One time in the course of my research on high-tech entrepreneurship, I asked a very successful venture capitalist what it took to be successful at high-tech startups. He stared right back at me and blurted out: “About the same thing it takes to be a successful drug dealer.”
Having grown up in a rough-and-tumble town in working-class New Jersey with far more petty drug dealers than successful venture capitalists or high-tech entrepreneurs, my intuition told me he was onto something. Now I have some proof.
A new study in The Quarterly Journal of Economics entitled “Smart and Illicit: Who Becomes an Entrepreneur and Do They Make More?” by Ross Levine of the University of California Berkeley and Yona Rubenstein at the London School of Economics takes a detailed look at whether risk-taking young rule-breakers are more likely to grow up to become entrepreneurs.
The answer is yes: People who have gone on to found or own their own incorporated businesses were more likely to have engaged in cutting classes, vandalism, shoplifting, gambling, assault, and using alcohol and marijuana. They were also more likely to have higher levels of education, score higher on aptitude tests, and have higher levels of self-esteem.
To get at this, the study draws upon several detailed data sources.
It pairs a National Longitudinal Survey of Youth in 1979 where subjects were later interviewed from 1994 until today with occupational data from the Current Population Survey (CPS) of the U.S. Census. They identify participants across a wide range of demographic indicators and aptitude tests, but most importantly for the study’s purposes they focus on two factors: an Illicit Activity Index and self-employment in incorporated and unincorporated businesses.
The Illicit Activity Index is based on some 20 questions about potentially misspent youth: 17 are about such delinquency as gambling, fighting at school, damaging property, shoplifting, and using and dealing drugs; three questions cover interactions with law enforcement, including being stopped by police or being charged with or convicted of an illicit activity.
The study compares that data and occupational profiles to the tasks detailed for self-employed people in incorporated and unincorporated businesses from 1995 to 2012. The distinction between incorporated and unincorporated is important, because self-employment is a big category that does not necessarily reflect entrepreneurism. Lots of self-employed people have jobs that require performing routine tasks just to get by—functioning as employer and employee effectively—whereas growing a business as an entrepreneur draws more on creative, analytical problem-solving or interpersonal skills like managing or persuading people.
The study generates a plethora of interesting findings on the backgrounds and earnings of entrepreneurs, but these are key.
White men were twice as likely to incorporate than others. Women account for 48 percent of the sample of workers, but only 28 percent of the incorporated entrepreneurs. The incorporated are also more highly educated, with 46 percent holding a college degree compared to 33 percent of salaried workers. They tend to come from high-income, well-educated, and two-parent families—a $100,000 increase in family income is associated with more than 55 percent increase in the odds of becoming an incorporated entrepreneur.
For that reason, the study looks largely at the effect on white males, controlling for family income, but even when the study controls for gender, race, and income, the “smart and illicit” factors reliably predicts an individual’s entrepreneurship.
Entrepreneurs in incorporated businesses earn significantly more than entrepreneurs in unincorporated businesses. Indeed, the median salaried worker earns more per hour than a self-employed person ($18 dollars an hour vs. $17 dollars an hour), even with similar education attainment. But the median incorporated entrepreneur’s hourly earnings are far greater than an unincorporated entrepreneur—$24.6 dollars an hour compared to $13.8 dollars an hour.
Entrepreneurs in incorporated businesses tend to concentrate in areas that demand greater non-routine cognitive skills, such as analytical thinking, creativity and persuading and managing people. The self-employed in unincorporated businesses, on the other hand, concentrated in areas that demand greater manual skills, such as carpentry, plumbing, or general contracting. Half of the incorporated entrepreneurs were managers, and less than 8 percent of the incorporated entrepreneurs were physicians and surgeons, lawyers and accountants combined. About 25 percent of the unincorporated were managers and about 17 percent of unincorporated entrepreneurs worked in skilled manual trades as carpenters, truck drivers, and automobile mechanics. As the study puts it,
To the extent that one associates entrepreneurship with analytical reasoning, creativity, and complex interpersonal communications rather than with eye, hand, and foot coordination, the data suggest that on average the incorporated self-employed engage in entrepreneurial activities while the unincorporated do not.
On top of this, true entrepreneurs in incorporated businesses also tended to have displayed higher learning aptitude and have had higher self-esteem scores when they were teenagers.
Most interestingly, as the study points out, these entrepreneurs were far more likely to have engaged in risky and illicit activities as teenagers. Both types of entrepreneurs were more likely to engage in illicit behavior as teens than salaried workers, but the incorporated entrepreneurs were much more likely to do so.
Here the findings are staggering. Entrepreneurs were twice as likely as salaried employees to report having taken something by force in their youth. They were 40 percent more likely to have been stopped by the police and had an overall illicit activity index greater than that of salaried workers. Though the unincorporated self-employed were also more likely to engage in those activities than salaried workers, the incorporated were twice as likely to do so.
It suggests that if we want produce entrepreneurs in the future, we might want to rethink how we look at how their behavior predicts their aptitude. As the authors write:
Furthermore, as teenagers, the incorporated tend to have higher learning aptitude and self-esteem scores. But, apparently it takes more to be a successful entrepreneur than having these strong labor market skills: the incorporated self-employed also tend to engage in more illicit activities as youths than other people who succeed as salaried workers. It is a particular mixture of traits that seems to matter for both becoming an entrepreneur and succeeding as an entrepreneur. It is the high-ability person who tends to break the rules as a youth who is especially likely to become a successful entrepreneur.
What can this study tell us about today’s entrepreneurial culture? Our sense of creative leadership—in Silicon Valley’s startup culture and elsewhere—rewards people who bend rules and defy norms, while people who work more conventional 9-to-5 jobs fall behind, even if they are running the business. Although the findings of the study do not address this directly, it not only raises questions about business ethics, but also privilege.
Even if the “smart and illicit” tendencies are predictive of entrepreneurship across race, gender, and class, the overwhelming majority of the people who fall under this category of entrepreneurs are white, well-off young people who, put in different circumstances, might see the same entrepreneurial gifts land them in jail.