Keep Your Day Job … Maybe

There is an interesting new NBER paper on the "nondiversifiable costs" of entrepreneurship. In other words, what costs, incurred by entrepreneurs in being entrepreneurial, should they consider in deciding whether to quit their day job?

Over the past 20 years, the typical venture-backed entrepreneur earned an average of $4.4 million [ed. really?!] from companies that succeeded in attracting venture funding. Entrepreneurs with a coefficient of relative risk aversion of two and with less than $0.7 million would be better off in a salaried position than in a startup, despite the prospect of an average personal payoff of $4.4 million and the possibility of payoffs over $1 billion. We conclude that startups attract entrepreneurs with lower risk aversion, higher initial assets, preferences for entrepreneurship over employment, and optimistic beliefs about the payoffs from their products.

Leaving aside that you’d be hard-pressed to find an entrepreneur not optimistic about payoffs from their products, I have a deeper issue. That $4.4-million gain figure is problematic, averaging, as it must, a host of VC-backed entrepreneurs who made nothing, and a few who made oodles. Using average (rather than median or mode) by including a few highly successful entrepreneurs in this kind of analysis is sort of like the old statisticians’ joke about Bill Gates walking into a room of 30 people and raising everyone’s average net worth by $1.6-billion.

Source: The Burden of the Nondiversifiable Risk of Entrepreneurship, by Robert Hall and Susan Woodward