• Study: Entrepreneurs Are Actually Pretty Rational After All

    free-moneyIt takes a lot to be an entrepreneur. Founders often work longer hours and for less money than people with “paid jobs.” And entrepreneurs who start companies that take off stand a very good chance of being elbowed aside at some point. According to HBS professor Noam Wasserman, who conducted a decade of extensive research into roughly 3,600 startups, 52 percent of founders are gone by the time a company raises its third round of venture funding.

    Still, the common myth that entrepreneurs are an irrationally optimistic lot isn’t entirely accurate, suggests new research from Daniel Ekeblom, a PhD student (and ex M&A analyst) at Lund University in Sweden; and renowned finance professor Ola Bengtsson (who, sadly, passed away in January).

    Indeed, using a dataset of 180,814 individuals’ responses culled by the Swedish government between 1986 to 2009 — answers to questions like, “Do you think your country will be better off financially a year from now?” — the pair discovered that optimism is actually correlated with favorable beliefs about nationwide conditions. More, when entrepreneurs have more favorable beliefs about nationwide conditions, those beliefs are relatively good predictors of the future.

    In a recent call, I asked Ekeblom what motivated the research. He said simply that it’s an aspect of entrepreneurship that’s almost always overlooked: what people know about the immediate environment in which they’re working. “We thought: Can we use our data to sort that out? Can we avoid that problem, eliminate it somehow?”

    Ekeblom went on to call the endeavor “real science,” given that he and Bengtsson were comparing expectations to outcomes on a subject that was beyond any respondent’s domain of influence.

    Either way, armed with his conclusions, I was curious to know how he viewed the current founder boom. He told me: “When I look at like Silicon Valley — and we have small clusters of startups here in Sweden as well — people are trying to make some interesting stuff, but many aren’t generating cash flow like you’d expect based on these billion-dollar valuations. There’s something that’s not really catching up.”

    You could blame a glut of optimistic entrepreneurs for continuing to start viral but unprofitable companies, but Ekeblom sees a reason for it. “Maybe they’re rational, and it’s the [investors and acquiring companies] who aren’t. I’m not at all sure people are looking at or responding to pricing signals in a rational way. Meanwhile the entrepreneur is saying, ‘Free money. Let’s go.’”

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