Entrepreneur—A Jockey or a Horse Owner?

Abstract

The business literature has long been concerned with understanding why people become entrepreneurs. This literature, however, has mixed together two important issues — founding a new business and being the right person to operate it. Up until recently, entrepreneurship scholars have largely believed that founders run their ventures personally. Yet it is not clear from either a theoretical or an empirical standpoint why this should be the case. Indeed, entrepreneurs are often criticized for having limited business expertise and placing personal motives ahead of financial returns. Whether founders are optimal managers for their firms strongly depends on their motives for operating the firm personally, i.e., whether their decision is driven by expected non-pecuniary benefits of management or by more strategic considerations. In our paper, we use fine-grained data on entrepreneurs in Denmark to examine what motivates them to operate their firms personally as opposed to hiring a manager. We find that while nonpecuniary motives play a role in the founders’ decision to operate their firms personally, opportunity cost of owner-management and relevant prior experience are equally important. Thus, entrepreneurs put significant emphasis on the characteristics that would improve firm performance and their overall wealth. Our findings are similar for entrepreneurs in high-technology and low-technology sectors as well as for founders who hire non-family and family managers. We also observe that when founders do not manage their firms personally, they typically work full-time at another firm or play a non-managing role in their own venture. In our subsequent analysis, we investigate how these two types of non-managing founders differ, providing further insights into their behavioral motives.