Happy or rich? The entrepreneurship "myths"...

[Nords]

The Entrepreneurship Myth

I'm looking forward to reading this one.

At the individual level, the core fact here is the typical, median, right-smack-in-the-middle entrepreneur is a failure. The cost is everything associated with that. So if you start a business and the business dies, you could have been working for somebody else. You could have been making a salary. You could have had the stability—you wouldn't have had that kind of stress that comes from the up and down of running that business.

So there's the personal costs. From an individual level, the myth is that somehow if you manage to hit the average or hit the median, you're going to be fine. The reality is that the distribution is so skewed you have to hit the top for it to matter, and in fact, you have to hit the top 10% to have income as an entrepreneur better than what you would have gotten working for other people.

Part of it is we have a belief that entrepreneurship is good because it's associated with things that we like to believe about Americans: being independent, doing your own thing, going your own way. The other part of it is that paradoxically, there is one really, really good thing about entrepreneurship that people don't talk about, which is dominant and we have lots of evidence to support: People who run their own businesses have greater job satisfaction than people who don't.

I think part of it is that we're trying to make sense of this paradox—that we really like it, but financially it isn't so great. So we create a myth that says because we like it and it makes us happy, it must also make financial sense, because otherwise there's a kind of conflict we can't resolve.

 

[W2R]

Absolutely.

That is why I think it's really urgent to get all one's ducks in a row before starting a small business, including having a huge cushion so that you don't expect to make a profit at all for several years.

I think that most of those who are in the bottom 90% and don't do as well with a small business as they would have if working for someone else, believed in the myth. They should have taken the possibility of failure a lot more seriously!

Once upon a time (back in the mid-1980's) I had a small electronic instrumentation design business that I started. Actually I was selling my senior EE project, but I set it up as a small business with all the paperwork. I guess I was one of the few who made a lot of money (probably an order of magnitude more than I would have if working for someone else), but the business was a failure.

Why was it a failure? Because I found out that I HATED running a small business. I loved doing design, but that part was essentially already done before I even started the business. Building the instruments was not as challenging, but was OK. However, there was a lot of paperwork and record-keeping and taxes and that sort of stuff, that I absolutely detested. You might as well have been pulling out my fingernails with plyers. Even worse, I found out that I am somebody who wants to do everything personally. Since I didn't feel comfortable getting an employee and delegating it, I closed the business after a year (after filling the outstanding orders, I refused to take any more).

The point of that little story is that money is not the only thing that can cause a small business to fail, and that should be considered before trying the entrepreneurial experience. Think about your personality and if you are cut out for it.

 

[bright eyed]

Gosh, that article will put the kabosh on Donny and all his big ideas on cnbc...

 

[Sandy]

I see small business pop up all the time and wonder why the owner ever thought they could make a living in that business in that location. I am not surprised when I realize they are no longer there in 6 months.

 

[CCdaCE]

Absolutely.

That is why I think it's really urgent to get all one's ducks in a row before starting a small business, including having a huge cushion so that you don't expect to make a profit at all for several years.

I think that most of those who are in the bottom 90% and don't do as well with a small business as they would have if working for someone else, believed in the myth. They should have taken the possibility of failure a lot more seriously!

Once upon a time (back in the mid-1980's) I had a small electronic instrumentation design business that I started. Actually I was selling my senior EE project, but I set it up as a small business with all the paperwork. I guess I was one of the few who made a lot of money (probably an order of magnitude more than I would have if working for someone else), but the business was a failure.

Why was it a failure? Because I found out that I HATED running a small business. I loved doing design, but that part was essentially already done before I even started the business. Building the instruments was not as challenging, but was OK. However, there was a lot of paperwork and record-keeping and taxes and that sort of stuff, that I absolutely detested. You might as well have been pulling out my fingernails with plyers. Even worse, I found out that I am somebody who wants to do everything personally. Since I didn't feel comfortable getting an employee and delegating it, I closed the business after a year (after filling the outstanding orders, I refused to take any more).

The point of that little story is that money is not the only thing that can cause a small business to fail, and that should be considered before trying the entrepreneurial experience. Think about your personality and if you are cut out for it.

Jeez, why didn't you sell it then? Might've made some good coin. I'm assuming it'd be tough to see someone else run with your idea?

-CC

 

[W2R]

Jeez, why didn't you sell it then? Might've made some good coin. I'm assuming it'd be tough to see someone else run with your idea?

-CC

Right! I'm too much of a control freak. It's weird to say that, because I don't think of myself that way. But when it came right down to it, that seemed to be the way things shook out.

