Entrepreneurship Hype – It Will Cost You

The idea is nice, but the odds don't make it real.

The idea is nice, but the odds don’t make it real.

One of the common themes among self-improvement seminars, self-help gurus and life coach experts is this idea that you are limiting yourself by working in a job and that you must own your own business. The clarion call for entrepreneurship is tempting indeed.  One well-known blogger has built a thriving business telling others to create their own business and not to be the ‘slave’ by working in a job.   Personal development is critical for everyone, but do you have to start a business to develop yourself?  

You can learn from the many classic self-help books, webinars and instructional videos (many offered free on YouTube or sites like Khan Academy, Coursera etc.) and develop yourself to become a valued employee, well-positioned to move up in your career.  A job is ‘dead-end’ only if you make it to be.  

The stories of entrepreneurial success are inspiring but are statistically distorted.  Many of us have heard that over 90% of all new businesses fail within the first 3 years.  The long-running Inc. magazine reports that 96% of businesses fail within the first 10 years, so even if you manage to cross the critical 3 year mark, you still have a high probability of not making it past the first decade.  For every successful start-up that you get to know about, there are at least 20 others that died trying.  Their stories are filled with incredible amounts of work, stress, financial loss and family lives put on hold while pursuing the ‘entrepreneurship dream’.   Many include divorces, bankruptcies and the silent fading away of marginal businesses because the profit they make barely equals minimum wage for the hours the entrepreneur puts in.  We don’t hear about the failures or seriously consider  them because of survivorship bias, a common thinking error most of us fall into.

In my corporate role involving M&A and strategic investments, I have come across over a hundred start-up business plans that are pitched to us, either for minority equity investments, for outright acquisition or sometimes just for a small business collaboration (with the hope that the association with our company could elevate the market value of the start-up so eager venture capitalists will throw in money at absurd valuations).   Among nearly 100 business plans, we screen down to about 5-7 to evaluate in depth (‘due diligence’ in corporatespeak).   Out of that, we invest or get into serious collaboration with no more than 1-2 companies.   Those are the real odds a start-up faces from my experience.   When I evaluate a start-up, I don’t look at it with the point of view of whether this will survive till the next investment round where I can sell our stake at a profit.   That may be the objective of an angel investor or venture capitalist.  If you want to build something that lasts at least 10 years, the metrics you will use to judge the possible success of a new business are very different.

It is a huge deal for a company to have not only survived 10 years, but show growing profits in each of the past 10 years.  This is a sign of a viable business model.   There are some companies whose business models have survived and thrived 25, 50 and even 100 years, but they are extremely rare, which their everyday familiarity with us (McDonalds, Wal*Mart, Proctor & Gamble, GE, Unilever etc.) somehow makes us take them for granted.   As an investor, one of the metrics I like is whether the company has consistently been profitable for the last 10 years and preferably grown both profits and dividends over the same period.  Why 10 years?  While this coincidentally meets the Inc magazine threshold, this is the time frame the economy is likely to have thrown at least one shock to the business (via a major downturn, recession etc.).  A business that has survived and outgrown at least one major economic shock is a real proof of both its strength and the durable demand of the products/services it offers.

My post is not intended to discourage you from entrepreneurship if that’s what you believe in.  The experience of starting and running a new business offers valuable life lessons for other reasons.  But if building a thriving profitable business is your main objective, I will caution you to consider the odds, and be prepared for a long, hard and lonely slog.  The motivational websites selling courses, workshops and videos as well as the one-on-one ‘success coaches’ are getting paid regardless of whether you succeed or not in your entrepreneurship venture.   When you hear the success stories as ‘testimonials’, consider the survivorship bias and the real odds that you are facing.  I have developed good friendships with many entrepreneurs because when they call me for advice, they know they will get it straight on what works and doesn’t.   I have even been offered Board positions to help them.  Couple of the businesses are near the 10-year mark,  so I am keeping my fingers crossed.

I have often wondered what is it about entrepreneurship, aside from the glamour of being featured on a business magazine someday, that attracts people.   I understand TV shows like Shark Tank have popularized the idea. Mostly, I think the idea of financial freedom is so strongly ingrained in the human psyche that we are willing to subject ourselves to extreme risk and poor odds for the mere prospect, however remote, of getting to that stage.  In the process, some actually take huge career and financial risks that makes their financial independence dream even more elusive.   In so doing, they also cast aside the far less glamorous path of being a diligent employee who believes in working hard, earning well, living frugally and investing wisely to reach financial independence.  It is possible to take calculated risks even in a corporate career – like moving to a new role in a new place, for example.  Similarly, in investing, you can take calculated risks by putting most of your money in broad index equities or established profitable companies that have long proven their business models.   At least those risks come with visible and historically-proven rewards.

Take the middle path.  You can be entrepreneurial in your thinking without taking the big risks of entrepreneurship.   It doesn’t suck to be an employee unless you buy into that notion as the self-help gurus want you to (so they can sell you their wares).   The ‘job=loser’ ideology will make you miserable and also, cost you because the odds on the other side are not in your favor.   Finally, if you do have that next brilliant start-up idea and the urge to take it to execution, moonlight that concept without taking huge financial risks till you can establish some traction.  Consider the odds in every decision you make, be it financial or entrepreneurial.   Good luck in your 10! journey.

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3 comments on “Entrepreneurship Hype – It Will Cost You”

  1. By ZJ Thorne

    I’m at year two of my business on top of my FT work and it is hard! My field averages 24-36 months to earn a profit at all. It is rough and takes a lot of dedication and I still might fail. I intend to keep working FT for other temp gigs for the next couple years to actually fund a next egg and allow me to do my own business FT. I don’t anticipate that I’ll grow rich from my business, but could from growing my skill set in the temp work I do. The business just will eventually be the lifestyle work I want to do.

  2. By Vicki@Make Smarter Decisions

    Really like your thoughts on this topic and I agree that there is a lot of “glamorizing” of entrepreneurship. For the majority of folks, starting and maintaining a successful business is an incredible amount of work. Many of the people I know who have made it in business started their business (and developed it) while still working full-time.

    • By TFR

      Thanks Vicki. Moonlighting is the least risky way to work on your business idea but it will be a lot of work as most have only limited time left after a demanding full time job. It is hypocritical that these self-help gurus have not walked the path themselves or at least worked in a company business development role starting a new business division before counseling others. Yet they declare themselves ‘qualified’ to advise what it takes to succeed in starting a business! It’s as if just motivational speech is all that’s required for entrepreneurial success!

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