Brought to you by Composer
Strategy is the antidote for uncertainty.
We begin 2023 caught in the fogs of inflation, a potential recession, and volatile markets. But what if it was possible to turn uncertainty into opportunity?
The tender state of the stock market over the last year has given retail investors some cause for concern. That doesn’t mean you should sit on the sidelines and wait for the market to jump back.
Don’t leave your money up to impulse. Find the perfect algorithmic strategy for your portfolio.
Composer makes it possible to utilize advanced algorithmic strategies that safeguard your money with logic and data. By responding directly to live market trends, your portfolio gets a fresh kick of financial agility and reacts appropriately. Simply pick from a variety of automated strategies, test it, and start seeing better returns on your investments. No code required.
If you only have a few minutes to spare, here’s what investors, operators, and founders should know about who becomes an entrepreneur.
- The market misjudges you. Entrepreneurs may not be born but made. When employers underestimate (and undercompensate) a worker’s value, the rational decision for that person is to start a business of their own.
- You’re well-rounded. Though venture capitalists often talk about finding a founder that “spikes” on a certain dimension, those most likely to become entrepreneurs are well-rounded. A 2005 study from Edward Lazear suggests that the self-employed tend to be generalists, not specialists.
- Mental health issues run in the family. According to one study, entrepreneurs are much more likely to face mental health problems – both directly and in their broader family. Sufferers of bipolar disorder, ADHD, and OCD are all more likely to go solo.
- You survived a difficult childhood. Running a business is not for the faint of heart. It is perhaps not surprising then that childhood adversity may increase entrepreneurship rates. One 2021 paper analyzes this connection by observing a group that suffered extreme hardship: China’s Great Famine survivors.
One of The Generalist’s primary obsessions is understanding how great organizations are made. In pursuit of that subject, we’ve studied companies from around the world, across industries, and at different stages of maturation, hopping from Starbucks to Stripe, Y Combinator to Flexport, Rappi to Kaspi, and DST to TSMC.
We spent significant time on the organization’s origin story in each of these cases. How did a trip to Italy influence Howard Schultz’s entrepreneurial vision? What did the Collison brothers build before they tackled payments? Why was Morris Chang perfectly positioned to build the largest semiconductor fabricator in the world?
Beneath the obsession with epic organizations is, perhaps, an even greater interest in the people and stories behind them. Despite that curiosity, we have yet to focus on the phenomenon of entrepreneurship itself. What factors influence the estimated 582 million entrepreneurs to build businesses? What characteristics and experiences drive someone to leave the safety of employment for the volatility of pioneerdom?
To try and answer these questions, I’ve reviewed dozens of academic studies on entrepreneurship and the factors that lead to it. It goes without saying, hopefully, that there are perhaps hundreds of intriguing, interesting papers on this subject. Today’s piece summarizes the seven results that I found most compelling. In some instances, they confirm the lessons gleaned from studying the companies mentioned earlier; at other points, they challenge them.
These findings are not presented as definitive truths. Indeed, academia’s replication crisis means that most studies should be viewed with some skepticism, perhaps especially those focused on Western, Educated, Industrialized, Rich, and Democratic (WEIRD) subject groups. Rather, I view them as intriguing frames of reference, heuristics through which part of the picture may be understood. Hopefully, they contribute to improved understanding for founders themselves and those who work with them.
With that, let’s explore the fundamental question: who becomes an entrepreneur?
In “Smart and Illicit,” academics Ross Levine and Yona Rubinstein investigate if early aptitude and rule-breaking behavior impact the likelihood of becoming an entrepreneur.
In the years before they enter the workforce, future entrepreneurs show higher intellectual aptitude, stronger self-esteem, and a greater belief in their ability to decide their future. They are also more likely to engage in illicit activities. Compared to employees, entrepreneurs are 2x more likely to have “taken something by force as youths” and nearly 40% more likely to have been stopped by the police. On an overall “illicit activity index” score – which incorporates behaviors like truancy, gambling, drug dealing, shoplifting, and vandalism – entrepreneurs score 21% higher than employees.
The 2013 study finds that this cocktail of traits is most potent when combined – that is, youths that are both “smart” and “illicit” are most likely to become entrepreneurs. They are also most likely to see the largest increase in their earnings when they transition from employee to entrepreneur. It’s perhaps not surprising that four of PayPal’s six co-founders built bombs in high school.
At the risk of being self-serving, we turn now to Edward Lazear’s 2005 paper “Entrepreneurship,” which discusses the relationship between entrepreneurship and a relative balance of abilities. Are specialists most likely to start companies? Or are founders typically “jacks of all trades?”
Lazear’s study uses data from the Stanford Graduate School of Business to make its assessment. In particular, Lazear examines whether the number of professional positions, range of business school classes taken, and academic performance across subjects influence the likelihood of becoming an entrepreneur.
Those that experienced a larger number of professional roles were more likely to become entrepreneurs. Indeed, just 3% of those that held fewer than 3 professional roles became entrepreneurs, compared to nearly 30% of those that served in over 16 different positions. Interestingly, moving between organizations decreased the probability of becoming an entrepreneur – the most likely to become founders took on multiple roles within the same organization. As Lazear explains, “It is not the case that entrepreneurs are those who cannot sit still.”
