Do you have what it takes?: What makes an entrepreneur successful

by Pop on December 7, 2010

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Is a will to succeed enough?

I’ve never started a business. It’s something I’ve thought a lot about, and you could argue that Pop Economics is kind of a small business. Just one with no revenues. But I’ve been fascinated by all the research that’s been done into what makes entrepreneurs succeed or fail. Are you born an entrepreneur or can it be taught to you?

It seems that the question should really be broken down into two parts. Sure, there are certain behavioral factors that might make you more or less successful in a new venture, but more than that, there’s a certain kind of person that it takes to decide to be an entrepreneur in the first place. Without the second factor, you get a bunch of potentially good entrepreneurs who instead whittle the hours away in a 9-to-5 job.

Entrepreneurs don’t seek risk but they accept it.

One oft-repeated assumption is that entrepreneurs like to take risks. Thing is, the researchers who’ve actually tried to discover how much risk entrepreneurs like to take haven’t been able to prove that their bold streak actually exists.

In the mid-70s, a professor from the University of Illinois surveyed entrepreneurs, newly promoted managers, and newly transferred managers on their risk-taking propensity using a highly-regarded psychological test. There didn’t end up being a statistical difference between the groups or between entrepreneurs and the population as a whole.

So much for that theory.

That’s not to say that entrepreneurs are unaware of risk. In fact, successful ones tend to spread it out amongst other founders and investors so that even if a bad event happens, they won’t be the only ones bearing the brunt of the pain.

Entrepreneurs have an innate need to be successful.

Some researchers have theorized that entrepreneurs simply want it more. They want positive feedback, to be recognized for successes, and to stand out from their peers.

Except they don’t. It turns out that while entrepreneurs are, indeed, high achievers, so are successful managers within a larger company. Being a high-achiever doesn’t make you more prone to start a business, it just gives you the ability to do so.

Entrepreneurs believe they can make a difference.

I’m very much a proponent of black swan theory. I believe unpredictable events have inordinate sway over my fate. That doesn’t make me a complete stick in the mud, but it does mean that I sometimes wonder “What’s the point?” when thinking about an entrepreneurial venture. Success or failure seems random to me.

Entrepreneurs, on the other hand, are supposed to feel “in control” and believe that the intensity of their efforts will translate into success or failure.

Except they don’t believe that either. Noticing a trend here? Researchers have found that managers believe in their power to change things just as much as entrepreneurs do.

Entrepreneurs can handle ambiguous situations.

And finally, something that does distinguish effective entrepreneurs from Joe schmoes. When faced with uncertain situations, some people become anxious and uncomfortable. Others don’t mind it or even enjoy it. Entrepreneurs, it turns out, can handle ambiguity without freaking out. Finally, something that distinguishes them.

(P.S. A paper from the UVA Darden School of Business helped me boil down the research on these entrepreneurial traits. It’s meant as an intro for students into the study of entrepreneurship. So definitely worth reading if you’re interested in the subject.)

So behavioral traits don’t help. Is it just luck?

Aside from the awareness of and comfortableness with ambiguity, not much seems to distinguish those guys who start multimillion-dollar companies from those guys who get promoted up through the ranks to run multimillion-dollar companies. The ability to be successful in one realm seems to translate nicely into being successful in the other.

A few Harvard professors took a look at start-ups listed by Dow Jones Venture Source to see if serial entrepreneurs—that is, entrepreneurs who started more than one company—were any better than those who just started one company. The idea is that if you performed well more than once, it must be something skill-related or personality-related that made you successful, rather than randomness. They looked at firms listed between 1986 and 2000, and since they were listed in Venture Source, all of them had gotten venture capital financing.

For the purposes of their study, the professors defined “success” as going public by the year 2003. Of course, selling out shouldn’t be viewed as a sole determinant of success for an entrepreneur. I mean, is Facebook unsuccessful because it’s still private? But anyway…

Their findings: Entrepreneurs doing it for the first time had a success rate of 20.8%. Entrepreneurs in their second or later ventures had a success rate of 25.0%. That’s a significant difference and suggests that something other than pure luck must be playing into the success or failure of new companies.

But sadly, the researchers note: “While our paper identifies entrepreneurial skill, it does not distinguish exactly what the critical entrepreneurial skill is.”

It’s not luck. It’s not being a risk-taker or a go-getter or a believer. Maybe it has to do with dealing with ambiguity, but that can’t explain all of it. Sadly, we’re still searching for our answer to the central question: How do I know if I have what it takes to be an entrepreneur?

Stay tuned: Some information on what successful entrepreneurs do have in common comes on Friday.


{ 1 comment… read it below or add one }

Emmy December 10, 2010 at 12:40 am

Maybe this goes under the “makes a difference” category, but is there such as thing as a “control freak” personality trait? Off the top of my head that seems to be the thing that the entrepreneurs I’ve known have in common. I mean, sure, you can be quite successful at a large company, but do entrepreneurs think that it’s somehow better or more fulfilling or more worthwhile if they do it for themselves, on their own terms? Really, the only other thing I can think of is insanity, so there you go.

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