Besides, nobody else would have done it right and I would have ended up being embarrassed to even think about it. At least this way, it's a good memory. It never really got out of the "kitchen table phase" either, so anyone taking it over would have probably wanted to rent someplace and buy equipment and so on, and would have run it into the ground.

 

[twaddle]

I am amazed by the people who open businesses like small restaurants. They are capital intensive, they don't scale, margins are low, you work your butt off, and your earnings are probably lower than the salary you could make elsewhere.

But they seem pretty happy. No boss, and they are an integral part of the community.

And then there are the guys like me who wanted low overhead, scalability, and then sold for a crazy multiple. Happy and rich while working, but even happier and richer afterwards.

 

[CybrMike]

In my opinion you are much more likely to hit it big working as an entrepreneur than you ever will climbing the corporate ladder.

Sure, you may just putz along with your little business, but at least you have some control over your income.

Entrepreneur for life here.

 

[terminator]

At the individual level, the core fact here is the typical, median, right-smack-in-the-middle entrepreneur is a failure. The cost is everything associated with that. So if you start a business and the business dies, you could have been working for somebody else. You could have been making a salary. You could have had the stability—you wouldn't have had that kind of stress that comes from the up and down of running that business.

The reality is that the distribution is so skewed you have to hit the top for it to matter, and in fact, you have to hit the top 10% to have income as an entrepreneur better than what you would have gotten working for other people.

That's what we want the proletariats to think . . .

Seriously, most people I've seen fail because they aren't well-rounded enough or don't have sufficient capital. You need a wide skill set to succeed as an entrepreneur -- you can't just be a good widgeter. You need to be able to run an office, hire good people, be a good supervisor, sell yourself or your product, etc. Not to mention you need capital and good business sense. Plenty of people are good at what they do/make and have some other skill(s) but just don't have the whole package. To some extent, jack-of-all-trades, master of none seems to apply as I can't be an expert at anything since I have to tend to so many different things.

 

[twaddle]

Eh, it depends on your goals in life. Some of the happiest people I know are starving artists. Well, they're even happier when they inherit grandma's estate, of course, but it's hard to beat the satisfaction that comes from positive public feedback on your creative works.

If you want to be rich, try to get hired as the CEO (or just about any high-level exec) of a public company. Beats the hell out of starting your own company. It's the next best thing to somebody handing you a money-printing machine.

 

[clifp]

My rule on how to make a small fortune in the (restaurant, computer, game, travel agent, Multi level marketing...) business is very simple;

Start with a large fortune.

 

[kumquat]

In my opinion you are much more likely to hit it big working as an entrepreneur than you ever will climbing the corporate ladder.

Totally depends on which corporate ladder you try to climb. I only got to rung 3 (3rd highest) but my ESOP let me RE a lot faster than some CEO's. I have nothing but respect for people who do their DD and build a successful business.

Depends a bit on the business area. If you're a plumber, "Joe's Plumbing" will be a more viable business than "Al's Computer Operating System" that competes with Microsoft. However, if Al is a success, his heirs will have a great ER, Joe's might have to run a business.

 

[NotSoonEnough]

Sure, you may just putz along with your little business, but at least you have some control over your income.

It did not work that way for me, without customers you have no income and no control. We (two of us) made about $50k the first year, and less the second, and even less the third year. We saw a need, we filled it, and that was that. During that first year I would have made four times as much as an employee than what I made with our little software company. Worse, the hours I spent crunching code and stomping bugs were more than double my typical 50 hour week as W2 fool.

As someone else has said (sorry about the lack of a reference, I don't recall where I found it):

[FONT=Times New Roman, Times, serif]For a number of years now I've preached to people about The Dream. Over the years I've seen The Dream have its way with, and then kill, a couple hundred different people. And it's nearly always the same.

It starts out with a reasonably intelligent person working in a job they hate; every time they have a bad day, deal with an idiot boss, whatever, they start dreaming of starting "the business" and working for themselves. In their mind, that means that they get to walk on the beach every morning. No more bosses. Get to do Starbucks whenever they want. And that's The Dream.

Sometimes The Dream involves fame, or notoriety, or quick money, or whatever.. but at its core, it is escapist fantasy. That and a whole lot of vanity.

So they finally work up the nerve and quit the job and plunge out on their own to chase The Dream. For the next six months to two years (depending mainly on how much savings they had to start with), they discover that running a small business is a lot harder than they thought. Marketing. Clients/customers. Expenses. Meetings. A lot of wasted, un-billable time. Stress. Significantly more complicated (and higher) taxes. Legal issues. And they're still not getting anywhere, still not making the sweet coin that lets them go to the beach every day.

