Merckle, reputed to be worth $9bn, brought his industrial empire to the edge of ruin by losing huge sums in a misguided bet on the shares of Volkswagen? Tragically he committed suicide when the investment went wrong.
I like to think that the fundamental distinction between gambling and the sort of business investments I make is about a degree of influence over the outcome. Taking a flyer by buying a lottery ticket is something over which one has no control. By contrast, staking money on the success of a start-up is a matter of judgment and work – you can influence the result.
The appeal of gambling is the uncertain outcome; entrepreneurship is about eliminating uncertainties. Astute entrepreneurs are constantly trying to reduce their downside and improve their chances of winning. Moreover part of the lure of gambling is that it seems to be easy money. Whereas founding a business takes effort. I don’t condemn gambling as an immoral activity,
but I do believe taking business
risks in starting or buying an enterprise adds a great deal more value to society.
Unfortunately those who attack capitalism and don’t understand entrepreneurs tend to see gambling, speculation, equity investing, venture capital and so on as the same thing. But the critical difference is that gambling is a zero-sum proposition – players trading stakes, less the house cut. Investing, on the other hand, generates positive returns to society – in the form of inventions, products, resources and jobs.
This is why comparing the stock market to a casino is childish. At its heart the former is a device to raise finance for industry. Meanwhile the latter is an amusement centre for people to play games for cash. Issues like this are about more than semantics, they reflect bias against commerce. The stock market should fulfil its intended function and fuel the creation of wealth and jobs. Perhaps financial engineering like hedge funds and derivatives trading are rather closer to gambling than real business, and their growth has helped crowd out the proper purpose of capital markets. Too often, unfortunately, the truth about business is obscured and distorted by a bloated financial sector.
The writer runs Risk Capital Partners, a private equity firm, and is chairman of the Royal Society of Arts