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Entrepreneurs with leadership experience create more jobs in new ventures

In a deep recession, job creation can be the engine of economic recovery—with much of the onus on small businesses and new ventures that rise from the ashes of unemployment. But how do the experiences and skill sets of new entrepreneurs affect job creation?

According to a new study co-authored by Sonali Shah, an assistant professor of management at the University of Washington Foster School of Business, entrepreneurs with a breadth of business knowledge tend to create fewer jobs in the early years of a new venture, while entrepreneurs with leadership experience tend to create more jobs in the early stages.

In businesses that are more labor intensive (say, restaurants), both breadth of knowledge and leadership experience allow founders to operate their firms with fewer employees.

“The message is relatively simple,” Shah says. “The more you know, the more you can do yourself. This allows the small business owner to hire fewer people, which is especially useful in the early years. On the other hand, if you are more comfortable leading other people going into the venture, you’re going to be more comfortable hiring people, either as employees or contractors; you have the skills to manage those new hires and hopefully use them in a very effective manner.”

Economic impact

For the study Shah and co-authors John Dencker and Marc Gruber examined 436 early stage German start-ups founded by unemployed individuals. In particular, they analyzed the effects of the entrepreneurs’ past leadership experience and breadth of knowledge across three general areas: marketing and sales, IT management, and the market and industry in which their business was operating.

The findings shed light on a significant sector of the economy. New ventures are such an important generator of jobs in the United States that, according to a separate study, the average employment growth rate from 1980 to 2005 would have been negative if not for the jobs created by newly founded firms.

So as a matter of public policy, Shah believes the study suggests that an education system that instills leadership, a broad knowledge base and “soft skills” will serve a nation—and its citizens—well.

“Part of building a stronger economy and society should be a focus on getting people a broader breadth of skills and leadership training,” she says. “In the U.S. we tend to focus on technical skills training and less on broad managerial knowledge and the softer skills of leadership, collaboration and communication. But those are important skills both in a corporate setting and when founding a company on your own.”

A “rainy day” fund

For individuals, Shah advises accumulating a “rainy day” fund of skills and experiences while in school, at work and through community service.

“To build your own skill set, expose yourself to different aspects of the business you work for and try to engage in leading people,” she says. “When you start a company—whether a consulting practice or a restaurant or anything else—you don’t possess the resources available at a large corporation. You can’t hire somebody every time you don’t know an answer. You need to solve problems yourself, by drawing on your skills, your social network or, most likely, some combination of both. Do what you can to build your skills and knowledge base prior to venturing off on your own.”

“Individual and Opportunity Factors Influencing Job Creation in New Firms” was published in the December 2009 Academy of Management Journal. It is the work of John Dencker of the University of Illinois at Urbana-Champaign, Marc Gruber of the Ecole Polytechnique Fédérale de Lausanne, and Sonali K. Shah, of the University of Washington Foster School of Business.