One of the most interesting changes over the past 20 years in the make-up of the very rich is that more of them are now self made. If you look at the wealthiest people in the US, the top 10 are dominated by tech entrepreneurs. Most of the big dynastic families that once ruled the rich lists have been pushed down to the teens or lower.
This makes me wonder if the rich have changed. There’s a commonly held view that the rich are very careful with their money (and that this is one of the secrets of getting rich). Yet many of the very richest these days are entrepreneurs who famously love taking risks. So are entrepreneurs different to “traditional” rich people? Do the new rich not care about losing money?
In a 2014 paper, Professor John Morgan at University of California Berkeley’s Haas School of Business and Dana Sisak, associate professor at the Erasmus University Rotterdam, looked at entrepreneurial motivation. Unusually, their Entrepreneurship and Loss-Aversion in a Winner-Take-All Society focused not on what the entrepreneurs stood to gain, but what they stood to lose. What they found was surprising.
They discovered that loss aversion, the fear of losing one’s salary, job and prestige, was directly linked to the effort the entrepreneur was prepared to put in. Entrepreneurs who put a high value on avoiding loss tend to work harder — more so than those who put a high value on new gains. This, not a love of risk, was what drove most of these people. “There is a view that entrepreneurs are often overconfident gamblers, who thrive on risk, yet there is little evidence to support this view,” said Morgan. “Entrepreneurs aren’t Steve Jobs. They’re ordinary people who want to start a business.”
This also says a lot about how we view start-ups and the so-called “cult of the entrepreneur”. Perhaps understandably we focus on exciting areas like Silicon Valley where there are a few big winners and a lot of losers. But the person who sets up a car dealership or an accountancy firm is an entrepreneur too — and these are sectors that can accommodate a lot of smaller winners. These entrepreneurs may become rich, perhaps even multimillionaires, but they are unlikely to become global icons.
Then there are the backgrounds of entrepreneurs-to-be. It may seem obvious but a lack of funding, lack of expertise and connections are regularly cited as the biggest barriers to starting businesses. In a 2013 paper, Ross Levine and Rona Rubenstein, economists at the University of California, Berkeley, found that you were more likely to found a company if you were white, male and well-educated. Levine told the website Quartz: “If one does not have money in the form of a family with money, the chances of becoming an entrepreneur drop quite a bit.”
This is the “riches to riches” narrative, which states that those who start businesses are people who have a financial cushion that allows them to be sanguine about losses (and work for nothing while they build the business up).
An extreme version of this was illustrated by the furore over the cover of an August 2018 issue of Forbes magazine describing Kylie Jenner as “self made”, when she came from a family that was already very rich. Jenner, the critics said, could afford to take risks that ordinary people could not dream of, knowing that if she lost a million dollars or two, she would not be out on the street. As the author and academic Roxane Gay tweeted: “It is not shade to point out that Kylie Jenner isn’t self made.”
There’s another factor at work here, too. Numerous studies show that children tend to “inherit” their parents’ careers. In one study produced by researchers at the Universities of Stockholm and Amsterdam, the authors said: “We find that having an entrepreneur for a parent increases the probability that ownbirth children become entrepreneurs by 60 per cent.”
This chimes with something quite a few entrepreneurs have told me. “Yes, being made bankrupt or having to enter a voluntary agreement is very bad news,” one said. “But . . . the world doesn’t end.” Another likened it to missing flights — the first time you see a million-pound business run though your fingers, you think it’s a disaster. But then you realise life goes on. Presumably having grown up around entrepreneurs gets you accustomed to this thinking at an early age.
So perhaps the real difference between entrepreneurs and other rich people is not that entrepreneurs don’t care about losing large sums of money. They do. But they know it’s nowhere near as bad as most people imagine.
Rhymer is reading . . .
The Capital by Robert Menasse, a satire that has been billed as “the first great EU novel” and which won the German Book Prize for 2017. Regrettably, I am reading the recently released English translation rather than the original German — and I hope to finish it before Brexit.
Follow Rhymer on Twitter @rhymerrigby
Get alerts on Entrepreneurship when a new story is published