The Market For Entrepreneurs

The role of entrepreneurship in aiding economic growth has earned increasing appreciation of late, not least in the wake of the global financial crisis. A standard Google search for “entrepreneur” returns 117,000,000 hits, while a cursory scroll through Google News’ entries throws up President Obama’s keynote American Jobs Act speech and though leading economists cannot agree on whether Europe lies in recession at the moment, all point to a lack of economic growth as a cause of woe. Rarely overlooked in recent years, entrepreneurship’s importance is now essentially beyond dispute.

This is why Obama assured Congress that “the drive and the initiatives of our workers and entrepreneurs have made this economy the engine and envy of the world”. It is why the British Prime Minister hailed the coalition March Budget as “on the side of everybody in this country who wants to create jobs, wealth and opportunity” and described backing “risk-takers and go-getters” as the only available strategy in a climate of low interest-rates and depleted government reserves. And it is why in 2004 more than half of the start-ups in Germany, Europe’s economic powerhouse, were supported by the federal employment agency.

Yet this overarching unanimity of purpose conceals many differences of opinion. The efficacy of extant measures to encourage entrepreneurship remains at best moot and at worst worryingly divisive, and it is not unfair to suggest the current state of knowledge on the topic is tentative and inconclusive.

Such agreement as exists is largely captured by what we might call the “Jena consensus”, named in recognition of the researchers associated with the Max Planck Institute in Jena, Berlin, who are actively involved in investigating public policy in this field. The consensus holds that the variables concerned in promoting entrepreneurship can be distilled down to financial support, education, social security arrangements, labour market policy, R&D/technology transfer policy, competition policy, bankruptcy arrangements and externality-driven market failures.

The Jena consensus offers a straightforward and useful thumbnail sketch of the diverse mechanisms employed by policymakers, but what it cannot offer – and what is desperately needed – is help in ascertaining the relative effectiveness of these different tools and, crucially, a means of assessing the trade-offs among them.

This, in short, is the problem that dogs policymakers in their efforts to encourage entrepreneurship: they have no intellectual foundation from which to act. The result is a veritable mini-industry of advisers, bureaucrats and assorted other players whose endeavors, however well intentioned, are inevitably cursed by experimentation, trial and error and – not in every case but arguably in too many nonetheless – failure.

One of the aims of a recent study by a professor at IMD and his colleagues was to begin laying that long-absent intellectual foundation. At its most basic, the intention was to step back and directly ask the practical question: “What resources are needed to persuade an individual with a job in hand to start up a new firm instead?”

In other words, translate policy variables into resource effects that in turn could be bundled into support packages that would be not just appealing to would-be entrepreneurs but cost-effective for policymakers. The idea was to consider policy options from an entrepreneur’s perspective – the market side – of the equation. It would be just as easy to phrase the central question thus: “Is there a market for entrepreneurship and are the different resources that make up for this market valued rationally?”

To investigate this the team used an Internet based survey – one using adaptive conjoint analysis techniques traditionally preferred in market research – to question almost 200 graduating MBA students in the US. This sample was well suited to the study, since MBAs prior to graduation represent a population of prospective entrepreneurs with the potential to the create high-growth firms that policy makers envy, and are in the process of considering trade-offs in future employment situations.

Students were presented with seven resource categories: support, funding, funding source, personal compensation, future employment, health insurance and office space. Within each of these categories were a number of levels of resource – for example, initial funding of $100,000, $1m or $5m towards the new business. Students were asked to evaluate how changes in levels of the seven different resource categories impacted their personal likelihood of launching a company.

This approach allowed the team to quantify the utility of “hard” or tangible resources (e.g. funding, the provision of office space, health insurance etc) and “soft” or intangible resources (e.g. support networks), drawing on numerous methods to calculate the monetary value of each. Several striking themes emerged.

Firstly, the average would-be entrepreneur wants a support package worth over three quarters of a million dollars to branch out on his or her own. This includes the $141,805 calculated to be the dollar worth of a guaranteed job. Leading on from this, he or she also heavily favors so-called “hybrid” or part-time entrepreneurship – that is, striving to set up a new venture while already in secure employment.

Jobs, of course, have long been cited as compelling incentives for entrepreneurship – but not necessarily, it now appears, in a truly accurate sense. It is having a job already – the comforting guarantee of some ready-made fallback in the event of failure – that increases the likelihood of embarking on a new venture. This method of transition is used by many entrepreneurs: they begin a business at home by initially working nights and weekends, knowing they can fund their efforts with cash flow from their regular job and then simply continue with that job if their plans ultimately go unrealized.

Perhaps most interesting, the results also indicate that the average would-be entrepreneur has comparatively scant interest in commonplace incentives such as networking opportunities and dramatically undervalue the provision of financing capital. Instead they believe the single most important resource that can deliver benefit is an experienced mentor who can give advice and guidance. Given that at present we have only a limited and rather “cold” understanding of how to match entrepreneurs with appropriate advisers, this is clearly an opportunity that researchers and policymakers alike need to better understand.

Finally, the matter of healthcare is worth noting. Our subjects demonstrated an inflated perception of healthcare’s value, so marking it out as a powerful incentive mechanism for encouraging entrepreneurship. Generally speaking, it is the differences between the perceived and actual worth of resources that could aid the design of support packages that encapsulate the best of both worlds: an attractive array of benefits for the would-be entrepreneur and a realistic financial proposition for the policymaker.

The long-term advantages of striking this balance require little endorsement or explanation in an era when it is widely acknowledged that the entrepreneurial market provides a critical feedstock for every other market in the business landscape. Policymakers need an enhanced grasp of the resources – either tangible or intangible – that they may have hitherto underplayed or even overlooked; and researchers need to examine in even more detail vital issues such as hybrid entrepreneurship and its consequences.

Fostering entrepreneurial activity undoubtedly constitutes a route to economic recovery, but for now we remain in every way only a few steps along the road. To borrow the coda of Obama’s American Jobs Act address: “Let’s get to work.”

Stuart Read is a Professor of Marketing at IMD in Lausanne, Switzerland. His research focuses on effectuation – the set of heuristics used to describe how people make decisions and take actions in situations of true uncertainty. He co-authored the study discussed here, The Market for Entrepreneurs, with Nicholas Dew (Naval Postgraduate School, Monterey) and Anusha Ramesh (Indian Institute of Management, Bangalore).

[This article has been reproduced with permission from IMD, a leading business school based in Switzerland. http://www.imd.org]