November 30, 2009

In a recent working paper Chad Moutray, the Chief Economist of the Office of Advocacy of the U.S. Small Business Administration) analyzed the earnings of the class of 1993 ten years after they graduated.  He found something that I summarize in the table below and have started to show to all my students.

Percentage of People Self-Employed and Wage Employed in the Private Sector with Different Earnings Levels ten years after Graduation.

                                   Self-Employed        Wage Employed

Less than $20,000           15.9%                         5.1%
$20,000 to $99,000         62.1%                         81.1%
$100,000 or more            18.2%                         11.2%

I show this to my students for two reasons.  First, if you become an entrepreneur, you have a less than one-in-five chance of earning more than $100,000 per year ten years after graduation.  For all the students who insist that they will certainly make a lot of money by starting their own businesses, this is an eye opener.

Second, you are much more likely to be either poor or rich if you go into business for yourself.  So if you can’t stand the idea of having an uncertain income, you shouldn’t become an entrepreneur.

Perhaps this is intuitively obvious to anyone who runs his or her own business, but it is valuable information for many people who are thinking about whether they want to be entrepreneurs or not.

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About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool’s Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By; Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Technology Strategy for Managers and Entrepreneurs; and From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company.