Future entrepreneurs were also more likely to take a broader range of business school classes and to have less variance between their best and worst grades across different fields.
Lazear offers an interesting explanation of why this might be the case:
Some production processes are very complex, requiring many skills in order to produce output. Others are relatively straightforward. As the world has become complex, a larger variety of skills may be required to be an entrepreneur. In an agrarian society, a farmer did not require too many business skills to run his small farm and get his produce to market. The founders of the modern corporation are a different breed. They are more than competent technicians; they must understand how to create a worldwide business.
Broadly speaking, Lazear’s findings correlate to my experiences. Many founders I have met seem to show an unusual breadth of knowledge and well-roundedness, including Zach Reitano of Ro, Christina Caccioppo of Vanta, and Kevin Aluwi of Gojek.
Those with a community
Knitting communities aren’t usually perceived to be breeding grounds for entrepreneurship. However, Hyejun Kim’s 2018 paper unpacks an intriguing aspect of the transition to self-employment: the importance of an offline network. (It also seems to be a favorite of Patrick Collison’s.)
To conduct her research, Kim reviewed data from 403,199 knitters active on Ravelry, known as the “Facebook of knitters.” Kim found that those who became entrepreneurs – individuals who made and sold original knitting patterns – tended to have undertaken more knitting projects across a range of product categories. For Kim, this echoed Lazear’s finding that “entrepreneurs tend to be generalists with balanced skill sets.” An intriguing wrinkle to this part of Kim’s study is that entrepreneurs tended to experiment with fewer techniques, suggesting there is value in some degree of specialization.
The most compelling part of Kim’s work relates to “entrepreneurial transitions.” Among participants with equal abilities, why do only some go on to sell their own products? The primary reason seems to be encouragement. The praise of fellow knitters, family, and friends can prove a vital catalyzing factor, even from sources with no knitting experience.
Joining a local community makes entrepreneurial transitions more common, perhaps because of this effect. When a knitter enters one of the more than 3,000 “Stitch N’ Bitch” groups in the U.S. (which I now very much want to attend), they are 13-25% more likely to become entrepreneurs.
We all need a little push sometimes.
Somewhere in the multiverse, Steve Jobs retired as a Hewlett-Packard employee, and Jan Koum currently works as a PM at Twitter. In our reality, both men were rejected from positions at those companies and went on to build Apple and WhatsApp.
“Information Frictions and Entrepreneurship” by Deepak Hegde and Justin Tumlinson assesses how the stories of founders like Jobs and Koum come to pass. The researchers argue that people choose entrepreneurship when inadequately compensated by the broader market.
The fundamental issue here is informational asymmetry. Employers make assessments based on “observable signals of ability.” Educational attainment and prior career experiences are both good examples of observable signals. (It is likely no coincidence that both Jobs and Koum were dropouts). Though reasonable proxies, these are ultimately noisy signals. Employers may misjudge candidates based on these criteria, subsequently under-compensating them.
The 2020 paper looks at the results of aptitude tests taken during adolescence. It maps this information to subsequent educational attainment and employment status. Those that become entrepreneurs perform better on adolescent aptitude tests than employees with similar academic credentials. Essentially, a college dropout who goes on to found their own company is likely to have shown higher intellectual aptitude than a college dropout who works as a W-2. If an employer primarily judges the first individual based on their educational background, they may understate their ability. As the study notes, “the larger the gap between an individual’s own ability and the median ability of individuals with his same academic credentials, the more likely he is to choose entrepreneurship.”
The study partially explains why immigrants often turn to entrepreneurship. These groups are frequently underestimated and undervalued, creating discrepancies that lead to starting a business. Every observer of the venture landscape will have observed this phenomenon. Recently, the GP of a storied venture capital firm shared that 70% of the entrepreneurs in their last fund were immigrants. Previous studies show that U.S. immigrants are nearly twice as likely to become entrepreneurs.
I am certainly no Steve Jobs, but it’s interesting to reflect on how the experience of starting The Generalist maps to this theory. In the years before founding this publication, I got far in the interview process at several top-tier venture firms but fell at the final hurdle. Though it could have been for several reasons, I felt that my unorthodox professional background (law firm, novel writing, culinary school, international development) contributed to being misjudged. Surely, I could analyze companies as well (or better; hello, ego, my old friend) as someone that had rotated through two years at McKinsey and Google? Going solo felt like the clearest opportunity to test that self-belief, one way or another.
Survivors of childhood adversity
Among the 20th century’s atrocities, China’s Great Famine is under-discussed in the U.S. and a taboo subject in China itself. Between 1959 and 1961, an estimated 45 million people died of starvation and associated ailments, nearly 7% of the total population. With some believing the central government under-reported deaths, the true figures may be much higher. Indeed, the official response to the famine was cavalier, with Mao Zedong saying, “When there is not enough to eat, people starve to death. It is better to let half the people die so that others can eat their fill.”
