Caveat with Entrepreneurs: Skin in the Game
Taleb distinguishes entrepreneurs who remain exposed to the consequences of their work from those focused on an exit. He argues that short assignments and sales can let decision-makers pass long-term risks to others.
THE IDEA
A Caveat with Entrepreneurs
Entrepreneurs are heroes in our society. They fail for the rest of us. But owing to funding and current venture capital mechanisms, many people mistaken for entrepreneurs fail to have true skin in the game in the sense that their aim is to either cash out by selling the company they helped create to someone else, or “go public” by issuing shares in the stock market. The true value of the company, what it makes, and its long-term survival are of small relevance to them. This is a pure financing scheme and we will exclude this class of people from our “entrepreneur” risk-taker class (this form of entrepreneurship is the equivalent of bringing great-looking and marketable children into the world with the sole aim of selling them at age four). We can easily identify them by their ability to write a convincing business plan.
Companies beyond the entrepreneur stage start to rot. One of the reasons corporations have the mortality of cancer patients is the assignment of time-defined duties. Once you change assignment—or, better, company—you can now say about the deep Bob Rubin–style risks that emerge: “It’s not my problem anymore.” The same happens when you sell out, so remember that:
The skills at making things diverge from those at selling things.
When to use it
Evaluating a startup founder's commitment by examining whether they retain significant equity and involvement post-funding.
Analyzing corporate decay by looking at executive turnover and incentive structures that encourage short-term thinking.
When reviewing a business plan, examine the product, incentives, and allocation of long-term risk as well as the quality of the presentation.
Comparing the long-term survival of founder-led companies versus those led by hired managers.
FROM THEORY TO EVERYDAY LIFE
In practice
Startup founder focused on exit vs. long-term value
A founder builds a company with the sole aim of selling it within a few years, ignoring product quality and sustainability. This contrasts with a founder who remains deeply involved and prioritizes the company's long-term survival and value creation.
Corporate manager avoiding legacy risks
A manager takes on time-bound duties in a large corporation, then moves to another position or company before the risks of their decisions materialize, leaving the consequences for others.
A MOMENT TO REFLECT
Put it to work.
How can you ensure you have skin in the game in your own entrepreneurial or professional ventures?
What are the long-term consequences of time-defined duties in corporate management?
How do the skills of making things differ from the skills of selling them, and which do you prioritize?
CONTINUE THE CONVERSATION
Source texts
- Skin In The Game Hidden Asymmetries In Daily Life (Nassim Nicholas Taleb)