What makes an entrepreneur?

Purpose

Sixty-three percent of Americans desire self-employment.¹ So what’s stopping them? And, are those who work for themselves really more satisfied than those working for others? In their 1998 article, “What makes an entrepreneur?” Blanchflower and Oswald analyzed data gathered from the United States and other industrialized countries, uncovering answers to these fundamental questions about who becomes an entrepreneur.

The authors’ analysis answers timeless questions still relevant to today’s aspiring entrepreneurs.

Research

Theoretical Model

As a research article, the authors followed the scientific method: they built a theoretical model they believed might explain the phenomena in question; then they developed hypotheses about the phenomena, consistent with their model; and finally, they tested if the empirical data confirmed their hypotheses.

The authors’ theoretical model² attempted to explain why some people become entrepreneurs while others don’t. The model had the following major elements:

1. Only a portion of people in society have the vision needed to recognize entrepreneurial opportunities.
2. The viability of entrepreneurial opportunities is hard to assess (e.g., by lenders or investors), making estimates of their likely success or profitability unreliable.
3. Potential entrepreneurs need capital to initiate their projects, but constrained capital is difficult to acquire.

The model supposed people will continue to enter self-employment until

• all people with entrepreneurial vision attain self-employed;
• access to capital disappears for any remaining opportunities; or,
• the benefits of self-employment (i.e., compensation, lifestyle, and overall satisfaction) fall to a level no greater than those of conventional employment.

Hypotheses

Based on the model, the authors developed and tested two hypotheses:

1. A lack of access to capital prevents some people from achieving their desire for self-employment.
2. People who are their own bosses are happier overall (have a “higher utility”) than conventional employees.

(Judging happiness levels is tricky business. The authors used “utility” as a proxy for happiness. In economics, utility means the satisfaction or net benefit one receives from something. To determine utility, research respondents (both self-employed and conventionally employed people) answered the question, ‘‘Taking everything into consideration, how satisfied or dissatisfied are you with your job as a whole?’’

The hypotheses were tested on data from multiple large surveys conducted in several industrialized countries,³ using both econometric and statistical analysis techniques.

Summary

Testing the data revealed answers to several interesting questions.

Are the self-employed happier than conventional employees?

Large numbers of people in the industrialized countries say they would prefer to be self-employed.

Those who are self-employed report themselves as more satisfied . . . than employees.

The survey data reported that 63 percent of Americans, 48 percent of Britons, and 49 percent of Germans would prefer self-employment. Large numbers of people desire self-employment and their wish is justified: The self-employed are, indeed, happier. Forty-six percent of the self-employed were “very satisfied” with their jobs compared to only 29 percent of employees.

What stops people from becoming self-employed?

The single biggest concern of potential entrepreneurs was with where to obtain capital.

Because of the uncertainty of success and the impossibility of forecasting future profitability of new ventures, traditional lenders understandably require a high level of collateralization to protect their investment. Not surprisingly, according to the data, the number one reason people didn’t pursue their dream of entrepreneurship was a lack of access to capital.

Does access to capital increase self-employment?

The receipt of an inheritance or gift seems to increase a typical individual’s probability . . . of being self-employed.

The research supports the old adage, “It takes money to make money.” People who come from a modest level of affluence (enough to receive a small inheritance or gift) are much more likely to become self-employed. Furthermore, by using statistical controls, the data showed that this self-employment was not just the result of affluent offspring inheriting a family business.

What level of inheritance or gift was needed to see this effect? People who received approximately $25,000 (in 2017 dollars⁴) were roughly twice as likely to be self-employed as those who received nothing.

The Take-Away

Self-employment versus entrepreneurship

The authors’ use a broad definition of entrepreneurship in the article—they consider an entrepreneur anyone who works for themselves in any capacity. In reality, at one end of a spectrum sit freelancers and contractors, then somewhere in the middle sit small business owners, and way over at the other end sit the venture-backed growth entrepreneurs.

Figure 1. Required capital and commitment increase with the ambition of the venture.

Though the authors lump these different modes of self-employment together in this study, each offers a different experience and each has different requirements in terms of capital and commitment. Because of this, follow-on research using more specific categories of entrepreneurship (i.e., freelancer, small business, and growth entrepreneur) would provide a clearer picture of what makes an entrepreneur (of each given type).

What makes an entrepreneur?

Regardless, this article fascinates me because it takes an objective look at two common beliefs: Being your own boss will make you happier but a lack of startup capital will stop you dead in your tracks.

For aspiring entrepreneurs, the conclusions are both reassuring and sobering. Yes, if you want to be an entrepreneur, go for it, because entrepreneurs are indeed happier than employees!

And according to the data, most people desire self-employment. So, what’s stopping them? Unless they received that reported $25,000 inheritance, it’s their lack of access to capital. So, the critical question to explore is, how can an aspiring entrepreneur avoid being stopped in their tracks by a lack of money?

Today, contrary to when this article’s data were collected, there is a burgeoning gig economy⁵ revolving around a self-employed workforce. Self-employment is just a few clicks away via today’s many online gig marketplaces. If you aspire for more than a gig, there is a plethora of free tools and information available, not to mention inexpensive software services, to help launch a new venture—even with little money in your pocket.

When capital is critical

If you want to hit the growth accelerator, or are working outside of a purely digital realm (e.g., biotechnology, Internet of Things⁶), capital is still the lifeblood flowing through successful startups.

Not all of us will receive a $25,000 inheritance, so yet-to-be-proven growth entrepreneurs need to bootstrap until they’ve reached a key milestone (e.g., obtaining a key client, generating exponential website traffic, producing a working product prototype), allowing them to garner coveted outside funding.

Until that happens, small amounts of bootstrapping capital come from many creative places, the most common being a day job, allowing entrepreneurs to build the business on nights and weekends. Or, it comes from the salary of a working spouse. Similarly, I’ve seen situations where one co-founder keeps their day job in order to fund the other co-founders who work on the business full-time.

Others launch their business in cahoots with their employer. They take a new product or service and spin it off, giving the employer an equity stake in exchange for capital, resources, and access to clients. Or, they quit, set up shop, and offer their services back to their old employer. (This is how I launched Obtiva in 2005 with only a $1,000 investment.)

In other words, while early capital is needed for many startups, there are ways to move forward before any funding ever hits your bank account. Don’t let your perceived need for capital discourage your startup dream.

1. This is out of 1,453 participants asked in the International Social Survey Programme of 1989, according to Blanchflower and Oswald (1998).
2. The model consists of a handful of equations that can be found in the paper.
3. For example, the National Child Development Study; the British Social Attitudes Survey Series, 1983–89; and, The U.S. General Social Surveys, 1972–90.
4. See https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=9000&year1=198101&year2=201701.
5. See https://www.bls.gov/careeroutlook/2016/article/what-is-the-gig-economy.htm.
6. See https://en.wikipedia.org/wiki/Internet_of_things.