Gradually, The Dream gets whittled down bit by bit until they hit a wall and realize: this isn't fun anymore. I don't want to do this. This isn't what I thought it was. They haven't reached their destination, and when they look forward, they see that the rest of the way is a long, long march over broken glass.

That's where nearly all of them quit and go back to the job.

At that point, The Dream is dead. The vanity show is over. That broken glass isn't an illusion - the rest of the haul really is going to involve a lot of suffering, and they know it. And since they got into this mainly to avoid suffering, it's not worth the march to them.

Thing is, every so often you get someone who reaches that point and, even though The Dream is entirely dead and buried and he or she has been bled dry of motivation, they decide to take the march anyway. Whatever it takes. Do or die, swim or drown. And so they start marching, hoping that they don't run out of blood before they get there.

Somewhere beyond the glass, The Dream is real. That daily walk on the beach is real. And those people actually have a shot at making it. They still might not. But they're at least now in the game.

The thing that some people don't understand is that The Dream isn't there to help them. They think The Dream is a motivator, a way to keep going, a way to keep their head held high, all the rest. But it's not.

The Dream wants to kill you. It wants it bad.

And worse yet, it knows you better than anyone else, even better than you know yourself. It is very capable of killing you, and if you're not very, very vigilant, it will.

[/FONT]

 

[Notmuchlonger]

Gosh, that article will put the kabosh on Donny and all his big ideas on cnbc...

LOL !

 

[twaddle]

It did not work that way for me, without customers you have no income and no control. We (two of us) made about $50k the first year, and less the second, and even less the third year. We saw a need, we filled it, and that was that. During that first year I would have made four times as much as an employee than what I made with our little software company. Worse, the hours I spent crunching code and stomping bugs were more than double my typical 50 hour week as W2 fool.

Good point. I underbid my first contract (when I was still in college). Made the equivalent of $3/hour. But it was a learning experience -- it taught me the power of the "fudge factor."

 

[NotSoonEnough]

Good point. I underbid my first contract (when I was still in college). Made the equivalent of $3/hour. But it was a learning experience -- it taught me the power of the "fudge factor."

As a contractor I estimate with a 4x "fudge factor" over what I think it will take. In other words, if I think it will take me a month to do the work, I will bid assuming four months. For cost-plus jobs I quote $150/hour and am always surprised when no one in the room blinks.

 

[brewer12345]

If you want to be rich, try to get hired as the CEO (or just about any high-level exec) of a public company. Beats the hell out of starting your own company. It's the next best thing to somebody handing you a money-printing machine.

Or work for a [-]hedge fund[/-] asset manager...

Whoever dreamed up "1 and 20" was a [-]greedy SOB[/-] brilliant person.

 

[BunsGettingFirm]

I think if you start with the premise that you're going to get rich starting your own business, you'll be severely disappointed, and this is coming from someone who's got one foot in the small startup world. I think you need to look beyond the monetary rewards and see why some people just want to start their own businesses.

Let me preface by saying that I work with a bunch of entrepreneurs who were recently acquired by a large computer company. Yes, I'm in finance, so I get to see the 7-figure payout that goes out every quarter to the original 10 employees of the company. However, if you think, "Man, I could have done that," let me dispel the myth. One of the employees is 45 years old. This is the first time he struck the big time. The youngest is 25. This also is the first time he struck the big time, so to say that there is a crap shoot aspect to the the payoff is an understatement.

There are, however, other factors. Theses folks aren't your typical corporate employees. They would hold real foot races in the isles, and the mildest jokes at this place would get you fired at another division. They just aren't built to obey rules of most kinds. I'm usually the guy who's way out in the left field in the typical corporate setting. Here, I feel as if I'm Mitt Romney. I can see that these people would go nuts if they were working in a typical R&D lab.

The other aspect is the learning. Yes, there is the bullshit of having to deal with the idiot government's form after form after form, but there are specialty firms that deal with nothing but small-company payroll and taxes, so you can offload some of the grunt work assuming you have VC-scale money. Besides, once you get the hang of the forms, they tend to remain somewhat similar the next year. While I was working in a larger R&D place, I could be designing a project for years without understanding how my project contributed to the division's P&L much less what the project's importance was in the company. I made decisions that made absolutely no business sense. In a smaller place, you see the result of your bad decisions up close and personally.

