What makes an entrepreneur?

by on February 6, 2008 at 6:39 am in Data Source | Permalink

A Brazilian entrepreneur, that is.  First and foremost, entrepreneurship is predicted by family characteristics, most of all having other entrepreneurs in the family and coming from a large family.  What predicts finding a successful entrepreneur?: "the individual’s smartness and higher education in the family."  Entrepreneurs are not more self-confident than non-entrepreneurs and overconfidence is a big danger.  Social networks predict who becomes an entrepreneur but not who becomes a successful entrepreneur.  Entrepreneurs in Brazil exhibit more trust but this result does not seem to generalize across countries.

Here is the paper, from the World Bank.  I thank Russ Roberts for the pointer.

1 TomG February 6, 2008 at 7:26 am

“Social networks predict who becomes an entrepreneur but not who becomes a successful entrepreneur.”

Given as written, since a successful one can only come from its general pool – then it stands to reason that social networks
do indeed determine the subset outcome too … it’s just that other factors within the general pool kick in for that further
successful state to occur. Point of clarification, that’s all.

2 Andrew February 6, 2008 at 11:48 am

I find the commentary at the link provided by tom s. interesting but ironic.

If the core criticism of the critics of capitalism is that of “access to capital,” then what are the alternatives to capitalism for appropriate allocation of capital to capable managers?

Besides, just because an entrepreneur’s parents are high in an organization does not prove access to capital, nor disprove hereditary intelligence as a predictor of success as either an independent entrepreneur or someone who rises within an organization partly due to entrepreneurial skills. I am one who doesn’t really believe there is a thick line between entrepreneurs and non-entrepreneurs. The skill sets that make one successful are probably the same that makes the other successful.

What separates capitalism is the ease with which people can obtain capital. But the capital providers are loathe to throw it away, lest they have less capital next time. Under capitalism, those without capital can obtain it by borrowing it from those willing to put it at risk. To ease the investor’s mind, the borrower (the entrepreneur) needs to have many qualities the investor values. Previous success is the most important proxy, but other predictors, appropriate or not, of future success are used. Connections is just another proxy.

What those without the “access to capital” under the current capitalist structure need to do is hone those qualities and find those investors that value them. If you don’t have the connections, get ’em. The purer the capitalism, the more open to diversity. I was at an angel investor meeting and they were really proud to be funding a black single mom.

3 Andrew February 6, 2008 at 12:49 pm

The following excerpt would seem to directly attack the “access to capital” critique.

“Note that inheritance of a business has a significant negative coefficient. There are two
alternative interpretations of that coefficient, however. On the one hand, it might reflect a
higher initial size of business (which might thus grow slower). On the other hand, this
may be an indication of lower competence and lower motivation of the business ownermanager
if he or she inherited rather than started business herself. This results is
consistent with the Bertrand et al. (2004) findings for performance of family firms in
Thailand.”

Even when granted a “business in a box,” people bestowed instant access to capital within a proven successful business perform below trend. Real capitalism is characterized by the ability of newcomers to enter competition and undermine stodgy businesses, some run by heirs. As I recall, most of the people on the richest lists started with little. And the point is that number continues to grow. We had aristocracy, and aristocracy is dying. The “access to capital” critique seems to me to be the last flailing death throes of a discredited ideology frantically grasping for plausible deniabilty.

4 Andrew February 7, 2008 at 7:04 am

Yes, they matter. But the above negative correlation associated with inheriting a business might be what Thomas Gilovich would term “regression to the mean.”

Free market capitalism is all about undermining establishments. Aristocracy is an establishment. Entrepreneurism is creative destruction. Having money only builds a wall of defense, it is not creative of offense. Heirs given businesses are predictably (by theory), and in realty (according to this report) undermined by hungry up-and-coming competition. Their “alternative” explanations and other alternatives should be explored, but I’m pretty sure the obvious explanation (obvious to those who understand the nature of creative destruction) is the right one.

Read Warren Buffett, Charlie Munger, and Charles Koch. What about their approach to business is about “access to capital?” They are about slow, methodical compound interest- through rationality, incentives, morality and ethics. Sure, they started with good opportunities, but their wild success is not due to their privilege. If you compound success over 70 years you can get rich. If you give your money to your heirs, yes they have access to capital, but if they lack the qualities of the producers they will lose it competition with those qualities. That is destructive of wealth. But what is the better alternative for allocating capital to capable managers?

I guess this stuff isn’t so obvious. Even Warren Buffett is for the inheritance tax based on the meritocracy fallacy (he should stick to business and leave policy to experts). Who is best equipped to judge merit? Bureaucracy or the market? Buffett should know better.

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