Blowing the whistle on the founding penalty

New research by Olenka Kacperczyk and Peter Younkin shows that ex-entrepreneurs often struggle to find ‘regular’ employment. Jeff Skinner explains how the ‘founding penalty’ works. The implications of bias against entrepreneurs are problematic for businesses and entrepreneurs alike. Businesses are missing out on a talent pool of highly motivated individuals, and aspiring entrepreneurs may find it more difficult to take a leap of faith.

It wasn’t so long ago that people tended either to be ‘lifers’, in the sense of staying in one field of employment – and even sometimes with one employer – for their entire working career or, on the other hand, lifelong business people who founded and ran their own business. And, if that failed, they started another one, spending their working lives as entrepreneurs and owners of businesses large, small and everything in between.

Today the boundaries are not so hard and fast: a ‘career’ as an entrepreneur is more available to more people than ever before, while secure, lifelong employment is much less widespread than it once was.

And, given the ever-increasing pressure on every kind of business to be more agile, entrepreneurial and capable of withstanding the threat of disruption, one would think that employers today – or the ones you’d like to work for – would place a high premium on the skills that a former entrepreneur could bring to their business. Surely initiative, drive, problem-solving capability, leadership skills and ability to cope with uncertainty would be a boon to any company?

Unfortunately, as an important piece of new research by Olenka Kacperczyk and Peter Younkin shows, this is not always the case, and former founders attempting to return to paid employment are less likely to be selected for interviews than those with a record of more ‘traditional’ paid employment.

Crucially, this negative effect is also gender-specific, but in a way that reverses the usual ‘gender penalty’ scenario: women are far less likely to face problems in this area than men. There is an apparent upside to this in that, for once, at least it is not women who are being ‘punished’ according to gender. But that upside is diminished in light of the fact that the reason for the lesser bias towards women is that recruiters don’t attribute ‘entrepreneurial’ characteristics to women in the first place.

Behind the bias

So, why the bias? It arises because employers generally seek three characteristics when recruiting: skills, commitment and attitude/fit.  Former entrepreneurs may well tick the skills box, but are ranked more poorly on the other two. Compounding this is the fact that skills tend to be obvious from looking at a candidate’s CV, whereas commitment and attitude or fit are less apparent, so recruiters look for other signals. The popular stereotype of an entrepreneur – autonomous, constantly seeking new opportunities, ambitious – does the applicant no good in most positions because recruiters are more likely to wonder whether they will ‘fit’, how long will they stay, whether they will do what they’re told, and so on.

The researchers tested their two hypotheses (that there is a bias and that it’s gender-specific) by submitting two fictional (but realistic) applications for real job vacancies to see who was invited for interview. The applicants are similar in every respect (college and degree, surname, zip code, etc) except one: one applicant has a founder background; the other does not. 

Using an extremely elegant research methodology, the researchers deployed many precautions to rule out other explanations of the results, including sending around 1,200 applications across 12 cities in the US and submitting the two different applications two days apart to avoid arousing suspicion. The researchers also chose the type of role being applied for carefully according to a number of criteria: roughly equal numbers of men and women, comparatively high mobility, and does not usually involve an up-front skills test (common in computing/engineering roles), eventually deciding on marketing/HR roles in medium/large enterprises. 

Other precautions included presenting a certain type of entrepreneur profile on the CV, distinguishing between founders of firms of a certain minimum size (at least 12 employees), as opposed to those who are self-employed or founding a company to offer professional services (a key distinction because employers don’t perceive ‘true’ entrepreneurs in the same way as they perceive self-employed individuals).

The research also controls for the listing of specific words in the job description, including whether attributes such as “entrepreneurial, “leadership, “autonomy” and “independence” are listed as desirable to see whether and how this affects the imputed bias. The results show unambiguously that the bias is dampened for roles where such attributes are invoked.

The results of the experiment are clear. Together, the two sets of analysis show that employers penalise prospective HR or marketing employees for having pursued entrepreneurship – and that the penalty is less pronounced for women than for men.

I don’t like your attitude

Building on their findings, the researchers conducted a second piece of work; a survey of recruitment marketing managers that assessed attitudes rather than actions. In the survey, each recruiter is shown a number of applicant CVs (founder and non-founder) and asked to rate the applicant according to several characteristics: likelihood to quit next job, team player, and easy to manage. In each case, ex-founders were perceived ‘worse’ than those with a pure employment history – and, again, females were penalised less.

Statistically, the results are worrying. Olenka Kacperczyk says: “We find baseline evidence that employers avoid ex-founders, such that pursuing entrepreneurship translates into a 35% reduction in the likelihood of receiving an interview. The survey experiment confirmed that the penalty is partially motivated by employers’ perception that ex-founders are less likely to fit and less willing or able to work at traditional firms.”

Compounding this finding, Kacperczyk says, is the fact that the baseline penalty is highly gendered: “Female founders are nearly twice as likely [13% vs. 7%] to receive a callback as their male counterparts. This gender discrepancy results from a persistent bias among employers … they do not perceive female ex-founders as exhibiting the same undesirable entrepreneurial traits as they saw in male ex-founders.”

The research findings matter for both businesses and entrepreneurs: businesses are often failing to tap a reservoir of rare talent and hard-earned skills that are potentially more useful to them now than ever; while, for founders, the penalty adds to the ‘cost’ of following an entrepreneurial career path. Not only do most ventures fail and entrepreneurs earn less than employees on average, the ‘recruitment bias’ adds further costs to the decision to found a business: if the venture fails, the founder will also find it more difficult to get a ‘regular’ job (one commensurate with their skills and ability) than someone with a ‘solid’ employment history. Entrepreneurs beware!

About the author: Jeff Skinner is Executive Director of the Institute of Innovation and Entrepreneurship at LBS. He teaches on several entrepreneurship courses at the School and leads many of the co-curricular activities supported by the Institute.

About the contributors:

Olenka Kacperczyk is Associate Professor of Strategy and Entrepreneurship at London Business School. 

Peter Younkin is Assistant Professor of Management at the Lundquist College of Business, University of Oregon.