Charter - Riches to Riches

Tuesday, 1 September, 2009

One of the key drivers of any economy is entrepreneurship and there have been many studies aimed at understanding the factors that nurture entrepreneurship and the nature of the people who become entrepreneurs. These studies are interesting even while they try to define and even formularise a concept and a spirit that are inherently elusive, like trying to write a recipe for charisma.

In July this year Kauffman, The Foundation of Entrepreneurship, in the United States released a study called ‘The Anatomy of an Entrepreneur’ in relation to the family background and motivation of entrepreneurs. The study surveyed 549 company founders in the US across a variety of high growth industries and asked them questions about their backgrounds, motivations, and experiences in launching companies. Rather than being a generalised survey it was intended to be illustrative of the backgrounds of entrepreneurs in industries expected to be higher growth.

While we can’t say that their findings would all be replicated in Australia I think they are still relevant enough to be of interest to us. Indeed what is most interesting in these findings is that they do not reflect the stereotypical entrepreneur. They certainly don’t show that entrepreneurs are the young cowboys that stigmatised the word in past decades.

In fact the study found that the average and median age of founders when they started their current companies was 40.

Over 95% of the entrepreneurs in the study had bachelor’s degrees and 47% had more advanced degrees. Three quarters of them ranked their secondary school academic performance among the top 30% of their class with over half ranking their performance among the top 10%. This wasn’t surprising considering that the industries in which the respondents were involved were sophisticated and included automotive, aerospace, computers and electronics.

These company founders tended to come from middle class or upper lower class backgrounds and were better educated and more entrepreneurial than their parents. Less than 1% came from extremely rich or extremely poor backgrounds. I suppose that these results may simply reflect the overall structure of society and the propensity of people to classify themselves with the majority of the population. Nevertheless the study’s conclusion was that the results ‘seem to show that entrepreneurs, on the whole, are more likely to emerge from stable, comfortable family existences, but not from circumstances of great family wealth’, and that ‘extreme poverty is a significant barrier to entrepreneurship’.

It seems that the traditional ‘rags to riches story’ has now been relegated to urban myth. While people in extreme poverty may have the ‘hunger’ to improve their lot in life they are unlikely to have the education, resources, networks and stability of today’s typical entrepreneurs.

Those respondents who were ‘extremely interested’ in entrepreneurship during college were more likely to start more than two companies. While this could be attributed to their typically earlier start as entrepreneurs, the study found that serial entrepreneurs were more likely than others to have always wanted their own companies.

Those that were ‘extremely interested’ in entrepreneurship during college were more likely to have come from ‘lower-upper-class’ backgrounds than lower social strata, and they were more likely to have rated “building wealth” as an extremely important motivating factor in starting their own busines.

Nearly three quarters of all respondents indicated that a desire to build wealth was an important motivation in becoming an entrepreneur but non-financial motivations were also important, with 68% giving ‘capitalising on a business idea’ as important and 68% stating that the appeal of a start up culture was important. Over eighty percent of respondents stated that inability to find traditional employment was not at all a factor in starting their own business. I have always understood that recessions and their consequent redundancies usually result in an increase in start up businesses. In trying to reconcile this with the findings of the study it is worth noting that the study was of people who were still in business, and did not take account of those that had started businesses and not survived. It seems a reasonable assumption that those who start a business principally because they can’t find other employment are less likely to survive than those with a strong drive and vision to build wealth, develop their own company and capitalise on a business idea. It may also be that people looking to ‘buy themselves a job’ tend not to be involved in the relatively sophisticated industries covered by the study. While this research doesn’t necessarily bring us closer to capturing the elusive essence of entrepreneurship it does make us review the old stereotypes. Certainly ‘rags to riches’ is not the story of today’s typical entrepreneur. If this study is anything to go by ‘riches to riches’ may be more appropriate.