Getting Started January 23, 2008, 10:48AM EST

The Entrepreneurship Myth

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And it's most likely to be organized as a sole proprietorship and to have no employees besides the owner—is that correct?

That's right. And in fact we're getting close to half, very close to the median would even be home-based.

Why do you think the myth of entrepreneurship, the image that you're debunking, is so popular?

Part of it is we have a belief that entrepreneurship is good because it's associated with things that we like to believe about Americans: being independent, doing your own thing, going your own way. The other part of it is that paradoxically, there is one really, really good thing about entrepreneurship that people don't talk about, which is dominant and we have lots of evidence to support: People who run their own businesses have greater job satisfaction than people who don't. I think part of it is that we're trying to make sense of this paradox—that we really like it, but financially it isn't so great. So we create a myth that says because we like it and it makes us happy, it must also make financial sense, because otherwise there's a kind of conflict we can't resolve.

You do point to this data that people are so much happier working for themselves that they'd need to earn 2.5 times as much working for someone else to be as happy. If that's the case, then despite the personal financial risks they take on, is there anything wrong with that?

It makes a lot of sense if people say, "You know what? I'm going to earn less money running my own business, but I really don't like to work for other people, and that's why I'm doing it. It's making me happier and I really don't care." I think that's great. The part of it that becomes a problem is when people just won't admit the reality that it may make them happy and they're doing it because they want to be independent, [but] then they delude themselves into believing that also it's financially better.

One of the things you describe is the typical entrepreneur makes decisions that lower his chances for success. Why do you think that happens?

Part of it is that they're in a hurry and don't have time. So to give you a good example—a business plan. We have lots of evidence that all kinds of performance measures of startups are enhanced if you write a business plan (BusinessWeek.com, 1/7/08). But a lot of people, actually the majority of people don't write them. If business plans help and they don't do it, why don't they do it? I think one reason is if you're not going to raise money from another party, the sole purpose of the business plan is to help you run your business. But if you think, "But it'll take me a lot of time to write it and I could just be starting," if you're in a hurry, you just start, and it handicaps your business. So I think one part is the rush.

The second part is, unfortunately, ignorance about what does work. We don't have a lot of information out there about what it takes to make a business successful.

You write that "encouraging startups is lousy public policy," based on the data you've examined. What would you propose as policy alternatives?

The part that's lousy public policy is the idea that entrepreneurs, regardless of what kind, are good, and if we just have more of them, it's better. But what's a good public policy is if we picked certain kinds of startups, and we emphasized the increase in those. But the way the policies are set up, they don't encourage the specific high-potential startups. Most of the policies are: More entrepreneurs—just let's get volume. It's a very volume-oriented strategy. That's bad public policy.

Tozzi covers small business for BusinessWeek Online.