One Field Where Being Super Rich is a Disadvantage

http://www.michaelpage.com.sg

How likely are you to become an entrepreneur? One of the biggest determinants is how much money you have. And one of the most common reasons cited for business failure is that the owner didn’t have enough capital to fund the business and couldn’t raise it from anyone else.

So it comes as a surprise to read a new paper by Ramana Nanda of Harvard Business School, who claims that businesses run by the wealthiest five percent of the population are actually among the most likely to fail.

Nanda’s data comes from a government registry in Denmark, which seems to keep track of every detail of its citizens’ economic lives. An American reader may wish he’d been able to do the study in this country, but consider the contents of the Danish Integrated Database for Labor Research: an individual’s age, education, salary, marital status, total income, and the value of their assets and debt. All legal residents and every firm in the country is included.

Those whose personal wealth places them in the richest five percent are the most likely to start businesses. Similar findings have been reported in other countries, which supports Nanda’s view that his findings can be extended to countries other than Denmark. Those in the top five percent of assets are 175 percent more likely to become entrepreneurs than those in the bottom 40 percent. Those in the top five percent also tend to start the least capital-intensive businesses. The wealthiest people tend to have lower salaries than their counterparts in the years just before they become entrepreneurs. This implies that their wealth is inherited rather than earned. If you believe that salary-at least across a large group of people-is also indicative of ability, then, on average these people are also a bit less capable than their peers. Rich people who become entrepreneurs earn less, relative to their old salaries, than others do. After two years of being an entrepreneur, Those in the bottom 80 percent, wealthwise, are earning an average of 11 percent more than they would have if they’d stuck with paid employment. Yet those in the top 5 percent of wealth are earning about 6 percent less than they would have if they’d stayed in their day jobs. This appears to be mostly because of the types of businesses started by each group. The wealthiest start less capital-intensive industries, where even the most capable entrepreneurs tend not to earn what they would if they’d stayed in paid employment, at least during the first two years in entrepreneurship. Those in more capital-intensive industries are more likely to surpass their previous salaries. Firms founded by rich people have higher exit rates than other firms. That doesn’t mean the firms necessarily failed, although it is the most likely explanation. It could also mean that the company was bought by another or that the entrepreneur simply decided to retire and close up shop. But the wealthiest people are about 25 percent less likely to have a successful exit-one in which their income the year after the exit is at least as high as the year before-than those whose wealth places them in the bottom 40 percent.

Nanda believes that together, these findings point to a common weakness among rich entrepreneurs, which is that they don’t have the same reliance on the capital markets that other entrepreneurs do. Nanda says this leads them to found and run businesses that otherwise couldn’t get off the ground, and to keep running the businesses even when they should by rights be shut down and the money used to fund them directed to more productive ends.