orgtheory.net

Brayden

In my earlier post about Scott Shane’s book, The Illusions of Entrepreneurship, I reported Shane’s findings that most entrepreneurs are rather boring middle-aged white guys. Fabio, unimpressed by the results, commented:

If the capitalist process requires a huge number of firms to yield a few winners, then the Shane approach is really only the beginning. It’s like saying that the study of athletes is boring because lot of normal people try out athletics on a small scale. That’s certainly true and worthy of study, but the real motivation for studying athletes is to study excellence, not the average. So while Aldrich is correct, it actually makes the study of outliers even more important. If any joe-schmoe can start a firm with modest goals, and many do, then what is it that distinguishes the folks who make the markets?

Fabio is right about the market selection process. Most entrepreneurs fail, and in fact, it appears that your modal entrepreneur is the most likely to fail. The winners – those firm founders who create enduring businesses – look a lot less average. The average (or modal) entrepreneur doesn’t seem to be doing the things that make entrepreneurs successful, leading to a high rate of failure.

• Most entrepreneurs start small and with very little capital even though start-ups that begin with significant funds and a larger staff are the most likely to survive.*
• Most entrepreneurs start their businesses as sole proprietorships even though incorporated businesses have a higher success rate.
• Most entrepreneurs start as part-time ventures, while entrepreneurs investing their full-time efforts into the business have higher survival rates.
• Most entrepreneurs start their businesses from scratch, but entrepreneurs that purchase their businesses from someone else have higher survival rates.
• Most entrepreneurs never write a business plan even though writing a business plan predicts the likelihood of gaining future capital investment.
• Most entrepreneurs start businesses that intend to serve the same clientele as served by their former employer, but the most successful entrepreneurs are those who differentiate and find an ignored customer base.
• Most entrepreneurs found businesses in industries with the lowest success rate.
• On top of all that, entrepreneurs have a high failure rate because they don’t get things right in their initial stages of formation. “It gets easier over time” (pg. 112). Start-ups’ rate of failure declines and their profitability increases the longer the business has been around. In other words, the market appears to sort out good businesses from bad early in the business life-course.

So the lesson to be learned is that your average entrepreneur is not very strategic or well prepared to enter the market. As a result the average entrepreneur fails and the entrepreneur that sticks in our mind is the successful, not-so-average Bill Gates-type. Is Bill Gates representative of most entrepreneurs? Of course not, but that’s probably why he survived!

*Of course there are some endogeneity issues in these data. It’s hard to tell if entrpreneurs that start off with good resources and infrastructure survive because of this early endowment or if they have early resources because they are doing something else that makes them successful. But the point is that most entrepreneurs never develop sufficient starting resources, for whatever reason that may be, that are correlated with long-term survival.