27 Jul 2011Working Paper Summaries

With a Little Help from My (Random) Friends: Success and Failure in Post-Business School Entrepreneurship

by Josh Lerner and Ulrike Malmendier

While starting a new company usually requires an independent spirit and self-sufficient nature, the decision to jump into entrepreneurship is often influenced by the acts of others. In this paper, Josh Lerner and Ulrike Malmendier explore how the entrepreneurial tendencies of peers affect not only one's decision to start a company, but whether that company will succeed. The researchers use data from a decade of first-year class sections at Harvard Business School. Key concepts include:

A higher share of students with a pre-MBA entrepreneurial background in any given section leads to lower rates of post-MBA entrepreneurship among students without an entrepreneurial background.
But this "discouragement effect" is narrowly focused: students in sections with more pre-MBA entrepreneurs are less likely to start unsuccessful ventures, but equally (if not more) likely to start successful ones.
Sections with few prior entrepreneurs have a considerably higher variance in their rates of unsuccessful post-MBA entrepreneurship.

Author Abstract

To what extent do peers affect our occupational choices? This question has been of particular interest in the context of entrepreneurship and policies to create a favorable environment for entry. Such influences, however, are hard to identify empirically. We exploit the assignment of students into business school sections that have varying numbers of classmates with prior entrepreneurial experience. We find that the presence of entrepreneurial peers strongly predicts subsequent entrepreneurship rates of students without an entrepreneurial background, but in a more complex way than the literature has previously suggested: A higher share of entrepreneurial peers leads to lower rather than higher subsequent rates of entrepreneurship. However, the decrease in entrepreneurship is entirely driven by a significant reduction in unsuccessful entrepreneurial ventures. The effect on the rate of successful post-MBA entrepreneurs, instead, is insignificantly positive. In addition, sections with few prior entrepreneurs have a considerably higher variance in their rates of unsuccessful entrepreneurs. The results are consistent with intra-section learning, where the close ties between section-mates lead to insights about the merits of business plans.