Startups fail and startups succeed. Today everybody knows that there are more startups who fail than there are startups who succeed. Oftentimes you hear your parents and friends quoting studies who seem to prove that failing founders would have been better of by having stayed in the workforce those last two years instead of driving a company against the wall.
This approach compares the financial situation of usually two people at a certain point in time. It is pretty clear that someone who just founded his own company is financially worse off than his counterpart who is working with an MBA at Morgan Stanley.
Professor Gustavo Manso is teaching Finance at the University of California in Berkeley. He just published a study called “Experimentation and the Returns to Entrepreneurship”. He decided to use a different approach to find out if entrepreneurs are financially better or worse off. He compared the compensations of employees over a longer period of time. His results show that former entrepreneurs have indeed a financial advantage over those who never tried themselves as entrepreneurs.
Of course, it is true that entrepreneurs earn much less (if at all) while they are working on their own company. If entrepreneurs returned to the workforce after being self-employed for longer than two years they earned around 10% more than other employees in the same job. Even if the companies of those entrepreneurs failed they still earned more than their counterparts who have never started a business.
Gustavo Manso’s study makes clear that entrepreneurs – regardless of their success or failure rate – still have a financial advantage over their colleagues who have never started their own business.
Most entrepreneurs fail quickly and are able to limit their losses by moving back to the salaried workforce. Few entrepreneurs succeed but these earn significantly more than salaried workers with similar characteristics. Overall, I find that entrepreneurs earn approximately 10% more than salaried workers with similar characteristics. (Manso, 2015)
The market seems to award the risks and experiences employees have earned during the time of self-employment. It is totally true that you can use your gained knowledge when you are returning to the workforce.
I personally started with personal self-development around one year ago and I just started being a serious entrepreneur several weeks ago. I can confirm that the amount you learn during your time as an entrepreneur is a lot higher than you would otherwise learn during a regular job.
I want to add that Gustavo Manso looked primarily onto individuals who called themselves “Self-Employed” this might of course also be a guy who started a restaurant around the corner. That is the reason why I think that the payoff for entrepreneurs in the sectors of technology and high-technology have probably a financial advantage which is a multiple of that 10 % Manso found in his study.
We should not be afraid of any financial losses we will experience during our startup phase. The financial payoff of entrepreneurs who start their own business – even if it fails – is greater than staying in the 9 to 5 workforce. This compensation might come in the form of a seven figure income of your company or at least a financial advantage of around 10% over your colleagues who have never tried self-employment themselves. If you are an employer or HR manager you should never underestimate the amount of experience and knowledge an entrepreneur learns during a two-year period of self-employment. Maybe this experience is worth more than a 10% extra earning and this experience could help your company survive in tough times.
“Experimentation and the Returns to Entrepreneurship” by Gustavo MansoHaas School of Business, University of California at Berkeley. Accessible here.