Paper: "The Burden of the Nondiversifiable Risk of Entrepreneurship"

"Our most important finding is that the reward to the entrepreneurs who provide the ideas and long hours of hard work in these startups is zero in almost three quarters of the outcomes, and small on average once idiosyncratic risk is taken into consideration.

Although the average ultimate cash reward to an entrepreneur in a company that succeeds in landing venture funding is $5.8 million, most of this expected value comes from the small probability of a great success. An individual with a coefficient of relative risk aversion of two and assets of $188,949 is indifferent between employment at a market salary and entrepreneurship. With lower risk aversion or higher initial assets, the entrepreneurial opportunity is worth more than alternative employment. We infer that entrepreneurs are drawn differentially from individuals with lower risk aversion and higher assets. Other types of people that may be attracted to entrepreneurship are those with preferences for that role over employment and those who exaggerate the likely payoffs of their own products.

Given the nature of the gamble revealed in Figure 2, entrepreneurs would benefit by selling some of the value that they would receive in the best outcome on the right, when they would be seriously rich, in exchange for more wealth in the most likely of zero exit value, on the left."

Hall, Robert E., and Susan E. Woodward. 2010. "The Burden of the Nondiversifiable Risk of Entrepreneurship." American Economic Review, 100(3): 1163-94. [pdf]