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How Bad Leadership Spurs Entrepreneurship

By on September 10, 2012


What do 70% of successful entrepreneurs have in common? They all incubated their business ideas while employed by someone else. Indeed, most people start their own companies — or go freelance — in order to stop working for others. Why? Because most managers are simply unbearable. Year after year, Gallup reports that most employees are unhappy at work, and that the number one reason for dissatisfaction is their boss.

But there is one upside to incompetent management: by failing to attend to their employees’ ideas, and continuing to demoralize their staff, bad leaders accidentally stimulate entrepreneurship. Indeed, if entrepreneurial employees (i.e., those who have the talent and drive to be inventive and enterprising) were happy at work, or at least felt that their ideas are being valued, they would contribute to innovation and growth in their employers’ organization, rather than setting up their own company. Therefore, bad leadership — or, if you prefer, incompetent management — is a major source of entrepreneurship. In fact, America owes much of its recent growth, technological innovation, and socioeconomic progress, to inept managers.

Consider the following facts:

  • Fresh start-ups create new jobs: A few innovative start-ups account for a large proportion of new jobs. Since the 1980s, America has replaced 50 million jobs with 100 million (more skilled, better paid, more useful) new jobs, and two-thirds of new American jobs are created by businesses that are less than five years old.
  • An entrepreneurial culture attracts talent: Half of the world’s skilled migrants go to U.S. In the past two decades, they created 25% of all American venture-backed companies. There are at least 500 start-ups with French founders in the San Francisco Bay area, and there are over 50,000 Germans in Silicon Valley, where salaries for software engineers are much higher than in Europe (or elsewhere). “Europe’s culture is deeply inhospitable to entrepreneurs,” as a recent article in The Economist pointed out, continuing, “Wanting to grow a start-up is as countercultural as piercings.” This is further evidence for the fact that incompetent leaders — in this case European politicians — unintentionally contribute to entrepreneurship… but elsewhere. European taxpayers have funded much of the brainpower that stimulated technological innovation and economic growth in the U.S.
  • Entrepreneurship opens the door to women: Unlike in corporate management, there is no glass ceiling in a company you start yourself, which is why female entrepreneurs are flourishing. In the U.S, their companies account for over $3 trillion of GDP (for the sake of comparison, that’s 40% of China’s entire GDP). Many of these businesses are led by women who would probably not have been considered for the top leadership position by their previous employers. For instance, Lisa Hufford founded Simplicity Consulting after 14 years as Sales Director at Microsoft; Crystal Culbertson founded Crystal Clear Technologies after quitting her job as logistics specialist for the Air Force; and Vicky Thompson founded the “Valuation Management Group” after 18 years at Fleet Finance (where she ascended to VP). These companies have grown a combined 8,000% over the past three years and have combined yearly revenues of $52 million. Surely their former employers regret letting them go?

Does this imply that we should hope for more incompetent leadership in the future? Not really. As Scott Shane documents in his excellent book, only 30% of start-ups live past 10 years; fewer than 10% grow, and just 3% grow substantially. This means most entrepreneurs are destined to fail, so there’s a high cost underlying successful enterprise. In other words, poor leadership is causing much more entrepreneurial failure than success — even if society still reaps the benefits of success. Besides, if managers learned to attract, identify, nurture, and retain entrepreneurial talent, they would promote growth in their own organization, with even more benefits for society (reducing the number of failed new enterprises). This is what John Donahue at eBay and Muhtar Kent at Coca Cola understood, but Mark Hurd at Hewlett Packard, and most European politicians, didn’t.

Not everyone should be an entrepreneur, and leaders can do much to harness their employees creative potential without forcing them to quit and create their own business. Likewise, many natural entrepreneurs will lack the necessary latent for leadership: if you cannot be managed, you cannot manage others either. This is why Mark Zuckerberg has hired Sheryl Sandberg, and why Larry Page and Serge Brin have Eric Schmidt.

Still, with 40% of Americans being self-employed at some point in their lives, it is crucial that we coach entrepreneurial skills even in those who are employed by others or did not ever plan to create their own business. The next few years will probably witness an even bigger transition from a business-to-business to a consumer-to-consumer economy: the more we teach people to create, market, and sell themselves, the more we shall prosper. Hoping for improved leadership is just wishful thinking.


Source: Harvard Business Review