What the literature says about the earnings of entrepreneurs

This piece is part of our series on high impact entrepreneurship. Sign up to our newsletter and we’ll email you with the rest of the series.

Summary

  • Until recently, academics lumped ‘entrepreneurs’ together with all the ‘self-employed’. A new paper, however, split the self-employed into those who owned incorporated businesses and those who don’t. (Though note that the incorporated self-employed are still very different from startup founders.)
  • Self-employed people who own incorporated businesses earn about 50% more than people with regular jobs.
  • Most of this is due to them being more educated and working harder. However, even if you correct for these factors, it seems like shifting into owning an incorporated business boosts income by about 18%.
  • The unincorporated self-employed (mostly running things like hairdressers, restaurants, corner shops etc.) earn less than salaried workers on average.
  • Once you try to compare like-for-like workers, you find that when people switch into unincorporated self-employment, 50% earn less than they would as a salaried worker (but gain more freedom), and 30% earn more. The overall average is about the same.

Introduction

It’s widely believed that entrepreneurs earn more than salaried workers. However, until recently the research did not seem to back this up. In fact, the findings of several studies in 1989 presented a puzzle: entrepreneurs appeared to earn less than their salaried counterparts.

In his 2013 book The Founder’s Dilemmas,

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Is nursing or headhunting the best career for you?

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Read our full review of nursing.
Read our full review of executive search.

 
One of the most frequent criticisms of our career recommender is that it usually recommends highly competitive options that are beyond the reach of most people. Furthermore, it disproportionately recommends careers for people with strong mathematical skills.

To begin to address this we have written two shallow career reviews of options that are both less competitive and less quantitative – nursing and executive search (also known as headhunting). Both are primarily ‘earning to give‘ careers.

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What were the bottom lines?

Nursing:

  • is quite well paid in some countries, with a low risk of unemployment
  • provides a launching pad for a career in medical management
  • is satisfying work for most nurses, with flexibility around hours, though nurse ‘burn out’ at unusually high rates
  • offers the opportunity to study advanced nursing degrees which are even better paid.

On the other hand,

  • we expect more nurses in the developed world will improve health outcomes only a small amount
  • we are cautious about recommending a nursing degree to high-school leavers because it won’t be much use to them if they decide not to become nurses –

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Doing good through for-profits: Wave and financial tech

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Wave is one of the most high potential social impact for-profit startups we’re aware of, and it was co-founded by someone in our effective altruism community – Lincoln Quirk. Wave allows immigrants to send money from North America to relatives in Kenya, Uganda, Tanzania and Ethiopia with much lower fees than if they used Western Union or MoneyGram. (Though Wave existing is nothing to do with 80,000 Hours, someone we recently coached chose to work for Wave and help them expand into the UK.)

Why is Wave such an important company? Previously, if immigrants wanted to send remittances, they had to use Western Union or MoneyGram. Both the sender and receiver would have to go to a physical outlet to make the transfer, and worst of all, the sender would have to pay 10% in transfer costs! Lincoln Quirk and his cofounder Drew Durbin have built software that allows instant transfers from a mobile phone in the US or Canada to a mobile phone in Eastern Africa or Ethiopia – and they only charge 3%, a saving of 7%.

For each dollar of revenue that they make, they are saving $2.33 for someone in the world’s poorest countries. Assuming a 20% profit margin, the figure is $12 in savings for each $1 of profit.

The potential positive impact of this idea is huge.

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We can learn a lot from Tara, who left pharmacy to work in effective altruism

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Tara saved lives working as a pharmacist in Bhutan – no really we checked, and she totally did – but she nevertheless left to try to find something better.

This is part of our series of profiles of people who changed their career in a major way in order to have more impact because of their exposure to 80,000 Hours.

Today Tara Mac Aulay is the head of operations in the Centre for Effective Altruism. But just two years ago she was working as a pharmacist. How and why did she make this transition? Her career path is sufficiently fascinating it’s worth telling the story form the start.

Tara was extremely conscientious and hard-working from a very young age. As a result she was able to finish high school and start studying at university at the young age of 16, rather than the usual 18 or 19. She managed to do this while at the same time i) redesigning the staff and inventory management for an Australian restaurant chain, then, because this saved them so much money, being promoted to a more senior role to ii) travel around the country to make major changes to failing stores to save them from closure. As a teenager! Needless to say, this entrepreneurialism and ambition allowed her to develop a wide range of professional skills at a young age.

