What are the odds of getting a venture capitalist to finance your new business idea? If you said less than the odds of dying from a fall in the shower, you'd be right. One of the great myths about entrepreneurship in America is that venture capitalists finance many entrepreneurs' ideas.
Myth or reality: Creating more start-ups will transform floundering economic regions, generate innovation and job creation, and perform economic wizardry.
That's another myth, according to Case Western Reserve University economics professor Scott Shane, who provides a reality check about starting new businesses in his new book The Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors and Policy Makers Live By (Yale University Press). The book is due in bookstores later this month.
Shane, the A. Malachi Mixon III Professor of Entrepreneurial Studies at the Weatherhead School of Management, examines several areas of entrepreneurship and shows the reality of starting a business: That the failure rate is higher and the economic impact lower than many realize.
"People start businesses based on the myths we tell ourselves about entrepreneurship and then are hurt when confronted by reality," he said. "Investors believe these myths and invest money and they're disappointed when they don't hold true. Policy makers make policy based on these myths and then wonder why the economy isn't growing with all these entrepreneurs now in it.
"The typical entrepreneur doesn't rake in the cash or make the evening news. It is important to realize that a tiny, tiny sliver of start-ups account for all the performance that entrepreneurs provide - while the typical entrepreneur is unsuccessful."
Through extensive research, Shane debunks many costly myths that individuals and policy makers believe to be true, starting with the most widely popular argument.
"We have a myth that start-ups are a magic bullet for economic growth; and that new business equals job growth" Shane said. "But data shows that to be untrue. Older firms are more productive than new firms, so putting money into the typical new company is a worse use of resources than putting it into the typical older company. Only 45 percent of new firms last five years and just 30 percent last ten years. And companies less than two years old account for only one percent of employment in this country. "
Shane stated that many of these myths stem from an inaccurate portrayal of entrepreneurship.
"We want to believe that all entrepreneurship is a good thing," he says. "But, we over inflate the positives and talk only about a small group of extremely successful start-ups like Apple, Google and Federal Express, but ignore the much larger number that fail."
Another common misconception regarding entrepreneurship, Shane says, is why people start companies in the first place.
"Most people don't start new businesses to make money," he said. "They start them because they don't want to work for someone else."
Shane's research found that the most common source of start-up capital comes from the founder's savings; and beyond that, 65 percent of new business founders in the United States use some sort of personal debt to finance their business. So, those starting companies are investing large amounts of their own money into an area with a high rate for failure, with little chance for success, he reports.
Additionally, those running their own businesses work more and earn less than what they earned in their previous employment, according to Shane's research.
He said that many of these myths are furthered by policy makers who provide start up companies with transfer payments, loans, subsidies, exemptions and tax benefits. However, evidence shows that government intervention to encourage new business creates a disproportionately high number of new companies in competitive industries with high rates of failure.
Shane plans to challenge individuals interested in starting or financing a new company with information from The Illusions of Entrepreneurship. He also hopes the book serves to enlighten policy makers to think differently- and critically- about entrepreneurship.
"In general, we have a naïve view of entrepreneurship and starting businesses," he said. "More thinking needs to take place before going forward with starting businesses. As teachers, we can do 'myth busting' and provide information that doesn't reinforce inaccurate notions and ideas."
Want to see how much you know about the reality of entrepreneurship? Take the entrepreneurship quiz.
Shane has authored or edited 11 books, including Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures, which won the 2006 Golden Book Award for the best business book in Taiwan.
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