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.