At the age of 15 she applied to study pharmacy,

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Plan change story: interview with Dillon Bowen, founder of Effective Altruism group at Tufts University

I recently interviewed Dillon Bowen, who runs the EA student group at Tufts University, about how his career plans changed as a result of interacting with 80,000 Hours. Dillon’s original plan was to do a Philosophy PhD and then go into philosophy academia. After going to a talk at Tufts by our co-founder Will MacAskill and receiving career coaching from 80,000 Hours, he started taking classes in economics, now intends to do an Economics PhD instead.

More details of the key points from the interview are below.

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10 steps to a job in politics

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Sacia B and Hugh T speak to Maria A while campaigning for the Greens in Canada.

I recently interviewed 4 people who work in government, the civil service, and political parties in the UK. Here is a synthesis of the steps they consider most useful for starting a career in politics.

Net-work to get-work. Go to as many political and think tank events as you can. Talk to people. Ask advice. Make friends.

Copy your heroes. Read biographies of people whose careers/impact you’d like to emulate. Copy what they did.

Be there. Physically spend time in the places you’d like to end up. That means visiting Parliament (you can sit and watch the Commons and Lords, and attend select committees). Have a drink at the Red Lion pub, where MPs and researchers hang out. Attend the annual Party Conference of your Party.

Enter the meme-space of the political class. Listen to the Radio 4 Today Programme every morning. (Have a break at weekends). How would you answer the interviewer’s questions? What questions would you ask? Watch Newsnight in the evening.

Apply for the Civil Service Fast Stream. It’s an amazing, underrated and potentially high-impact career. The assessment process in itself is good practice, and you’ll meet some cool people if you get through to the assessment center. If you don’t get in first time, keep trying.

Organise a meeting with your local MP.

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Podcast with Ben West, who expects to donate tens of millions for charity through tech entrepreneurship

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I recently interviewed Ben West (second to left), the founder of Health eFilings. After reading 80,000 Hours’ website, Ben entered tech entrepreneurship – from software engineering – in order to ‘earn to give’. Amazingly, Ben pledged to donate any money he made above the minimum wage. His company helps American physicians file paperwork with the US government, and collect ‘performance based pay’, much more easily. Several other 80,000 Hours alumni have ended up working in his company. You can read a summary of the key points from the interview below.

Summary of the interview

  • Ben West was influenced by Peter Singer’s work when he was young to start donating his income. Four years ago he was a software engineer donating to New Harvest, a meat substitute organisation.
  • He spent almost a decade at a large healthcare IT company, which helped to prepare him for what he’s doing now. He doesn’t think he could have successfully started this company without having experience in the health IT sector first.
  • He learned about 80,000 Hours through a link on the blog Overcoming Bias. Reading our work on entrepreneurship made him willing to consider starting his own business despite the fact that he’s risk averse by nature. He then spoke with some other well-informed people, including Carl Shulman (who volunteered for 80,000 Hours in the early days), who gave him more information about what the path involved.

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Plan change story: from neuroscience academia to cost-effectiveness research

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Hauke did a PhD in Neuroscience and was planning to go into academia. But after reading our research, he changed his plans and applied to jobs in German politics, consulting, tech-startups and our parent organisation, the Centre for Effective Altruism. He’s now Director of Research at Giving What We Can, where he researches which charities most effectively alleviate extreme poverty.

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Lehua closed down her fundraising startup after reading our blog: plan change story

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Learning about ‘counterfactual analysis’ threw some puts on sunglasses cold water on Lehua’s startup idea.

Lehua Gray’s story is an interesting ‘significant plan change’ because she increased her social impact simply by realising what she was doing was not accomplishing anything when the true counterfactual was taken into account.

Lehua is an entrepreneur in Texas who studied environmental sciences but afterwards taught herself coding. In late 2014, along with two co-founders she had just met at the eBay Hackathon, she founded a company that offered charities an innovative fundraising platform and took a cut of the money raised. Her role in the startup was a combination of coding, UX and sales.

