Steve Blank Why entrepreneurs create businesses rather than join them

If you ever asked me why I was more interested in startups than at work in a big company, I would have answered several times: "I want to be my own boss." "J & Likes the risk. "" I want flexible work schedules. "Want to work on difficult problems that matter." "I have a vision and I want to see it come to fruition." "I have a vision. saw a better opportunity and I grabbed it … "

I never thought I was attracted to startups because I thought more about my abilities than the value a big company would give them. At least not consciously. But this is the conclusion of a provocative research article, Asymmetric Information and Entrepreneurship, which explains a new theory of why some people choose to be entrepreneurs. The conclusion of the authors – Entrepreneurs believe that they are better than their resume and show that they can earn more money by acting alone. And in most cases, they are right.

I will summarize the conclusions of the paper, then share some thoughts on what they could mean – for businesses, entrepreneurs and business education. (By the way, keep in mind the conclusions you draw from the conclusions, the authors do not just talk about high tech entrepreneurs.They talk about anyone who chooses to work on their own, that 's the only way to go about it. it is a convenience store in the restaurant business without a high school diploma or a high tech founder with a Ph.D. in computer science from Stanford.)

Authors' research was conducted among 12,686 people over 30 years of age. They found:

  1. signaling. When looking for a job, you "signal" your ability to employers via a resume with a list of your degrees and work history. Signage is a sophisticated academic term that describes how a party (in this case a person looking for a job) credibly conveys information to another party (a potential employer).
  2. Able. People choose to be entrepreneurs when they feel more capable than what employers can say in their resume or during an interview. Thus, entrepreneurs embark on the business because they can not show their value to potential employers.
  3. Better salary. Overall, when companies choose the entrepreneurial spirit, they earn 7% more than in a job in business. In fact, in companies, salaries are usually set by observable signals (your training and your experience / your employment history).
  4. Less predictable salary. But the disadvantage of being an entrepreneur is that, as a group, their pay is more variable. Some earn less than if they worked in a company, others much more.
  5. More intelligent. Entrepreneurs have higher scores on cognitive skills tests than their degrees predict. And their cognitive abilities are superior to those of people with the same academic and professional qualifications who choose to work in a company.
  6. Immigrants and financing. Signage (or lack thereof) may explain why some groups such as immigrants, with less credible signals for existing businesses (unknown schools, no license to practice, unverifiable work history, etc.) tend to orient themselves. towards entrepreneurship. And why family and friends financing is a dominant source of financing for start-ups (because friends and family are more familiar with a contractor's capabilities than anything their CV can pass on).
  7. Entrepreneurs are reluctant to undertake more formal training because they expect their productivity to be greater than what the market can infer from their qualifications alone. (There is no signal for entrepreneurial skills.)

Lemons against cherries. The most provocative conclusion in the paper is that Asymmetric information on capacity leads existing firms to use only "lemons", relatively unproductive workers. the talented and more productive choose the entrepreneurial spirit. (Asymmetric information, that's when one party has more information or better information than the other.) In this case, entrepreneurs know something that potential employers ignore – that nowhere on their resume does it show resilience, curiosity, agility, resourcefulness, model recognition, tenacity and having a passion for products.
This implication, that entrepreneurs are actually "cherries", contrasts with an abundant social science literature that says entrepreneurs are "lemons" – those who can not find, can not or can not stand "real jobs". "

So, what to do with all this?
If the authors are right, the way we report capacity (summarizing the list of studies and employment history) is not only a bad predictor of success, it also has implications for businesses, startups, education and existing public policies that require further reflection and research.

companies: In the 20thIn the last century, when companies competed with their counterparts in the same business model, they wanted employees to help them apply current business models (whether it's an assembly line or code writing). supporting or developing existing products). There was little loss when they failed to hire employees with entrepreneurial skills. However, in the 21stcentury, businesses face continuous disruption; now they are looking for employees to help them be entrepreneurial. Yet, their recruitment and interview processes, which define the signals they seek, are always focused on execution and not on entrepreneurial skills.

Surprisingly, the company that embodies the best is not a traditional manufacturing company, but Google. In her article on recruitment, Marissa Mayer described her hiring process as follows: "Most often she relies on graphs, graphs and quantitative analysis to make a decision, especially when it comes to to evaluate people … At her meeting, she discusses the averages and scores of the SAT in order to reduce the list of candidates, many of whom have graduated from the Ivy League, …One candidate obtained a C in Macroeconomics. "It's troubling for me," says Mayer. "Good students are good in all things. "

Really. What a perfect example of adverse signage. No wonder the best performing Google products, other than search, have been startups acquisitions non-internal products: YouTube, Android, DoubleClick, Keyhole (Google Maps), Waze were created and managed by entrepreneurs. The type of people that Google and Marissa Mayer would not have and would not have hired started the companies that they bought.

entrepreneurship. When I shared the document with Tina Seelig at Stanford, she asked, "If schools offered better ways to showcase the potential of someone, would that result in less entrepreneurship? Interesting question.

Imagine if, in an ideal world, business recruiters found a way to identify the next Steve Jobs, Elon Musks or Larry Ellisons. Would existing business processes, procedures, and models negate their innovation skills or would they lead big business to a new renaissance?

The economic environment. To what extent does the economic context influence the signaling (hiring only according to the qualifications)? It can be assumed that in times of low unemployment, it will be easier to find a traditional job, which would result in fewer start-ups and explain why large firms are often created during a recession. Those who can not get a traditional job start their own business. Yet other public policies come into play. Between the late 1930s and the 1970s, the US tax rate for people earning over $ 100,000 was 70% and 90% (taxes capital gains fluctuated between 20% and 25%). Venture capital flourished when tax rates fell in the late 1970s. Was entrepreneurship stifled by high taxes on personal income? And did it prosper only when entrepreneurs understood the possibility of making a lot more money alone?

Leave a company. Some new companies are created by people who let big companies start their own business. In other words, they were not trying to find a job in a company, they were trying to escape. While creating your own business may seem attractive inside a business, the difficult reality is risking one's life, financial stability, family, and so on. What motivates these people to leave the relative comfort of a stable business income and to embark alone? Is this the same reason: does not their company value their innovation skills and only measure them in terms of execution? Or something else?

Entrepreneurial education. Is entrepreneurship for everyone? Should we hope to be able to teach entrepreneurship as a compulsory course? Or is it calling? Increasing the number of new businesses will only generate an overall wealth if business creators are actually more productive as entrepreneurs.

Lessons learned

  • Entrepreneurs start their own business because existing companies do not value skills that are not on a resume
  • The most talented people choose the spirit of business (lemons versus cherries)
  • Read the newspaper and let me know what you think

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