5 ms·

The Entrepreneurship Myth

34 points by dshah 19y ago

mixmax 19y ago
From the article: "I hate to deflate egos, but on the other hand I want people to have a realistic understanding of things. The industry a person picks to start a business has a huge effect on the odds that it will grow. If you go back 20 years or so, about 4% of all the startups in the computer and office equipment industry made the Inc. 500, 0.005% of startups in the hotel and motel industries made that list, and 0.007% of startups in eating and drinking establishments." This ignores cause and effect. Presumably a lot of business in the hotel and motel industries are simple mom and pop shops with no intention of growing. This is almost never true for "the computer and office equipment industry" Also presumably there there is a significant difference in the capabilities of founders in these two industries. I hate when writers cannot see beyond their numbers, and cannot distinguish between cause and effect. That being said I found it interesting that "you have to hit the top 10% to have income as an entrepreneur better than what you would have gotten working for other people." Maybe if I hadn't done those startups I would have a red ferrari by now ;-)
- mechanical_fish 19y ago
  Presumably a lot of business in the hotel and motel industries are simple mom and pop shops with no intention of growing. This is almost never true for "the computer and office equipment industry" Well, I don't think you can assert that without statistics. I wouldn't be surprised if the "median" computer company is a one-person consulting firm -- a services company. Also presumably there there is a significant difference in the capabilities of founders in these two industries. Well, there, I agree -- I suspect that the average grocery store owner has a lot more business skill than the average computer-industry founder. ;) By necessity -- the grocery business is more complex, with literally thousands of moving parts; there's more competition, and the margins are a lot smaller. Having said that, your basic point is correct -- computer startups have a much better chance of making big money, for reasons that have been explored ad infinitum around here -- low overhead, low cost of volume manufacturing, cheap distribution, large and international markets, etc. And that's exactly what this guy is saying when he suggests that you "choose the right industry". His argument isn't addressed to the folks around here. It's primarily addressed to the "average" founder -- the person who founds a corner store, a dry cleaner, a hair salon, or a decorating business. These are the folks who go to "entrepreneurship" seminars (featuring lots of photos of the guys from Yahoo, Google, McDonalds, and Pepsi) and imagine that any chain of hot-dog stands could lead to similar financial success -- whereas, in fact, it's likely to cost them money. Of course, running your own company also makes you much happier, on average -- a point which the author readily concedes.
  - zaidf 19y ago
    "I wouldn't be surprised if the "median" computer company is a one-person consulting firm -- a services company." This is one thing pg has been very clear about: a start-up isn't about taking away a monthly paycheck. It is about scoring big. If your start-up is helping pay for your apartment, that is good but hardly the goal of your start-up. Founders know that. When your consulting firm is helping pay for your bills, the end goal is reached. Little growth happens once you reach that goal. There are exceptions--and almost any business can be transformed into a start-up(doesn't mean it will succeed). Infosys would be a good example of starting out as a small consulting firm and transforming itself into a start-up and now a giant.
goodgoblin 19y ago
I don't think anyone on here is starting a hair cut business (unless its like robot hair stylists or something)
- noonespecial 19y ago
  The suck-cut! As you can see, it sucks as it cuts...
  - umjames 19y ago
    You mean the Flowbee? http://www.flowbee.com http://www.flowbee.com
    - brent 19y ago
      No, I'm pretty sure he meant suck-cut: http://www.free-press-release.com/news/200509/1125942792.html http://www.free-press-release.com/news/200509/1125942792.htm...
      - noonespecial 19y ago
        HA! Its real! Priceless! I actually meant the "Suck Kut" from Wayne's World... Who'da thunk someone would actually try to build one!? Thanx for that link. Made my day.
  - phil 19y ago
    Well, it certainly does suck.
- Tichy 19y ago
  I actually was hired as a developer for a b2b portal for hairdressers once... How about checking webcam picks to indicate to users when they need a new haircut. Would that be a viable idea for a startup? ;-)
noonespecial 19y ago
He seems to have missed one very important fact about startups. If it doesn't work, you can try again! I think the odds are pretty slim for everyones first startup but you learn from it and have another go. Its like saying that everyone has a very low chance of getting over 10' on thier first pole vault so its bad policy to have it in the olympics. Just to offer a counterpoint. Our startup has grown far less than we hoped. We have only one large cororate account and 5-10 smaller local offices. There's only three of us and we're half-way thru year 4. BUT we've already made what we would have made in 10 years at the jobs we quit.
sabat 19y ago
There's something very simplistic and reductive about this guy's reasoning.
bfioca 19y ago
"It shows the average new venture will fail within five years, and even successful founders usually earn 35% less over 10 years than they would working for others." -- That's fine, that's not why I'm starting a company anyway, I don't want to work for others.
mynameishere 19y ago
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. What? No one told him the oldest cliche in the book, that money doesn't buy happiness? Is it a mystery that so-and-so would be happier making 40K and owning a business than another person doing inventory at WalMart for 50K?
- nkohari 19y ago
  You can make 50K doing inventory at WalMart? :) (But you're exactly right, money isn't everything.)
  - mattmaroon 19y ago
    Wal-Mart's normal employees do inventory once or twice a year. They aren't paid anything extra, and most probably make half of that. They do often hire outside consultants to help, and I've no idea what those guys get paid.
- curi 19y ago
  It's not a paradox. The more unpleasant a job is, the more you have to pay to get people to do it.
  - ivankirigin 19y ago
    Rock star?
    - curi 19y ago
