Entrepreneurs, Hiring, and Investment in Human Capital

Recently, I have been generating some posts from the book, Personnel Economics In Practice.  In all the posts the issues that were explored were from the company perspective.  With the way this job market is, it’s worthwhile to explore personnel economics for entrepreneurs.

High unemployment will eventually cause creative people to start up their own businesses.  If they start to have a modicum of success, they will have to hire employees.  How they go about that task can make or break their business.  Most of the time entrepreneurs will staple together whatever scarce resources they can find to survive. But simply cobbling together what is there without a strategic thinking process can insure that there is a flaw to contend with down the line. If the flaw is bad enough, they might end up back on the unemployment line!

Entrepreneurs should go through the same “risky hire” analysis that a company goes through.  It’s not ironic that a multi employee company and a small start up should do similar analysis.  Virtually all economic concepts are at play in the same way in both big and tiny companies. The only difference is scale and the time it takes to respond to them.  Little start ups are generally more agile.

In the Risky Hire concept, the entrepreneur will get creative when it comes to pay. Cash is at a premium. It’s difficult to make, and difficult to raise. Most of the time, the employee will get some sort of equity for their efforts. At the early stage, equity is a cheaper resource than cash, it actually makes the employee assume a lot of the risk!

Entrepreneurs aren’t necessarily cut from the same mold.  There is no tried and true path that guarantees success. However, one can make a few generalizations. They generally have a broad education, and not a specialized one.  Entrepreneurs tend to be jack of all trades type people.  They need understanding of lots of different business concepts and how they interact. Initially, they might be an employee of one. No doubt you have heard someone say, “they are the cook, the waitress and the bottle washer.”! Once the company grows, they need to oversee everything-and manage all the growth. For this reason, an MBA is a good all purpose degree and often more valuable than highly specialized training.

Company founders tend to have a few other traits that make them good at starting up companies. One is that they have an ability to understand and tolerate risk. However, this point is sometimes magnified. It might actually be riskier to stay with a larger firm. The entrepreneur doesn’t have to worry about damaging existing brands, customers or their fellow employees. They can return to a more traditional job if the new venture fails.

One other dominating trait about entrepreneurs. They are optimists. They see an opportunity and they take it. If your worldview is consistently pessimistic, it’s hard to see brass rings when confronted by them. Even in these really uncertain, hard economic times, entrepreneurs will find something that they can exploit and drive a new business though. Their optimism is infectious, and they are fun to be around.

If you are an entrepreneur, should you invest in acquiring new skills? The answer is yes. The entrepreneur should invest in polishing their weakest skills. If an engineer has no financial skills, or business skills; it might pay for them to take classes, or at least seminars in these subjects. They might even go the whole nine yards and get an Executive MBA.