Busting Entrepreneurial Myths

July 8, 2014 at 8:30 AM

Stumbled upon The Illusions of Entrepreneurship by Scott A. Shane. Though now a number of years old, the book’s attempts to challenge common views on ‘entrepreneurship’ remain relevant. While most of us associate entrepreneurship with the rich and famous world-beaters, Shane reminds us that the category includes infinitely more dry cleaners, variety store owners, cab drivers and even farmers. Consider some of the many tidbits the book offers:

• 11% of US households have a self-employed head.
• In 2005, 13% of people in the US between the ages of 18 and 74 were in the process of starting a business. The trending is down.
• The typical American entrepreneur is a married white man in his forties who attended but did not complete college. He is not trying to be the next Bill Gates but rather just trying to make a living.
• Three-quarters of all new businesses have no employees.
• The psychological factors associated with entrepreneurial endeavor - risk tolerance, social confidence, anxiety-acceptance, novelty, focus, etc, “are only the slightest bit different among entrepreneurs and non-entrepreneurs and have nowhere near the effect of being white or male, which doubles the odds that someone is an entrepreneur”.
• Most people start businesses simply because they do not like working for someone else.
• The less money that people earn, the more likely they are to start their own businesses.
• Only 2.4% of businesses started in 2004 were founded by individuals under the age of 24. The most common age for founders is 35-44.
• The industries in which people are most likely to start new businesses are not the best ones to start a new business in but rather the worst. People do not gravitate to businesses with high margins and few competitors or with high barriers to competition (such as patents for example). Instead most entrepreneurs start businesses where there are a lot of firms already in operation and ones that are not that financially attractive. In fact the distribution of new companies mirrors the distribution of existing businesses.
• Industries with the highest failure rates are also the ones that have the highest firm start-up rates. Forty-five percent of entrepreneurs start businesses in industries where they have worked before and therefore understand (eg. barbers start barber shops, chefs start restaurants). Those tend to be the ones that employ the most people and are the most competitive. Also, new entrepreneurs tend to start businesses in areas where starting a new business is easy to get started. These are often more prone to failure as well.
• The typical start-up that survives over time is not very profitable. Only one-third of all owner operated businesses generate more than $10,000.00 in profit.
• People read that Silicon Valley and Route 128 are the entrepreneurial hotbeds of the US. In fact the highest start-up rates are not in those areas. Instead, Vermont had three times the rate of people transitioning to self-employed status compared to the lowest state which was Delaware.
• Areas such as Silicon Valley actually have a lower rate of venture creation because the insatiable demand for talent at places like Google and others means that a smaller portion of the population is going into business for themselves (opportunity cost of leaving high wage-paying jobs). Compare this to a location such as Laramie which has relatively few companies looking to hire a large number of people and thus has a higher rate of new firm creation.
• Some locations have more people starting businesses than others because of their industrial composition. Most start businesses in the industries in which they currently work and in the towns they live. Therefore start-ups in an area tend to be similar to the companies currently in operation in that area. Also if an industry is capital intensive it will likely have fewer start-ups in that area than a services oriented, lower cost area - think Detroit versus Atlanta for example.

It goes on and on and on….Though the book’s seemingly endless statistics leave your head spinning at times, it is a treasure trove of interesting, sometimes counter-intuitive information to reflect upon.
 
 
About the Author

Robert Hebert is the founder and Managing Partner of StoneWood Group Inc., a leading executive search firm in Canada. Since 1981, he has helped firms across a wide range of sectors address their senior recruiting, assessment and leadership development requirements. 

Contact Robert by email at rhebert@stonewoodgroup.com or call (1) 416-365-9494 EXT 777