Entrepreneurship · Risk

Is there inherent inequality of opportunity to be an entrepreneur?

Shingai Samudzi

July 19th, 2015

A lot of discussion about what makes a startup entrepreneur stems from some conception of an inherent set of behaviors and personality characteristics.

This article (http://qz.com/455109/entrepreneurs-dont-have-a-special-gene-for-risk-they-come-from-families-with-money/) with data from a number of studies like NBER seems to indicate that startup entrepreneurship is largely limited by class, and is less about personality and more down to ones network.

If the research insights are accurate, should this give us pause about the myths we have created about the risk tolerance of startup entrepreneurs?  Can we really say that we are more risk tolerant if entrepreneurship is more prevalent among people who have financial safety nets to fall back on in the event of failure?

Lauren Musto MBA Candidate at the UCLA Anderson School of Management

July 19th, 2015

To be an entrepreneur? No.

To be a tech startup founder where you sacrifice profitability at the expense of growth from the beginning in order to make it grow bigger and faster? Absolutely. This is fundamental in understanding what risk and risk tolerance looks like. People who have or have access to money--or have the confidence that no matter what happens they can get out there and get a six-figure job and rebuild their credit--will always be at an advantage over those who can't afford (literally or metaphorically) to bootstrap. 

Benjamin Olding Co-founder, Board Member at Jana

July 20th, 2015

Perhaps some entrepreneurship behavior is specifically risk-seeking.  However, a lot of it is more like risk management - creatively making decisions to give yourself the highest chance of success.  If you have no financial safety net and your family relies on you financially in some way, seems like a pretty good decision to focus on increasing your financial stability before you worry about anything else.

The "entrepreneur" label the article uses is clearly some kind of professional designation, not observation of entrepreneurial behavior.  In my experience, people from families that do not have money tend to display more entrepreneurial behavior: they are constantly assessing financial risk and pretty rationally (and creatively) adapting to it.  They are not risk-averse or risk-seeking: they are risk-managing.  

Being a "professional" entrepreneur mostly just means access to capital - in fact, that might really be all it means, if you think about it.  You don't need any other qualification than that and an interest in starting a company.  A majority of startups fail, after all.  Is it really news that people who come from families with access to capital have an easier time accessing capital?

One thing to note about the study is it is observational - kind of like "people who drink one glass of red wine each day on average have fewer health problems."  A causal mechanism may make sense to us here somehow, but the study is just descriptive.  Family money may equally be a proxy for something else, like access to top universities, which in turn create a brand for the entrepreneur that makes it easier on average to later raise capital or partner with a talented schoolmate.  

Or something else entirely.  No one should be surprised that the "Matthew effect" is real, even for (or perhaps especially for) professional entrepreneurs - it's hard to figure out too much beyond that from reading this.  I'd just like to caution people from thinking that being an entrepreneur professionally is somehow more "entrepreneurial" than not being one.

Manu Pillai Experienced Executive, Technology and Operations driven

July 19th, 2015

http://www.ram-charan.com/about-ram/

Ram started in a shoe shop. Current PM of India started as a roadside tea seller. 
Basics are the same - cash flow, cash velocity, margins, inventory, customer value, competitiveness, time management ... all with folks who had no safety net.

Applies to tea, shoes or tech. Personally, it was only after I accepted the brutal truth of this simplicity did things start to get better. 

Anonymous

July 21st, 2015

Hi!

I think there is to many factors to consider and everything is a lot deeper then just risk taking.

Country history, traditions, cultural mindset, access to money, access to knowledge, family, etc.

I will try to describe one scenario going in two ways, from a entrepreneurship perspective.
The same scenario from other perspective could have totally different outcome.