The team’s hope was to make the viral nature of the ‘ice-bucket challenge’ replicable. In their platform, someone would donate money to a charity, but it would only actually be delivered if, say, 3 friends who they nominated matched their donation. They might also be offered the option to do a public challenge on social media that would spread the fundraiser instead of donating the full amount, as in the ‘ice-bucket challenge’.

Over a period of 9 months they had built this platform and were improving it while some charities tested it out.

However, in the first half of 2015 Lehua started following me on Facebook and so started regularly encountering and reading new 80,000 Hours’ blog posts about how to have more social impact.

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One of the most exciting new effective altruist organisations: An interview with David Goldberg of the Founders Pledge

It’s my pleasure to introduce David Goldberg to those who in the effective altruism community who don’t yet know him. He’s behind the Founders Pledge, which in just 8 months has raised $64 million in legally binding pledges of equity, is growing fast, and has got some very exciting (but currently confidential) plans in the works. I met him when I was representing 80,000 Hours at the Founders Forum conference earlier this year and introduced him in more depth to the idea of effective altruism, which he’s now built into the core of the Founders Pledge’s mission.

Tell us about your background

I did my undergraduate work at UCLA in Political Science and Public Policy and then continued with postgraduate study at the University of Cambridge focusing on International Relations. My plan was to get a PhD and then stay in academics and shape International Security policy. However a year in, I realised that the practical impact of my work would be marginal at best, so I finished with a Master’s degree and began to look for opportunities that would actually have a discernible effect on the world. I got involved with Founders Forum For Good — the precursor to what I do now with the Founders Pledge — where I focused on helping social entrepreneurs build and scale businesses. Before all that, I spent a couple years in finance in the US, started and sold a business in Europe, and ran a chain of Segway dealerships in California.

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Take the growth approach to evaluating startup non-profits, not the marginal approach

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In its first 2 years, Google made no revenue. Did this indicate it was a bad idea to invest or work there?

We spent the summer in Y Combinator, and one of the main things we learned about is how Y Combinator identifies the best startups. What we learned made me worry that many in the effective altruism community are taking the wrong approach to evaluating startup non-profits.

In summary, I’ll argue:

  1. There’s two broad approaches to assessing projects – the marginal cost-effectiveness approach and the growth approach.
  2. The community today often wrongly applies the marginal approach to fast growing startups.
  3. This means we’re supporting the wrong projects and not investing enough in growth.

At the end I’ll give some guidelines on how to use the growth approach to evaluate non-profits.

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Why and how to found a (GiveWell) non-profit

We’ve argued against non-profit jobs as an early career move, because many have little impact and you often don’t get good career progression.

However, there’s a certain type of non-profit opportunity that we think is very exciting: start a non-profit focused on implementing an evidence-backed intervention in international development i.e. try to make the next Against Malaria Foundation.

Why?

  • There’s lots of evidence-backed interventions that don’t have a well-run, transparent organisation implementing them.
  • Scaling up many of these interventions can be expected to have a big impact.
  • There’s a huge pool of funding for non-profits going after these opportunities, most notably from GiveWell, but also foundations like Gates and CIFF, as well as government aid agencies. These groups would like to fund more non-profits, but can’t find enough that meet their criteria.

We’ve talked about this opportunity for years – see our exploratory career profile on it – and it has become even more pressing recently. The money flowing through GiveWell is growing rapidly, but the pipeline of non-profits isn’t.

GiveWell recently made a post about exactly the sorts of non-profits they’d like to fund:

  1. Charities that implement GiveWell’s priority programs: vitamin A supplementation, immunizations, conditional cash transfers, micronutrient fortification, or even bednets and deworming (since our top charities that focus on the latter two have limited room for more funding).

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Startup employees don’t earn more

Image by Sebastiaan ter Burg. License: CC-BY-SA 2.0

Since the average startup founder who makes it to Series A earns more than a large company employee, many believe that early-stage startup employees also earn more (albeit less than founders). Dustin Moskovitz has even claimed that startup early employees have better earnings prospects than founders.

We’ve looked at the data, and this does not seem to be true on average. There are strong reasons why people might want to work at a startup (e.g. career capital), and it’s true the employees of the most successful startups will earn more; but someone deciding between working at a startup vs. a bigger company should rarely be making the decision based on income. On average, startup early employees earn at most only a little more than developers at larger companies.

