Entrepreneurship: a clarification

Several people have criticized my claim that access to capital is a key determinant of entrepreneurial success by pointing out that many people who inherit businesses make a pig's ear of them. For example, The Entrepreneur says:

Access to capital does not correlate very highly with entrepreneurial outcomes. That is, more money at start-up does not predict more entrepreneurial success.

I fear we're talking at cross-purposes here. We can both be right. To see how, let's build a Bayesian box; the numbers here are purely to illustrate this  - no more.  Take 100 people. Say 50 have access to capital and 50 not. And let's say 10 of the 100 become successful entrepreneurs; the other 90 either never start businesses or fail. And let's say that 8 of these 10 had access to capital and two others didn't. We then have this box.
Now, the way I've built the table, my claim stands. Having access to capital greatly increases your chances of becoming a successful entrepreneur; 8 in 50 vs 2 in 50. But the Entrepreneur is also right. Even with access to capital, only a small fraction of people - 8 in 50 - become successful entrepreneurs.
Now, people who look for personality-based explanations of what makes an entrepreneur look only at the first row. My concern, though, is about the bottom left box. How many potentially good entrepreneurs  are there among this 48 who were deprived of their chance to succeed by lack of access to capital?
If you want to assuage my concern, you should argue that access to capital is no longer a problem - that the numbers in the box are wrong. This could be either because businesses have become less capital-intensive, or because capital is plentiful; Luigi Zingales discusses these possibilities here and here (pdf), for example. Pointing to people who inherited money and falied won't do.

Comments

[John East]

I heard on the radio a couple of weeks ago (sorry, no link) that the failure rate of second generation family businesses is something like 60%, rising to 80%+ in the third generation.
Whether this significantly excedes failure rates of business sold off as going concerns I haven't a clue, but the figures suggest that if one hasn't demonstrated entrepreneurial flare by starting up a business from scratch, on inheriting a going concern the wisest course of action might be to sell up and go and lie on a beach somewhere.

[reason]

John East,
it seems inheritable entrepeneurial spirit and inheritable wisdom don't necessarily go together.
(i.e. You may be right, but don't expect wisdom to be greater amongst hiers as it is anywhere else in the population.)

[ad]

What is the failure rate of first generation family businesses? Over 50%, if memory serves.

[Alex]

The claims aren't mutually exclusive, anyway.

There's no reason to think that inheriting a family business is anything like an optimal allocation of capital; in fact you'd struggle to find a process less likely to allocate capital to people with the skills (and interest) to manage it successfully.

The reason for this is of course that capital is only partially fungible (import Dsquared, RobertVienneau*); if you inherit a business, as opposed to *money*, the capital is already pre-allocated to some particular task. And there is no reason whatsoever to think that your picking the right parents implies you'll be any use running Alderman Progress & Sons VirtuaWare Ltd, or that you have any desire to.

And anyway, if you've inherited a business, what you need is not entrepreneurship. Wrong problem.

[BGC]

Most businesses fail - see Why Most Tings Fail by Paul Ormerod http://www.paulormerod.com/.

This is Creative Destruction, is intrinsic to modern economies, and is a good thing (on average and in the long term).

It is what make the economy a cognitive process more powerful than any individual understanding. In this respect (and in others) entrepreneurship is formally equivalent to biological natural selection.

[QuestionThat]

Fisher's 2x2 matrix p-value is 0.09165.