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The Surprising Truth About Why People Become Entrepreneurs

question_mark2.jpg(It’s not what you think)

Why do most people become entrepreneurs?

Maybe they seek to satisfy their souls by pursuing their lifework. Maybe they long to create lasting organizations that will change the world, or better a community. Maybe it’s part of a grand pursuit to understand reality.

Or does the decision result from a flash of inspiration into an unmet market need? The ambition to solve a gnawing workplace problem? Involvement with technical breakthroughs unappreciated by employers?

Do aspiring entrepreneurs yearn for wealth? For fame? Are they psychologically driven to embrace risk? To lead others?

Maybe the reasons are more prosaic: a corporate layoff, the desire to exercise new skills, a pressing need to make more money.

None of these scenarios, as it turns out, underpin the single reason why most people become entrepreneurs.

According to a comprehensive study of entrepreneurship published earlier this year by Scott A. Shane, a professor at Case Western Reserve University, most people start businesses in order to avoid working for others. Writes Shane:

The real reason that most people start businesses, however, has nothing to do with wanting to make money, to become famous, to better their own communities, to seek adventure, or even to improve the world. Most people start businesses simply because they just don’t like working for someone else.

Shane’s study, entitled The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By, contains surprising findings that contradict almost every bit of entrepreneurship folk wisdom you’ll encounter online. The results are compiled in an extremely readable book of the same title.

Lay readers will certainly find Shane’s conclusions counterintuitive. Everyone knows that great entrepreneursillusions_of_entrepreneurship2.jpg invent marvelous technologies, create heretofore unimagined markets, launch heroic quests to do social good.

The key to understanding Shane’s findings lies in his definition of entrepreneur: anyone who starts a new business.

That’s a definition I agree with. But it’s at odds with popular perception, because most people think of new businesses as high-tech, high growth companies.

Nothing could be further from the truth. The vast majority of new businesses are sole proprietorships: one-person, undifferentiated, work-at-home enterprises without employees, started on a shoestring, in mature, low-growth industries (not biotechnology or software), managed by a principal without ambition (or plans) to expand. It is these tiny enterprises—not the Googles of the world—that account for 80% or scott_shane1.jpgmore of all new businesses.

Few of Shane’s findings will surprise those who’ve formally studied entrepreneurship. But I admit that for me, it was an eye opener to see “don’t like working for someone else” as Reason Number One for starting a business.

The hard-hitting facts of Illusions, though, should only encourage aspiring entrepreneurs. The world needs more genuine characters, more original souls determined to trod their own path, and no other.

More power to those who strike out on their own—damn the odds, and whatever the reason.

You may also enjoy:

Entrepreneurship: A Primer

In Praise of Salaried Employment

Making Money: The Right and Wrong Questions to Ask

9 Comments to The Surprising Truth About Why People Become Entrepreneurs

On Oct 23, 2008, Dave commented:

Tim,

Timely comments. I work in a technology incubator and just last night hosted a panel of 20 and 30 somethings talking about entrepreneurship. The topic of why and when they became entrepreneurs came up about halfway through the panel discussion.

While their answers jive somewhat with Mr. Shane’s, I think they hit a bit further to the truth.

While it is true that many entreprneurs start businesses to avoid working for someone else, there are still millions of people that don’t like working for someone else that continue to do so. I personally think it’s only part of the answer.

I believe the other part of the answer emerged last night, and it is a theme I hear over and over again: there came a moment where I just KNEW I had to make the jump into entrepreneurship.

I know Mr. Shane’s writings and this is probably too metaphysical or emotional for him, but working with entrepreneurs day in and day out I consistently hear this reason given. Being an entrepreneur is hard, risky, financially challenging and takes incredible passion and commitment. Simply avoiding having a boss is not enough in most instances (IMHO) to push one over that edge.