This is the backdrop the researchers chose for their 2021 study. In particular, the researchers use data collected during and after the Great Famine to assess the connection between childhood adversity and migrant entrepreneurship. (“Migrant entrepreneurship” refers to those that migrated within China. Those that migrated from rural areas to cities were discriminated against and faced serious hardship.)
The study produced a range of interesting findings. Firstly, subjects born and raised in the hardest hit districts (those with the highest “excess death rate”) were most likely to grow up and become migrant entrepreneurs. “Exposure to more severe famine has a positive effect on becoming an entrepreneur,” the study notes. Secondly, those that were younger during the famine were most likely to become entrepreneurs later in life.
Surviving the Great Famine took extraordinary resourcefulness, self-reliance, and the ability to adapt to changing circumstances. Children born and raised during this period likely had to develop these traits extremely early. Combined with the discrimination they faced in labor markets, these qualities may have led many to self-employment.
Stay one step ahead of the most important trends shaping the future. Our work is designed to help you think better and capitalize on change.
Those with bipolar disorder, ADHD, and OCD
“There is no great genius without some touch of madness,” Aristotle is believed to have said. A 2019 work suggests that is true for entrepreneurs – both directly and indirectly.
Entrepreneurs suffer much more frequently from mental health issues and tend to have families with these illnesses at a higher rate. Forty-nine percent of entrepreneurs researched profess to have one or more mental health conditions, compared to 32% among non-entrepreneurs. When families are factored in, 72% of entrepreneurs are directly or indirectly impacted by mental health issues. Non-entrepreneurs have a direct or indirect impact rate of 48%.
Researchers Freeman and Staudenmaier are particularly interested in the prevalence of bipolar disorder, ADHD, depression, anxiety, and substance abuse among entrepreneurs. I found the conversation around bipolar disorder and ADHD most arresting – in addition to a supplementary study focused on OCD. A few observations:
- Bipolar disorder. This study references research that establishes a connection between bipolar disorder and attainment. The condition’s manic element often contributes to an extreme work ethic, lofty goals, and high confidence – all of which can be useful for an entrepreneur. The authors reference a study that finds individuals with bipolar disorder are more likely to be self-employed and in the top 10% of income earners.
- ADHD. Those with ADHD are more predisposed to become entrepreneurs. Novelty-seeking and rapid decision-making are symptoms that can be helpful for a founder. However, those with ADHD frequently have lower rates of conscientiousness and higher impatience and inattentiveness. That can make sufferers less skilled at necessary tasks like accounting and bookkeeping.
- OCD. Though Freeman’s study doesn’t mention OCD (it may be included under “anxiety”), another work shows a connection between it and entrepreneurship. Those with OCD are more likely to become entrepreneurs, perhaps because of the persistence and perfectionism that are frequent symptoms. I’ve previously written about my history with OCD.
It’s interesting to juxtapose these findings with Lazear’s view of entrepreneurs as generalists. Those who start businesses of their own may be well-rounded but not necessarily well-balanced. The creativity, persistence, and self-belief associated with these disorders come at a cost. As Freeman’s study summarizes, “We suggest that entrepreneurs who are highly endowed with a plethora of successful personality traits may also be expected to have a greater number of diagnosable psychiatric conditions.”
In the popular imagination, Silicon Valley is the land of the young whizz-kid. The traditional founder archetype is a brilliant engineering dropout in the mold of Bill Gates, Mark Zuckerberg, or Patrick Collison. How true is that stereotype?
Not very, according to the 2018 paper “Age and High Growth Entrepreneurship” by Pierre Azoulay et al. Focusing on U.S. startups – rather than all new businesses – the National Bureau of Economic Research study finds the mean age for founding a company to be 41.9 years old.
Interestingly, this rough age range holds well across various populations. For example, when narrowed in on “high-tech” founders, particularly, there is little change – the mean age ranges from 41.9 to 44.6. In “entrepreneurial hubs” like Silicon Valley, the average declines slightly to 40.8.
Ok, you might think. Surely the results are skewed? There might not be as many wunderkinder, but they’re the most successful.
That doesn’t seem to be the case. Mean age actually increased when focusing on the most promising ventures. The 0.1% fastest growing new companies from the data set were led by founders with an average age of 45.
Finally, Azoulay’s study looks at the historical performance of firms like Microsoft, Apple, Amazon, and Google. If Mark Zuckerberg is right that “young people are just smarter,” shouldn’t those companies decline as founders age?
Despite this data, venture capital investing skews toward young founders. Rather than searching for another Mark Zuckerberg, investors should keep their eyes open for the next Herbert Boyer. The Genentech founder started the company at the age of 40.
The Generalist’s work is provided for informational purposes only and should not be construed as legal, business, investment, or tax advice. You should always do your own research and consult advisors on these subjects. Our work may feature entities in which Generalist Capital, LLC or the author has invested.
Join over 55,000 curious minds.
Join 60,000 readers and get powerful business analysis delivered straight to your inbox.
No spam. No noise. Unsubscribe any time.