      The most famous rock stars, and actors, and sports players, are paid a lot due to high demand and low supply. (Plenty of supply of willing people, but not plenty of supply of people with hundreds of thousands of fans.)
  - mynameishere 19y ago
    It's not a paradox. Well, that's why I quoted that passage. To point out that it's not a paradox.
nostrademons 19y ago
A little more economics and a little less statistics would've helped his argument immensely. Entrepreneurship flourishes when there are diseconomies of scale and dies when there are economies of scale. It's not hard to see why: if things get cheaper as you get bigger, then the first company to get big will gobble up all the smaller companies, and you end up with a monopoly or oligopoly. If things get more expensive as you get bigger, then no firm will grow larger than a certain limit, and after a certain point the most productive employees will leave and start their own businesses, because they can make more money that way. (If costs stay roughly the same, as in most professional services, the industry trends toward many small firms because of the psychological benefits of working for yourself.) Software is the perfect example of a business with diseconomies of scale. Every experienced software engineer knows that adding people to a project makes it go slower. The only reason why a large software company might be more efficient than a small one is if there's an additional factor of production that has large economies of scale: for example, data centers (Google/Yahoo), logistics & warehousing (Amazon.com), buyer eyeballs (E-bay, Facebook), or retailing (Microsoft, Borland, Ashton-Tate, and all the boxed-software manufacturers of the 80s). Other than that, there's no economic reason why big software companies should exist. Big companies buy little companies when there's a market that they want to get into and apply their economies of scale to. They can't develop the product in-house, because small teams of programmers are more productive than large teams of programmers and so the startup would continually outpace them. But the resulting merger would be more economically efficient, because the startup could take advantage of the large company's datacenters & warehouses. So they trade money for product; the small company's founders get rich, while the big company buys a product that can make more profit under the large firm than as an independent firm. It's probably also worth mentioning that technology developments can fundamentally change the structure of an industry. Intel single-handedly destroyed the minicomputer industry, because those firms had relied on their economies of scale in manufacturing to justify their size, and Intel brought greater economies of scale to the thousands of ISVs who could then produce software more cheaply than the big proprietary vendors. The RIAA held a distribution lock on the music industry for years, but when the Internet came along and made distributing music free, power shifted to the independent bands who have significant diseconomies of scale. The Internet looked like it was heading towards a universe of big firms with large datacenters, but then LiveJournal and Flickr published their scalability approaches and made it possible for everyone to scale out for free.
nkohari 19y ago
There are two kinds of businesses. First, there are so-called "lifestyle" businesses, like bars, restaurants, B&Bs, etc. that people start because they'd rather work for themselves than someone else. Most owners of these types of businesses aren't interested in expanding or getting rich -- just doing what they enjoy. Then there are "growth" businesses, like (most) technology startups. Many people who start tech startups are interested in working for themselves, but they are more likely to be interested in expanding the business as well... not to mention the most important fact, that technology companies can expand much faster than other types of companies. As demand increases for, say, a website, it's much easier to scale up the infrastructure by adding new computers than it is for a hotel chain to build new hotels, or a "brick and mortar" retailer to build more stores.
- hhm 19y ago
  But you can have lifestyle tech companies too, or can't you?
  - bootload 19y ago
    "... he most important fact, that technology companies can expand much faster than other types of companies. ... But you can have lifestyle tech companies too, or can't you? ..." Facebook & Apple for example?
  - imsteve 19y ago
    But when you can sell tech companies for 10x yearly income, who's going to hold on to their successful company for that long?
mnemonicsloth 19y ago
The median startup is a business that's capitalized with about $25,000. The financing of that business comes from the entrepreneur's savings. The business is a retail or personal service business, a hair salon or a clothing store, that kind of thing. The founder doesn't have expectations of a very high growth business, in fact [the entrepreneur is] probably thinking a goal of $100,000 a year of revenue is a good goal. The economist guy isn't wrong -- it's the article's title that's misleading. It is hard to bootstrap your own gas station or hair salon. I'd argue, though, that developing new technology is a fundamentally different undertaking.
anaphoric 19y ago
Of course I don't agree with this guy, but I think we need to dissect the common entrepreneurial statement "I don't want to work for others". Now I am sure that we all agree that entrepreneurs do in fact need to "work for others", namely the customer! But yes there is something different about doing it in the role of supplier rather than employee. I think in general what entrepreneurs are after is about "controlling their creative outputs and at least having the chance of being highly rewarded". Sure you can do that to an extent as an employee, but putting your heart and soul into something as an employee makes one feel like a chump. Especially when you are surrounded with all the loafers and parasites within the common organization. (Sorry if that sounds harsh) Since the guy in the article didn't really make any concrete policy recommendations, he could consider suggesting reforms within larger organizations to reduce alienation.
- deleted 19y ago
  [deleted]
jamiequint 19y ago
I think this article misses the point of the book. The reviews on Amazon seem to frame a different picture of what he is actually writing than this Business Week article does. "Scott has clearly and entertainingly shown why policy makers, entrepreneurs and investors should focus more attention on high growth, high potential start-ups and less on the ''me-too'' new companies than is currently the case." I think this is something that most people here would probably agree with.

