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.


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