Then there's the problem of getting fat in a corporate setting. I don't mean the spare tire around some people's waists though that may be a physical manifestation of their states of mind, but I digress. When your income is relatively secure, relatively good, and your actions have a fairly long feedback loop, it's easy to start to think you can just go to work, put your 9-to-5, and go home or go shopping. Before you know it, years have rolled by, and you have not updated your skill set, your contact list, and much less your resume. Then when **** hit the fan, you're left with a bunch of useless junk and a skill set that's way out of date. Working in a entrepreneurial venture keeps you lean because you know the clock is always ticking, so you put off buying that new car, and you race against the clock to update your skills.

The choice is not simple. If you have the cushion and you're not risking your own money, by all means give the startup world a good try. If you're very good and very lucky, you'll get rich. If you're very good but not very lucky, hopefully, you'll go back to the corporate world with the hyper drive and ambition and the same lean and mean lifestyle. You can still FIRE.

 

[nnkrealtor]

Its like the old saying about being a farmer....."If you want to make a Million dollars farming, then start with 2 Million and quit when you get to one"

 

[TargaDave]

Timely thread for me and interesting article. While I didn't make out anywhere remotely close to CyberMike or ESRBob I did beat my "corp equivalent" salary and I'm certainly no brainy hotshot. Not a glamorous cake walk but on the whole it did beat mega-corp servitude.

In my case it was all by default; had to follow DW without secure job, won some research contracts that lead to a basic napkin idea, brought on a couple of partners, somehow managed to get a joint development effort with a mega-corp with almost no money and no widget, conned-begged $4.5M from VC's and angels, accumulated 15 employees, and then finally managed to get to $6M in aggregate sales before hitting the skids and (just barely) selling out to a very small public foreign company (semiconductor equipment biz). We were a no rules, beer in the refrig, pride in our widget type group. Touch and go most of the way. I've since parted ways with the new owners this last October. Of course with VC's I gave away much of the ownership in return for a steady market rate income and very little of my own money at risk. Slept reasonably well at night except for the public speaking engagements.

I think the article does make some common sense points but I also think most people are smart enough to realize there is no free lunch in entreprenuership despite any glamorous depiction by the media. I will add a comment, as expected VC's luv to talk up their winners and hide the loosers like they never existed just like the media. Something like 1-30 biz plans seen by VC's gets funded, of those funded 7 out of 10 go completely bust, 2 are in the breakeven-ish return and 1 eventually hits. I would be somewhere in that break evenish category though if feels like a bust.

One common theme among the hardcore entreprenuer types I have encountered over the years, it seems to be like a drug addiction, almost like you are drawn into it and have no other choice. I liken the mindset to the Richard Dreyfuss character in Close Encounters of the Third Kind.

 

[saluki9]

Or work for a [-]hedge fund[/-] asset manager...

Whoever dreamed up "1 and 20" was a [-]greedy SOB[/-] brilliant person.

He was ok, but he didn't have the [-]balls[/-] vision of the guy who started 2 and 20

 

[BunsGettingFirm]

I think you also have to look at the article's data set. He included all the mom-and-pop shops that got funded with $25k. By including all the almost-perfect-competition businesses, he's assured that his data set will include businesses that make no economic profit even if they were properly run.

I think the author's unsaid argument is that a corporate career is comparatively worry free, and he may be right. I almost never worried if my paycheck would bounce, but I did constantly worry if my lips were sufficiently puckered behind the, well, right behinds, and I certainly had to worry about getting labeled as a drunk because I had an O'Doul's at lunch. The corporate worries are usually about some trivial, irrelevant bullsh*t. It's because the real fight out in the marketplace is so far removed from the typical corporate drone's life, so you gotta fight about something else to get ahead.

 

[segfault]

If you want to be rich, try to get hired as the CEO (or just about any high-level exec) of a public company. Beats the hell out of starting your own company.

Well, I wouldn't mind that, but I don't see that many listings for "CEO" on Monster.com.

 

[Grizz]

Starting a biz is tough, and the odds are against you, but I would never tell someone to not try it.

A more risk averse alternate plan is to find an existing biz that has a proven successful track record, staff, customers, supplier and customer accounts, a decent lease, and a motivated owner (health, age). Then buy it.

Once you've done this, try to use the existing owner for a while and run with the status quo. Watch carefully for areas that you can improve on the way things are done and tweak the operations slowly over time so as not to upset things.

This is a far quicker and more sure way to success both monetarily and for your lifestyle.

 

[Milton]

Well, I wouldn't mind that, but I don't see that many listings for "CEO" on Monster.com.

All you have to do is read two or three of D. A. Benton's books (e.g. How to Think Like a CEO: The 22 Vital Traits You Need to Be the Top Person, or Executive Charisma: Six Steps to Mastering the Art of Leadership), and you will be just as qualified as many actual CEOs.