The First Commandment: Take Risks

Summary: Take entrepreneurial risks. Train yourself to take EV (expected value) positive bets early in life and then spend your life making as many EV positive bets as you can. Make small bets initially but once you realize that the odds are in your favour, load up and go as big as you can afford to without putting your existence in jeopardy.

[To find out what the Ten Commandments of Indian Entrepreneurship are, please click here: https://marcellus.in/blogs/the-ten-commandments-of-entrepreneurship-in-india/]

“Successful risk-takers are good estimators. They are Bayesians, comfortable quantifying their intuitions and working with incomplete information…

…you have to be comfortable turning your subjective feelings into probabilities and acting on them. And in other enterprises involving risk, you have to be willing to make at least a good first-pass estimate….

You also have to recognize that—as an outgrowth of Bayes’ theorem, which works by revising your probabilistic beliefs as you collect more information—your estimates will become more precise as you collect more data. But sometimes your edge comes from being willing to act on a relatively crude estimate to take advantage of an opportunity when other people are still mired in the fact-finding stage.” – Nate Silver in ‘On the Edge: The Art of Risking Everything’ (p. 237). Penguin Books Ltd. Kindle Edition.

Disclaimer: Copyrights of the book is exclusively reserved with Author/Publisher of the above book; we do not claim any rights on the same.

I remember that day in 2003 as if it was yesterday afternoon. It was a summer’s day in London. I was five years into my management consultancy career and struggling to get promoted. I had been told by the HR department of the American consultancy where I worked that without an MBA they would not promote me. Being an obedient employee, I had done my GMAT, secured a respectable score (97^th percentile) and was about to apply to the usual highly ranked business schools when I did the maths on how much it would cost me to do an MBA.

The cost of the fees and the salary I would forego to do a two-year MBA was equivalent to a two-bedroom flat in the far-flung suburbs of London where I had grown up. Even as I winced at the investment entailed by an MBA, I checked the curriculum to see what I would be learning from an MBA at a respectable school. Whilst the modules on Marketing, HR, and Supply Chain looked to be new areas of learning for me, much of the content was the same as what I had studied in my four years at the London School of Economics. Hence, I decided to sit down with my line manager, Steve, to understand whether I should invest several hundred thousand dollars on an MBA.

Steve – himself an alumni of Imperial College and London Business School – was blunt. He said that a business school is like a “modelling agency rather than the army”. Seeing my perplexed expression, he spelt out the metaphor more clearly.

The army toughens you physically and mentally. By itself, a stint in the army might not land you a good job. However, the mental resilience, discipline, drive & determination that the army instils into you is more likely than not going to help you rise in the world.

On the other hand, attractive young men & women go to modelling agencies not to become more attractive but to get signed-up for modelling gigs. In this sense, a modelling agency is almost like a clearinghouse for attractive people – they supply their talent to the agency and agency finds buyers for this talent e.g. advertising agencies representing corporates who want to promote their products.

Steve said an MBA from a good business school is like being signed by a modelling agency i.e. it wouldn’t make me any smarter, but it would increase the chances of my getting a senior role from a prestigious employer. That in turn would compel my then employer to promote me once I graduated from business school.

“But why can’t the firm promote straight away rather than making me go through this modelling agency-MBA drill?” I asked Steve.

What Steve said next changed my life. He said “Saurabh, most middle managers in large companies do not want to take any risk. If we promote you and you misfire on your next project then we will get a rap on our knuckles. Plus it will set a bad example i.e. other people in the firm who are in your grade will also demand promotion without an MBA. On the other hand, if you go and do an MBA and we then promote you, everything changes. Because then if you screw up, we have our bases covered thanks to the modelling agency – MBA having vetted you as a credible executive who deserves a senior role.”

Once Steve had helped me understand that corporate life in a successful management consultancy was about taking as few risks as possible, I realised that I had to move on from such an environment. In spite of what you might think of Bengalis, I come from a family of risk takers. My maternal grandfather’s dad was the first major real estate developer in Kolkata. My maternal grandfather was a successful lawyer and a real estate investor. My paternal grandfather migrated from what is now Bangladesh to Kolkata a year before the Partition and proceeded to set up a successful legal practice. My father and I were actually the first people ever in our family to enter salaried employment.

My chat with Steve took place in 2003 when I was in my mid-twenties. My wife and I took stock of our modest savings after my chat with Steve, and she gave me two years to build a successful business. As my wife put it “Investing two years and GBP 20K in building a business feels like a better use of our savings rather than spending that money on your becoming a capitalist drone at some business school. And if your venture doesn’t work out, you can always go back to salaried employment.”

·    Probability of Marcellus succeeding = 60%

·    Upside if Marcellus succeeds = $100mn

·    Probability of Marcellus failing = 40%

·    Downside if Marcellus fails = $1mn i.e. the money we could afford to invest to create Marcellus