Tuesday, September 1, 2009

Peers Influence Decision to Become an Entrepreneur

Why do some geographic areas — such as California’s Silicon Valley — produce so many entrepreneurial companies? The answer may be workplace peers. Working with former entrepreneurs makes individuals more likely to start their own businesses, says Professor Jesper Sørensen of the Stanford Graduate School of Business.

STANFORD GRADUATE SCHOOL OF BUSINESS — Entrepreneurs are people who sacrifice the security of a regular paycheck for the freedom and flexibility to build their own business. Be they empire-generating gurus like Steve Jobs or lesser-known, self-employed freelance writers, why do some individuals forego traditional business structures to branch out on their own?

Workplace peers are one important influence, say researchers. Those who work with former entrepreneurs are more likely to start their own businesses.

Analyzing comprehensive labor census data from Denmark, Jesper Sørensen of Stanford Graduate School of Business and Ramana Nanda of the Harvard Business School found that those who became first-time entrepreneurs between 1990 and 1997 were more likely to have worked with colleagues who formerly owned their own companies or independent businesses.

"Although the data isn't refined enough to tell us precisely, we think this suggests that sometimes all it takes to become motivated to be an entrepreneur is to have a seed planted in your head by someone close to you who has done it," says Sørensen, the Walter Kenneth Kilpatrick Professor of Organizational Behavior. "When you meet others who have gone out on their own, it doesn’t seem that crazy."

The effect holds even though the peers may be back at conventional jobs precisely because their enterprises have failed. "It may be that being exposed to someone who has gone through an entrepreneurial experience tells you that the worst that can happen is you'll end up back where you started," explains Sørensen, who culled data from the profiles of hundreds of thousands of Danish citizens.

The investigators also speculate that being around former movers and shakers can give insight into novel ways of doing things, knowledge of other industries, and important contacts. "These factors could be what allow people to take off independently," Sørensen suggests.

Successful entrepreneurs need a variety of resources, which may relate to another of the study’s findings: People whose co-workers have worked in a variety of places are also more likely to become entrepreneurs. The researchers infer that learning from colleagues, even through informal conversations, can help people identify when and how to launch a new venture.

Peer influences were most pronounced for entrepreneurs who did not have entrepreneurial parents. "People with parents who owned their own businesses had already been exposed to the idea of entrepreneurism as a viable career option, and had presumably already chosen against it," says Sørensen. "This shows even more clearly what a strong role-modeling dynamic there can be at work. Even if — and especially if — we don't know much about what it means to start one's own company from our family, we can be encouraged and inspired by our colleagues to make a huge life change."

The study sheds light on why geographical regions tend to vary in terms of entrepreneurial activity, and why hotspots like Silicon Valley can arise. "Entrepreneurism seems to be a self-reinforcing phenomenon — once you have one entrepreneur, you’re likely to have more, as that person influences others," says Sørensen.

Chalk one up for nurture.