I will take my own country - Lithuania. In history, country had a lot of wars, occupation, socialism, a lot of smart and perspective people were taken out of country or killed. So we could say, country had a "reset", (again, from entrepreneurship perspective) and almost everyone was an employee or working their own small farm.
~20 years ago, some people started their own business without any long term traditions of entrepreneurship, most of it was buy-sell. Others gained their property and wealth by privatization, but I will skip this, because it's the same as winning a lottery, you don't win entrepreneurial skills instantly.
So people who started their businesses, some started to think differently, maybe not all of them did a lot, but they have raised their kids differently.  They thought their kids values of relationships, partnership, where money comes from (not a salary) , to be curious, try things, create things.
For example, I have a friend, who's father is building wooden doors, stairs, etc. So my friend was allowed to try things, work with materials and equipment, of course living side by parents and helping them, he learned the relationship owner-employee, to manage people, small business finances and social layers was not a problem, he didn't see other people in different layers as different. Other than wood and parents company, he learned to play with electricity, wiring, computer hardware. He was not rich, but enough for basic needs. And I took his example, because he didn't chose to open a company and be a big businessmen. Recently he got a job at a European institution, after some time (year or two) he managed to open his company and sold the same services he was working as an employee and by hiring other people he started to take over a lot more processes.
We (I grew up in a similar environment) had a very small group of friends who's parents had their small businesses, they are all more or less successful in what they do, and non of them are only a 9-5 employee.
So in sort - the GOAL is always to CREATE something, and everyone around is a possible partner, the rest will come.
Other scenario are people who's parents were employees. They were told - learn and you will GET(*) a job, and then you will earn a lot of money to provide for your family. Their daily life looks like this - 9-5 job, after work, maybe a second job, or festivals, beer, TV, maybe some home fixing, or tasks they cant do during the work hours. So they are thought, that they should sell their hours to work and get money.
As you see, the pattern is totally different, the life philosophy is different. One doesn't even know that other philosophy even exists. So to answer your question about access to money, is only partly true.
Because of you grown in an environment where people are using money to do things, learn how to leverage it, etc. You will live by this too. If you learn how to bake a cake and sell it, you will open a small home bakery and grow to big eventually if you choose to.

GET(*) - In my culture, this word is a pain kids are being grown on this, because of socialism before. After they graduate they think they will get a job only because they graduated and have a diploma. But don't understand that knowledge is only a tool, not a result. This started to change, hopefully everything will be ok.

I want to remind, I was looking from an entrepreneurship perspective, the same things could be really good for other results.

Cheers!

Joe Milam CEO AngelSpan, Inc.

July 19th, 2015

While there is something to that notion, I think the data sample is too small to generalize that startups that got VC funding are the ones that 'count', or that starting a company when you are 20 something is all that counts. One of the fastest growing subsets of entrepreneurs are those startups where the founder is over 40. That has nothing to do with family money. Joe Milam *Book a Time * *916.599.6200*

Jagadesh Ningappa Business Advancement I Solution Aggregator I Value Management I Co-Founder

July 19th, 2015

My opinion it depends on whether one is 1st generation entrepreneur or 2nd or 3... 1st gen entrepreneur, his/her upbringing, network, view for starting a venture will be very different from the 2nd or 3rd...for these its always advantage to network 2nd or 3rd gen entrepreneurs to get exposed to 6 feet depth of entrepreneurship and knows how to make/dream it big. On Jul 20, 2015 8:08 AM, "Shingai Samudzi"

Scott McGregor Advisor, co-founder, consultant and part time executive to Tech Start-ups. Based in Silicon Valley.

July 20th, 2015

This is very culturally dependent. It is definitely much easier to try to run a start-up if you already have a large financial back stop to cover your costs during the start-up period. But even so, you have to acknowledge the change of financial failure may be high, and even if you can personally "afford" to lose the money at risk, can you afford what it will do to your relationships with friends, family and other possible employers or business partners? In Silicon Valley having a failure doesn't necessarily prevent you from having a second act. But in some cultures a financial failure can dishonor your entire family.

Sam McAfee Building Popup Incubators for Corporate Innovation Programs

July 20th, 2015

I like the statistical types of answers above and I think they're important.

But I would also point to the well-documented phenomena that people from a less desirable class background are more likely to have internalized a worker mentality over an entrepreneur mentality, and less likely to be expected to be entrepreneurial in their behavior. Fewer of the people around them are likely to be entrepreneurs, so it will be harder for them to find support in their community. Class and race happen to track closely together, so there are certainly disproportionate impacts on non-white founders from this sort of phenomena. Absolutely, and there are many social scientists who study this, and rigorous scholarship on the subject. 

That is not to say we should "blame the victim" if folks from a working class background have more trouble making the connections and finding the support necessary to succeed. Rather it is looking squarely at systemic issues of inequality. Structural inequality does create an up-hill battle for founders coming from more adverse economic backgrounds, no question.

