The risk concept for entrepreneurs reconsidered: New challenges to the conventional wisdom

Abstract

This paper explores the entrepreneurial risk construct, focusing on how the decision to launch a new venture may entail risks different from what is found in established firms. Opportunities often emerge from the creation of specialized knowledge: in start-ups this knowledge is characterized by concerns for rent appropriation and information asymmetry. We suggest that traditional measures of risk do not properly account for these concerns; hence an illusion of greater risk-taking attaches itself to entrepreneurs, especially if the specialized-knowledge is difficult to observe. We suggest alternative measures that better capture these concerns, including the dilution of control when issuing equity, cash burn rates, etc.