34 points by dshah 19y ago

From the article: "I hate to deflate egos, but on the other hand I want people to have a realistic understanding of things. The industry a person picks to start a business has a huge effect on the odds that it will grow. If you go back 20 years or so, about 4% of all the startups in the computer and office equipment industry made the Inc. 500, 0.005% of startups in the hotel and motel industries made that list, and 0.007% of startups in eating and drinking establishments." This ignores cause and effect. Presumably a lot of business in the hotel and motel industries are simple mom and pop shops with no intention of growing. This is almost never true for "the computer and office equipment industry" Also presumably there there is a significant difference in the capabilities of founders in these two industries. I hate when writers cannot see beyond their numbers, and cannot distinguish between cause and effect. That being said I found it interesting that "you have to hit the top 10% to have income as an entrepreneur better than what you would have gotten working for other people." Maybe if I hadn't done those startups I would have a red ferrari by now ;-)

mechanical_fish 19y ago
Presumably a lot of business in the hotel and motel industries are simple mom and pop shops with no intention of growing. This is almost never true for "the computer and office equipment industry" Well, I don't think you can assert that without statistics. I wouldn't be surprised if the "median" computer company is a one-person consulting firm -- a services company. Also presumably there there is a significant difference in the capabilities of founders in these two industries. Well, there, I agree -- I suspect that the average grocery store owner has a lot more business skill than the average computer-industry founder. ;) By necessity -- the grocery business is more complex, with literally thousands of moving parts; there's more competition, and the margins are a lot smaller. Having said that, your basic point is correct -- computer startups have a much better chance of making big money, for reasons that have been explored ad infinitum around here -- low overhead, low cost of volume manufacturing, cheap distribution, large and international markets, etc. And that's exactly what this guy is saying when he suggests that you "choose the right industry". His argument isn't addressed to the folks around here. It's primarily addressed to the "average" founder -- the person who founds a corner store, a dry cleaner, a hair salon, or a decorating business. These are the folks who go to "entrepreneurship" seminars (featuring lots of photos of the guys from Yahoo, Google, McDonalds, and Pepsi) and imagine that any chain of hot-dog stands could lead to similar financial success -- whereas, in fact, it's likely to cost them money. Of course, running your own company also makes you much happier, on average -- a point which the author readily concedes.
- zaidf 19y ago
  "I wouldn't be surprised if the "median" computer company is a one-person consulting firm -- a services company." This is one thing pg has been very clear about: a start-up isn't about taking away a monthly paycheck. It is about scoring big. If your start-up is helping pay for your apartment, that is good but hardly the goal of your start-up. Founders know that. When your consulting firm is helping pay for your bills, the end goal is reached. Little growth happens once you reach that goal. There are exceptions--and almost any business can be transformed into a start-up(doesn't mean it will succeed). Infosys would be a good example of starting out as a small consulting firm and transforming itself into a start-up and now a giant.

