RICH versus KING

Old studiesGrowth in economyPeople to produce goods and services

Opportunity to earn profits

Push --> Helps

Thus, that the entrepreneur aims at maximizing his profits is one of the most fundamental assumptions of economic theory (Scitovszky).

However Recent Studies

Claim that entrepreneurs have usually lower initial earnings and lower earnings growth than could be earned in paid employment.

Therefore, why people pursue entrepreneurial ventures?

Two factors the CONTROL MOTIVE and the PROFIT MOTIVE.

This study argues that there is a tension between these motivations.

WHY? Because when entrepreneurs have to do strategic choices, it affects these two factors.

If an entrepreneur wants to build a valuable equity stakes, he will need to attract resources to the organization. However, the resource providers will demand a degree of control as a condition of providing those resources. Therefore he will lose a part of control.

Many entrepreneurs face a choice between financial gains and decision-making control.

Entrepreneurs who make choices consistent with a control motive should be more likely to become King.

While entrepreneurs who make choices consistent with a profit motive should be more likely to become Rich.

Entrepreneurs will face a trade off between these two outcomes, Rich versus King.

What will you do if it was you?

Main Results

After conducting a test on a unique dataset of 460 private ventures in the technology industry, here are the main results.

Entrepreneurs with strong profit motives should be willing to give up both equity and board control to attract the best investors. Rich motivation entrepreneurs will give up control of the company to attract the best resources.Why? Because they rather maximize the chances that they will achieve their major goal of financial gains.

Entrepreneurs with strong control motives would make different choices.They would rather keep control and choose less prestigious and lower-value investors who will take smaller equity stakes and will be less demanding about board control.Such decisions will help entrepreneurs maximize their chances of becoming King even if it means to fail to grow a more valuable company, and therefore ending up with less valuable equity stake.

What about entrepreneurs driven by both major motives? Control + Profit

These are the entrepreneurs that face a dilemma in their strategic choices.They want to achieve the entrepreneurial ideal of being both:Rich + King = Rich and Regal

The results suggest that most entrepreneurs have to sacrifice one of their motives at the end. However, those who succeed at being Rich and Regal have been more likely to have gained human, social and economic capital prior to founding.By gaining such capital before starting their ventures they may not have to give up as much equity and control to attract co-founders, hires and investors.