Three estimates of how much startup early employees earn, including both equity and salary

According to AngelList, early-stage backend developers, for example, generally get about $110,000 in salary and .7% equity (salary data from Riviera is similar).

While the startup salary data is fairly clear, it’s hard to know how to value the equity portion of their compensation. Below are three different methods for doing so, which all show that developers at early-stage startups at most earn only a little more than they would at a large tech company.

1) Using average exit values

Let’s assume the 0.7% equity stake will eventually get diluted down to .35% at time of exit (a typical amount of dilution from Series A to exit).

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The return to coding bootcamps may not remain so high forever

We have been positive about learning to code as a way to gain useful skills for earning to give or doing directly valuable work, and promoted software engineering as a career path.

We are not the only ones who have noticed that this is a pretty great opportunity. From the LinkedIn blog:

Technical talent is in high demand. As of publishing this post, a LinkedIn job search for “Software Engineers” in the US reveals more than 100,000 open jobs. Adding a couple more tech-related roles (“User Designer,” “Data Scientist”) increases the total to more than 200,000 job openings. Job seekers looking to meet job requirements can enroll in a Master’s degree program, but that comes with a 2-year opportunity cost. Now, a shorter path is emerging: fully immersive coding bootcamps.

Coding bootcamps typically last 6-12 weeks and require participants to show up to a class in person. Bootcamps are a relatively new model, but they’re a growing trend that could help close the skills gap. Tapping into the Economic Graph, we compiled aggregated data on over 150 bootcamp programs and more than 25,000 LinkedIn members who have indicated they are attending or have attended bootcamps to identify emerging trends.

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Are too many people going into biomedical research – or too few?

Are too many people going into biomedical research or too few? As we explore in our new review of the career there are probably too many people entering the field. Biomedical research is a very promising way to make the world a better place if you have a high chance of being a top researcher, but for most people it’s a very tough road and entering could be a costly mistake. In the rest of the post, we’ll explain why and help you figure out whether it might be for you.

Biomedical research is a good path—if you’re a good fit.

We sometimes encounter people who might be a good fit for biomedical research, but who are skeptical about its potential impact. We think this might be misguided because:

  1. There are exciting areas of research that could offer enormous upside, such as anti-aging research, neural implants, gene therapy and synthetic biology.
  2. Potentially very high returns to research with comparatively low costs. According to one estimate, the prevention and treatment of cardiovascular disease in the US in the 1970’s and 1980’s alone had $31 trillion of associated gains. This is on the order of 60 times as large as all spending on medical research over the period. Another analysis estimates that a 1% reduction in cancer mortality in the US would be worth $500 billion (in comparison,

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Will effective altruism destroy the arts? No.

158300A recent article on the Washington Post expressed concern that the growth of effective altruism could seriously reduce funding for the arts. It even mentions that the Bonfils-Stanton Foundation recently decided to focus 100% on funding the arts and culture, in part because “philanthropy, directly or indirectly influenced by the effective altruist approach, is increasingly focused on problems perceived as more pressing”.

This was astonishing to me.

Here’s why effective altruism is not going to destroy the arts.

1) Only a couple of percent of American philanthropy is influenced by effective altruism, and it’s not taking funding from the arts.

Explicitly “effective altruist” giving is well under $100m per year, only 0.03% of the total Americans give to charity each year.

If we look more broadly to giving that has an effective altruist style, even if it doesn’t explicitly use the label, the Gates Foundation is the largest proponent. But the Gates Foundation spends about $4bn per year, only 1% of the total Americans give to charity each year.

It seems hard to claim that more than a couple of percent of American philanthropy is even remotely influenced by effective altruism. One study found that only 3% of American donors give based on the relative performance of the nonprofits they donate to. Only 4% of total American giving even goes to international causes,

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What do leaders of effective non-profits say about working in non-profits?

Rob Mather – founder and CEO of GiveWell’s top rated charity, Against Malaria Foundation. Photo credit:
Andrew Testa.

I reached out to leaders at GiveDirectly, Against Malaria Foundation, Deworm the World Initiative (part of Evidence Action), Schistosomiasis Control Initiative and Development Media International to ask for their views. Here are their responses.

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