The entrepreneur’s dilemma
So, should you quit your job at a big company to start your own small company? The business press is full of examples of entrepreneurs that have done fabulously well from this, and Paul Graham had written several essays that explain starting a company as the opportunity to work incredibly hard for a few years to earn what you would earned over a whole career in a big company. Personally though, I suspected something different was at play. I read about it in the “Good capitalism, bad capitalism” which mentions:
[…] several reasons why radical innovations seem to emanate from entrepreneurs rather than large firms[…] For one thing, successful radical innovation, if undertaken by the entrepreneur, promises what might be call “mega-prizes” – hundreds of millions, if not billions, of dollars of wealth. Nothing comparably awaits the radical innovator in a large firm, who might get a special recognition award and a onetime bonus.
Beyond this, paradoxically, studies have found (for the United States at least) that the typical entrepreneur earns less monetary compensation than her employee counterpart. Why then do so many entrepreneurs willingly engage in what is inherently risky activity? Because the additional psychic rewards – being one’s own boss, pride in self-accomplishment, and so forth – make the entrepreneurial endeavor worthwhile even if the entrepreneur does not gain the mega-prize. This, in turn, explains why entrepreneurs have a comparative advantage relative to large companies in attempting to discover and commercialize breakthrough innovations. Because a not insignificant portion of the entrepreneur’s “income” from her activity is psychic, the entrepreneur is the low-cost provider of radical innovation. Often, therefore, it is more economical for the large firm to wait for entrepreneurs to develop the radical innovations and then buy them out.
Italics were in the original text. Folks, you have got to want to be an entrepreneur, not to be rich, to start your own company.