On Oct 23, 2008, Pace commented:

Thanks for the recommendation! I also enjoyed The E-Myth, another book about exposing entrepreneurial myths. Reading that book inspired me to trash the idea for the Four Hour Work Week-style business we were thinking of starting and do something entirely different instead — something we’re passionate about.

I feel that starting a business to do what you love is much more sustainable than starting a business to avoid working for others. (Heck, doing anything to AVOID doing something else will probably not get you anywhere great.)

On Oct 23, 2008, by Tim commented:

@Dave — Your humble opinion is correct, in my humble opinion. I think those whose primary motivation is to avoid having a boss account for the overwhelming majority of solo, sole proprietorship entrepreneurs–the ones who rarely expand their businesses and wind up earning less than they would as paid employees, according to Shane’s study. In a sense, they are “needs driven” rather than “opportunity driven” entrepreneurs.

You and your 20 and 30 something audience no doubt discussed opportunity driven entrepreneurship, which is more along the lines of what most of us imagine when we hear the word “entrepreneur.”

BTW, hope you’ve recovered from your night on the airport floor :-)

@Pace — I agree: Positive incentives rule. As Emerson said, nothing great was ever achieved without enthusiasm.

Congratulations on your new start. Hope you’ll keep us up to date on your progress.

P.S. The E-Myth books are terrific; I think they now comprise the world’s number one selling small business series on entrepreneurship.

On Oct 24, 2008, Yolanda commented:

I’m still too childish to understand this, i’m just working to make money instead of doing the things that i like.
Because owning one’s business is based on financial foundation to some extent.

On Oct 27, 2008, Aaron commented:

Thanks for the post. I think there should be a question about how accurate you think the quiz is in determining your level of entrepreneurship. I bet most entrepreneur would answer “not much”, despite the insights.

@ Dave for me, I knew I had to do something else when I saw an opportunity to offer real value. At a certain point, I just couldn’t stand on the sidelines anymore.

And by the way, being self-employed as a cog in someone else’s machine feels different than creating your own machine.

On Oct 27, 2008, by Tim commented:

@Aaron

You raise a good point: I think the quiz is almost irrelevant in terms of determining one’s own suitability for a life of entrepreneurship. Its main value is simply debunking common misperceptions. Remember that it’s essentially a demographic survey of the total population of self-employed people, which is heavily skewed towards “lifestyle businesses” run by one-person sole proprietors.

I love the way you characterize the difference between creating a job and creating a business: “being self-employed as a cog in someone else’s machine feels different than creating your own machine.” Most solo entrepreneurs under Shane’s definition of “entrepreneur” have essentially created jobs for themselves (being self-employed as a cog in someone else’s machine).

Nothing wrong with that; it can be a fulfilling and lucrative lifestyle choice. But as you point out, it is fundamentally different from creating a business that has a life apart from the founder’s 24 x 7 involvement.

On Oct 30, 2008, Jeremy Day commented:

This is sooo true! It is why I love working for the small family owned company I work for now. I have direct management oversight and the owners give me near full autonomy to call the shots. They also value my input. Its the next best thing to being an owner of my own company.

Cheers,
Jeremy

On Aug 11, 2010, Janice commented:

So true. I’ve ONLY worked in entrepreneurial type firms for almost 40 years, and without exception, this is the case. Which is not to be confused with the type of product or service offered. The business structure was definitely dictated by need, the product or service by opportunity, familiarity with the market and enthusiasm. How else can a business succeed if its product or service isn’t opportunistic? One of the reasons at least my entrepreneurs found it difficult to be employees was that they thought differently about things to the point where their ideas needed expression, ergo their own business. Very different today. Many people start their own businesses because they can’t find j.o.b.s., not because they think they’re building a better mousetrap.

On Aug 12, 2010, by Tim commented:

You effectively point out the distinction between opportunity-based entrepreneurship and necessity-based entrepreneurship.

It’s interesting how just a few short years ago, the Global Entrepreneurship Monitor study classified most entrepreneurship in so-called emerging markets as necessity-based. Not anymore!

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