Blog Post

Are founders significantly richer than most people?

Harvard thinks so.

“Entrepreneurs are, on average, significantly wealthier than people who work in paid employment. Research shows that entrepreneurs comprise fewer than 9 percent of households in the United States but they hold 38 percent of household assets and 39 percent of the total net worth.”

So writes Ramana Nanda, an assistant professor at Harvard Business School, in his new paper called the Cost of External Finance and Selection into Entrepreneurship, published today in HBS’s Working Knowledge.

It sounds encouraging, but don’t get too excited. What the study really confirms is a long-held suspicion that the rich are more likely to become founders in the first place.

It ought not to surprise you that when market forces make funding more difficult, founders without their own “human capital” (Prof. Nanda means “means”) are more likely to be discouraged, while the very well-heeled benefit from a narrowed field of competition. But apparently, this trend holds even with founders who are above average in wealth — a socio-economic class that is highly-represented in business schools and, therefore, perceived to be potentially very enterprising (i.e.: rich enough to want more; smart enough and well-connected enough to make it happen.)

The greatest relative decline in entry [to entrepreneurship] came from individuals with lower human capital, many of whom were above median wealth. This finding suggests that an important part of the positive relationship between personal wealth and entrepreneurship may be driven by the fact that wealthy individuals with lower ability can start new businesses because they are less likely to face the disciplining effect of external finance.

Worse, he argues, tax incentives or other initiatives intended to motivate the not-so-rich into entrepreneurship don’t really even things out, because even people with deep pockets can to reap the benefits of such programs.

Anyway, you should read the paper. It’s just one more reason to bootstrap your butt off.

7 Responses to “Are founders significantly richer than most people?”

  1. It’s been said “It takes money to make money.” And that’s true. More entrepreneurs with some financial security can take a bit more risk. It doesn’t mean that you have to be a millionnaire, just smart with your money. My guess are the odds of making it from the streets to being a millionnaire are less than the odds of making it from a middle class situation.

  2. Well, maybe my next business idea will be the one that makes me rich. It’s a lot harder than it looks. Oh wait, blogging IS my next business idea and I’m not getting rich. Darn!

  3. Getting into the “old boys club” is a matter of resources. The market is efficient; a good enough idea will find funding.

    The intrinsic nature of someone who can jump from a plane with silkworms, hoping they weave a parachute before they hit the ground is person who will succeed regardless of the situation. (Yes, there are exceptions when the paradigm of competition is not business and leadership acumen)

    The lessons that can be learned, in failure or success, can only be administered in the crucible of entrepreneurship.

  4. Brennan Sherry

    I’d be interested in knowing what constitutes an “entrepreneur”. Is it someone who started a business and is still in that business? Because the fact that they are still in it means it survived, which means they are probably doing pretty well. Otherwise, they would go back to and be an employee and have much more job security. If the business does in fact fail, then they go back to being an employee. There is a filter going on that for the most part only the successful entrepreneurs stay entrepreneurs, so a study like this would skew entrepreneurs to seeming rich. I would be interested in how much overall being an entrepenuer helps your career. Basicially taking the average salary of anyone who has at some point in their life started a business (of course throw out the ones who had a lemonade stand when they were a kid, basically a business where they planned on fully supporting yourself via income from that business).

  5. I commented over at, but I’ll drop it here, too.

    That’s just bad math… Using a mean when they should be using a median.

    Throw Bill Gates onto a bus and the average bus rider earns billions a year. That’s not particularly meaningful.

    “Sorry, this is another myth. Entrepreneurship creates a lot of wealth, but it is very unevenly distributed. The typical profit of an owner-managed business is $39,000 per year. Only the top ten percent of entrepreneurs earn more money than employees. And the typical entrepreneur earns less money than he otherwise would have earned working for someone else.”

    (from Scott Shane, the author of “The Illusions of Entrepreneurship via