There is an old saying that it takes money to make money. There is some truth to that, of course: A 10% return on a $1-million investment is $100,000; the same return on a $1,000 investment is $100. The latter will get you a gross of milk; the former will get you a small farm.
The link, however, between wealth and entrepreneurship is less well known. There is a large set of studies that have looked at the factors that matter most in someone deciding to become an entrepreneur. While the general view might be that it helps to have the wolf at the door — in other words, people become entrepreneurs because they have no other choice — most studies have shown there is a positive relationship between wealth and the likelihood of someone becoming an entrepreneur. Put another way, it takes money to make an entrepreneur.
Why might that be? Well, so the theory goes, capital markets aren’t perfect, so good ideas go wanting for money (i.e., venture capital) if they are backed by people who can’t get the thing kick-started with their own money. It seems superficially sensible, and this has long been the preferred explanation for the entrepreneurship-wealth link.
Well, the link is now being questioned. A new study by Kevin Moore for the Federal Reserve shows that with better measures of wealth the link to entrepreneurship only exists for people in the top-quartile of home equity value. In other words, for the majority of people wealth is not the primary constraint in becoming an entrepreneur. Matter of fact, as the paper points out, most entrepreneurs start their business with less than $10,000 in capital.