The Entrepreneurial Spawning of Scientists and Engineers: Stars, Slugs, and the Small Firm Effect

Using data from a broad sample of US scientists and engineers, we examine the relationship between work experience in firms of different sizes and worker ability on decisions to enter entrepreneurship. We find that workers in small firms are far more likely than others to leave paid employment to found new ventures, and that prior experience in small firms predicts a number of positive performance outcomes in the early stages of entrepreneurship. Additionally, we show that entrepreneurs come disproportionately from the high and low end of the paid-employment ability distribution as reflected in their pay; and we find that small firms are disproportionately populated with such workers. Together our results suggest that heterogeneous preferences alone are not responsible for the relationship between firm size and spawning. Rather the labor market plays a role in sorting those for whom the pecuniary returns to entrepreneurship are likely to be highest into small firms, and it does the same for “misfits”, whose only work alternative may be self-employment. Moreover our results suggest that small firms not only employ individuals who are more likely to become entrepreneurs, they also make these workers better entrepreneurs, particularly those of high ability.