So, yes, there is inherent inequality of opportunity. No, it's not really about risk tolerance or personality. It's about systemic inequality in general, which affects every economic area, not just entrepreneurship.

Shingai Samudzi

July 20th, 2015

@Manu and @Lauren,

You both have raised good points about the distinction between a "tech entrepreneur" and the more traditional type of entrepreneur.  That being said, even something like opening a laundromat, a plumbing company, or a food truck requires access to startup capital.  That would either come from one's pocket, from friends/family, or via some kind of institutional loan.  Providing a few examples of people becoming moguls from extreme poverty doesn't really address the more structural inequality of opportunity in entrepreneurship.

If we were to look at non-inheritance business owners in major economies like the US, India, China, Russia, etc, what percent do you think could count among their 5 best friends or close family at least one other business owner/high net worth individual?

@Benjamin - I might disagree with you about the "entrepreneurial behavior" distinction from "professional" entrepreneur for a few reasons.  An analogous example is the distinction between someone who is athletic and someone who is a professional athlete.  The pro athlete is also athletic, regardless of the additional privileges or benefits they have that are not available to someone who is merely athletic.  Similarly, the (successful) "professional" entrepreneur is likely to have similar entrepreneurial behaviors that you have identified in your experience with families who come from less money.

On the other hand, I think that data in general would not support your anecdotal experience that those from poorer background display more entrepreneurial behaviors.  In the US, for example, one well-observed hallmark of families caught in the poverty cycle are very poor financial choices and an irrational attitude about money.  The predatory lending schemes that predicated the subprime mortgage crisis in 2008 exploited aspects of the American financial psychology (and information asymmetries) that were decidedly "non entrepreneurial."  The poor families you have observed with entrepreneurial behaviors tend to not remain poor over multiple generations - but there is still a wealth/income ceiling if not even one or two members of the family become "professional" entrepreneurs.  The fact remains that the wealthiest in our society are entrepreneurs, the children of entrepreneurs, and those who are well networked with entrepreneurs.

@Scott - Interesting point about the cultural differences, particularly around the social consequences of failure.  Perhaps it is a bit of American exceptionalism that has caused us in the US to attribute the risk-tolerant characteristic to entrepreneurs.  Entrepreneurs in other cultures frequently do have a much more conservative attitude towards risk and only make moves when there was a high probability of success.

Benjamin Olding Co-founder, Board Member at Jana

July 20th, 2015

@Shingai - I agree with you (and was in agreement when I posted); I was being imprecise with my language, reflecting on my own experiences rather than focusing on communicating what I meant.  

I definitely did not mean "poor" or anyone struggling with poverty.  You are absolutely right the decision-making in those circumstances are very difficult, and not "entrepreneurial."  In fact, I think there's a lot of economists who have done some pretty compelling research showing how this is at least partly a function of circumstance - and that it's very difficult to get out of that cycle without some kind of additional resources.  

I was more thinking of people whose families (like mine) work in areas like construction or public storage or plumbing or even bar tending and often do not have college degrees - in contrast to friends' families who I think of as wealthy.  I was also thinking of other cultures I've lived in where people's incomes might be considered "poor" if we compared them to an average US citizen, but who are in the middle class of their country.  

Most of my family could not make heads or tails of a term sheet - an important thing to be able to do as a professional entrepreneur, but not what exactly what I think of when I think of "entrepreneurship" as a behavior.  I do think people's behavior in this group is a lot more entrepreneurial, even though they are far less likely to end up labeled as a professional entrepreneur in the studies the original link was about.  

The link is focused on professional entrepreneurs, and access to capital is (with some exception of bootstrapping, but not frequently) a requirement to that status.  I don't think the amateur athlete/pro-athlete metaphor is too helpful here.  If it takes money to be considered a professional entrepreneur, it doesn't seem like a big leap that group will be dominated by people from families with money.

I doubt I would be an "entrepreneur" today if it weren't for the school I went to, but I do think I have always been pretty entrepreneurial in my approach to life - largely because of the examples in my (certainly not poor, but definitely not wealthy) family.  I think it's a mistake to think that coming from a family with money implies entrepreneurship...  I think it mostly just implies money and access to money. 

I was not (and am not) trying to make any statements regarding poverty one way or the other, however...  I'm not qualified.