Jesper Sørensen: Why do entrepreneurs take the leap?

Despite the romanticized image of billion-dollar paydays for founders of tech firms, taking the leap into entrepreneurship is fraught with risk. So then why do so many workers give up the security of a steady paycheck and strike out on their own?

Published: Aug 24, 2015
Jesper Sørensen: Why do entrepreneurs take the leap?
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Researchers have pondered that question for some time, and many have theorized that a desire to be one’s own boss is the driving factor. But research by Stanford GSB professor Jesper Sørensen takes a fresh look at the question and comes up with a very different explanation: People become frustrated when they are blocked from advancing in their careers. “But it's not just blocked mobility in the sense that I can't get ahead in the firm that I'm at. It's blocked mobility in the sense that I can't get a job with another employer that I feel is better than my current one,” says Sørensen, who co-authored the study with Amanda Sharkey from the University of Chicago. “And because I feel stuck, I'm more likely to be tempted by an opportunity to start my own firm.”

In many cases this applies to high performers as much as anyone else. Paradoxically, many people do well precisely because they are well-matched to the unique demands of their current job — so much so that their value is simply not as high to an outside firm. In fact, labor economists have long argued that well-matched employees tend to stay at companies longer than their poorly matched colleagues. As a result, they don’t receive many job offers from other companies, while colleagues who are less well-matched move on to better, higher-paying jobs.

Those high performers could stay put, and if they work for a company that allows them satisfying moves up the ladder, they may well stay. But self-employment starts to look attractive to those who work at a small firm with little room to advance, or to those whose career trajectory is blocked at a larger organization.

If the decision were purely financial, they might be better to stay. A 2000 study by Burton Hamilton of the Olin School of Business at Washington University showed that with the exception of the very top earners, most entrepreneurs would be better off financially if they remained in salaried employment.

Sørensen says individuals who want to innovate don’t have to do it on their own. Ideas that create value often develop within firms, a process sometimes called “intrapreneurship.” He adds that most of the people who become entrepreneurs don’t create very innovative companies — and they don’t necessarily intend to. “When they start their corner convenience store, they aren’t dreaming of creating the next Walmart or 7-11,” says Sørensen.

Sørensen and Sharkey argue that decisions about creating things within an existing firm versus striking out on one's own are made in the context of the opportunities an individual encounters in his or her career — many of which arise due to factors out of their control. “People underestimate the extent that their success is about context; you flourish in one context and not the other,” says Sørensen. “A talented sushi chef may not reach her full potential in the labor market if there are no sushi restaurants. Similarly, someone who is well-suited for work in a collaborative entrepreneurial venture may be ill-served by an organizational environment dominated by large bureaucratic firms.”

Looked at that way, organizational diversity (or the lack of it) may have more to do with the choice of becoming an entrepreneur than the perceived appeal of being one’s own boss, says Sørensen.

For managers who want to retain their most talented employees, Sørensen says one implication is that high performers who do not generate offers from other firms are at the highest risk of leaving to launch their own venture. “The key is to recognize that this may have less to do with their desire for independence than their desire for new opportunities to get ahead. Thinking creatively about how to provide such opportunities can help you retain your best performers.”

Jesper Sørensen is the Robert A. and Elizabeth R. Jeffe Professor and Professor of Organizational Behavior at Stanford Graduate School of Business and a Susan Ford Dorsey Faculty Fellow for 2014-2015.

This piece originally appeared in Stanford Business Insights from Stanford Graduate School of Business. To receive business ideas and insights from Stanford GSB click here: (To sign up : https://www.gsb.stanford.edu/insights/about/emails ) ]

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