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Wharton's
Ben Campbell Finds Little Financial Downside in Startup Jobs.
"I'd love to try that, but I can't afford the risk."
It's a line that every entrepreneur sometimes hears from family members and friends. Underpinning it is the notion that a lot of startups fail and, in turn, hurt the careers of their former employees.
Ben Campbell, an assistant professor of management at Wharton, says the conventional wisdom isn't true—or at least wasn't in the semiconductor industry in California during the 1990s. Sure, he says, plenty of startups went under, but that didn't handicap their former employees. In fact, working for a startup seemed to boost workers' careers no matter how their firms fared.
Campbell, in a study titled, "Is Working for a Startup Worth It?" combed through unemployment insurance records to examine the earnings of every engineer who worked in California's semiconductor industry from 1990 through 2002. He matched each engineer who went to a startup with one with similar prior earnings who stayed at an established company. He then compared their subsequent earnings.
His initial finding was no surprise: When engineers jumped to a startup, their earnings dipped. But these "charter employees," as he termed them, caught up fast. Within five quarters, their total earnings were, on average, higher than those for comparable folks who stayed with established companies. And after five years, they'd earned nearly $14,000 more, on average, than their big-company counterparts. Likewise, they also trumped comparable workers who took new jobs at other established firms.
Some who believe startup employees should earn more because they shoulder more risk might not see these findings as surprising. But interestingly Campbell discovered that the labor market didn't penalize employees who had the misfortune to get layed off by their startup employer. Indeed, these workers not only found new jobs, they earned enough to compensate for any lost earnings while they were unemployed.
Nearly a
third of employers in the California semiconductor industry did fail
during the period that Campbell studied. He says, "In
the quarter of firm death, employees at dying firms experience an earnings
dip of 21%, but workers
experience full recovery in the following period," he points out.
"
There are no significant differences in the effect of firm death on the
career profiles of workers in the charter sample relative to all other
workers, Campbell
says. "The downside risk just doesn't seem to be there."
Put another way, if engineers could tolerate occasional interruptions in employment—you might even call these unpaid sabbaticals—they had little to fear and much to gain in jumping to a startup.
Clearly, something odd is happening here. If former startup employees saw their earnings continue to rise, then, in essence, subsequent employers were rewarding them for failure (or at least not tarring them with the failures of the companies they worked for).
To help him interpret this result, Campbell, who earned his doctorate at the University of California at Berkeley, interviewed engineers. One finding jumped out. "At the established companies, these guys were just project engineers," he says. "But at the startups, they were maybe one of four founding employees and the vice president for engineering. If the company folded, they still had that line on their resumes. And that experience was valued by subsequent employers."
Campbell also suspects that, as vice presidents, these folks assumed duties and learned skills that they wouldn't have had as project managers. They probably didn't just meet budgets but also had to formulate them. And they likely participated in fund-raising, via meetings with potential investors, in ways that wouldn't have been necessary at a big firm.
Campbell's results also underscore a subtle distinction about the world of work: Skills matter, but opportunities do, too. And in California in the 1990s working for a startup was a great opportunity. "You could have been the best entrepreneur in the world," he explains. "But if you stayed at an established firm, you weren't going to be compensated for those rare skills. You had to have the skill and the opportunity to demonstrate them."
Consider
the comparison with, say, a jazz saxophonist or a ballerina.
To be a great performer, they need not just talent
but a stage.
In the California
semiconductor
industry in the '90s, startups gave entrepreneurial engineers
a stage.
Another surprise for Campbell was his discovery that initial
public offerings played very little role in startup engineers' subsequent
earnings. "I
expected there to be a huge effect from IPOs," he says.
He cautions that that result may be a quirk of the unemployment-insurance
data, which doesn't
capture all forms of noncash compensation, including some
stock options.
Taken together, Campbell's results lead him to conclude that "at least in California in this time period, there was really no penalty for failure."
He warns that that the results may not extend to other places and other times. California semiconductor startups in the '90s represented a holy trinity—a hot industry during a stock-market bubble in perhaps the most startup-friendly region in the country. His numbers, which stretch till 2002, capture a bit of the post-bubble downturn, but in the future he hopes to expand the analysis to include more of that period.
Likewise, he'll also examine other technology hotbeds to see if they yield similar results. California's business culture may tolerate failed ventures in a way that other places might not. "In a less dynamic startup region, I think there would be costs," he says. Someone trying to start a bank in North Carolina or a biotechnology company in New Jersey might see a drop in earnings if a venture failed.
Campbell also points out that his study shouldn't be taken as a recommendation for everyone to run off and join a startup. Some folks are just too risk-averse to accept any variability in earnings, and startup employees did see zigzags in their pay, even though, on average, they recovered and sprinted ahead.
Plus, in his interviews, Campbell found that the startup engineers tended to be the folks who could most tolerate risk. "They were mostly single and male, and they were all extremely confident about their own skills. We'd talk to them about startups failing and they'd say, ‘Yes, that happens, but it won't happen with mine.'"
Some entrepreneurial tendencies—like self-confidence—are universal.
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