To be an entrepreneur or not to be… the answer lies in the middle

When evaluating entrepreneurship, people compare two options: committing full time or not doing it at all and remain in their salaried job. However, there is one more option: hybrid entrepreneurship. Hybrid entrepreneur is a person who holds a job for all his primary economic needs and is also working on his own idea.

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We at Sparklehood have based our whole thesis on the assumption that hybrid entrepreneurship provides for advantages and allows working professionals a smooth and de-risked transition from job to startup. ‍

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Advantages ‍

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Real Options theory and Mitigation of Uncertainty

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Hybrid entrepreneurship can be analysed by using the real options theory, a framework used for making investments in risky and uncertain contexts. The idea is that by making a small initial investment one can gather information and therefore reduce the uncertainty before committing to larger investments. 

Entrepreneurship is surely an extremely uncertain and risky context. Hybrid entrepreneurship allows one to launch a startup on a smaller scale with less sunk costs and downside risk. In other words, it is a way to test the entrepreneurial waters and understand the startup profitability and one’s fit within the entrepreneurial context. 

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Risk Aversion and Core Self-Evaluation

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People who enter entrepreneurship with full commitment are less risk averse and have higher Core Self-Evaluation (CSE): degree at which one would believe in his/her own capabilities and have the conviction of being able to influence results. Increase of one standard deviation in risk aversion links to a 20.21% decrease in the entry into full-time employment. On the same lines, a one standard deviation decrease in CSE is associated with a 11.2% reduction in the entry into full-time employment. 

However, high risk aversion and low CSE become insignificant in the case of hybrid entrepreneurship. There are no significant differences in the degree of risk aversion and CSE between hybrid entrepreneurs and full-time working professionals. This happens because hybrid entrepreneurship allows to test the likelihood of a startup with a small initial investment instead of jumping in the dark. Conclusion is that risk aversion and CSE do not influence whether an individual decides to launch a startup or not, but only how: full-time or hybrid.

Economic entrepreneurial performance

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Hybrid entrepreneurship allows you to validate an idea and wait for revenues before committing full-time. Rates of transitioning to self-employment are indeed positively influenced by positive financial performance. Uncertainty reduction by learning about entrepreneurial performance is undoubtedly a relevant benefit. Earning an additional Rs 80000 increases the likelihood of transitioning to self-employed by 18%. On the same lines, a one percent increase in Hybrid Intensity (ratio of Hybrid Self-Employed Income / Salary Income) leads to a likelihood increment by 5%. 

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What is interesting is that the choice of transition through hybrid entrepreneurship is linked to: 

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• Less entrepreneurial experience; individuals who had no prior startup experience and have less knowledge about the industry they intend to target with their startups, are more likely to prefer hybrid entrepreneurship. 
• Higher opportunity costs; individuals with a higher salary are more likely to prefer hybrid entrepreneurship because their opportunity cost is higher. Individuals who faced a negative salary income shock are more likely to commit straight away to entrepreneurship because they have less to lose. This seems to contradict the opinion that constrained individuals prefer hybrid entrepreneurship. 

Learning benefit 

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If entrepreneurs are willing to make decisions in a context of uncertainty and based on assumptions, hybrid entrepreneurs instead prefer to have a solid basis on which to take their decisions.

The information and learnings one gains with a smooth transition into entrepreneurship is extremely relevant and its importance is confirmed by the fact that there’s willingness to pay an option premium to understand the startup potential. Indeed, 25.8% of hybrid entrepreneurs present a lower income compared to full-time employment. 

Conclusion is that surely positive revenues coming from startups confirm one’s idea, but also it is worth sacrificing a little to be sure entrepreneurship is a profitable “unrisky” path.

Let the numbers speak

1. Hybrid entrepreneurs are 38+ times more likely to transition to self-employment over full-time employees. 
   

2. Rate of transition to full-time entrepreneurship is twelve times higher for hybrid entrepreneurs than for those holding a salaried job only (8.5% against 0.7%). 
   

3. Hybrid entrepreneurs are more likely to transition to full-time entrepreneurship than wage work only (36.6%). 54.9% persist in hybrid entrepreneurship. This means that hybrid entrepreneurship is more often an intermediate stage into full-time entrepreneurship than a dead end.
   

4. Individuals who enter entrepreneurship in a staged manner have higher chances of survival compared to those who quit their jobs and take a step in the dark. Indeed, there is a 33.3% decrease in the hazard of exit from self-employment associated with staged entry. This is surely in contradiction with the commonly held opinion that an entrepreneur must commit solely on his/her startup to become successful.

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Hybrid entrepreneurship is usually left in a corner. The stories which win are usually the ones of people dropping out of college or their well paid job to build success on their own. However, the advantages of a staged entry are undeniable and there are many successful entrepreneurs who have walked that path. 

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It is beneficial to take minor steps to validate your idea before deciding to invest more in it. Jumping two-feet into entrepreneurship comes with greater uncertainty, but this uncertainty can be moderated thanks to all the learning and information gathered during hybrid entrepreneurship which lead to higher survival chances. 

References

Raffie J. and Feng J.; 2014; SHOULD I QUIT MY DAY JOB?; A HYBRID PATH TO ENTREPRENEURSHIP. Academy of Management Journal, Vol. 57, No. 4, 936–963.

Folta, T. B., Delmar, F., & Wennberg, K. 2010. Hybrid entrepreneurship. Management Science, 56: 253–269