goodgoblin 19y ago

I don't think anyone on here is starting a hair cut business (unless its like robot hair stylists or something)

noonespecial 19y ago
The suck-cut! As you can see, it sucks as it cuts...
- umjames 19y ago
  You mean the Flowbee? http://www.flowbee.com http://www.flowbee.com
  - brent 19y ago
    No, I'm pretty sure he meant suck-cut: http://www.free-press-release.com/news/200509/1125942792.html http://www.free-press-release.com/news/200509/1125942792.htm...
    - noonespecial 19y ago
      HA! Its real! Priceless! I actually meant the "Suck Kut" from Wayne's World... Who'da thunk someone would actually try to build one!? Thanx for that link. Made my day.
- phil 19y ago
  Well, it certainly does suck.
Tichy 19y ago
I actually was hired as a developer for a b2b portal for hairdressers once... How about checking webcam picks to indicate to users when they need a new haircut. Would that be a viable idea for a startup? ;-)

noonespecial 19y ago

He seems to have missed one very important fact about startups. If it doesn't work, you can try again! I think the odds are pretty slim for everyones first startup but you learn from it and have another go. Its like saying that everyone has a very low chance of getting over 10' on thier first pole vault so its bad policy to have it in the olympics. Just to offer a counterpoint. Our startup has grown far less than we hoped. We have only one large cororate account and 5-10 smaller local offices. There's only three of us and we're half-way thru year 4. BUT we've already made what we would have made in 10 years at the jobs we quit.

sabat 19y ago

There's something very simplistic and reductive about this guy's reasoning.

bfioca 19y ago

"It shows the average new venture will fail within five years, and even successful founders usually earn 35% less over 10 years than they would working for others." -- That's fine, that's not why I'm starting a company anyway, I don't want to work for others.

mynameishere 19y ago

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. What? No one told him the oldest cliche in the book, that money doesn't buy happiness? Is it a mystery that so-and-so would be happier making 40K and owning a business than another person doing inventory at WalMart for 50K?

nkohari 19y ago
You can make 50K doing inventory at WalMart? :) (But you're exactly right, money isn't everything.)
- mattmaroon 19y ago
  Wal-Mart's normal employees do inventory once or twice a year. They aren't paid anything extra, and most probably make half of that. They do often hire outside consultants to help, and I've no idea what those guys get paid.
curi 19y ago
It's not a paradox. The more unpleasant a job is, the more you have to pay to get people to do it.
- ivankirigin 19y ago
  Rock star?
  - curi 19y ago
    The most famous rock stars, and actors, and sports players, are paid a lot due to high demand and low supply. (Plenty of supply of willing people, but not plenty of supply of people with hundreds of thousands of fans.)
- mynameishere 19y ago
  It's not a paradox. Well, that's why I quoted that passage. To point out that it's not a paradox.

nostrademons 19y ago

A little more economics and a little less statistics would've helped his argument immensely. Entrepreneurship flourishes when there are diseconomies of scale and dies when there are economies of scale. It's not hard to see why: if things get cheaper as you get bigger, then the first company to get big will gobble up all the smaller companies, and you end up with a monopoly or oligopoly. If things get more expensive as you get bigger, then no firm will grow larger than a certain limit, and after a certain point the most productive employees will leave and start their own businesses, because they can make more money that way. (If costs stay roughly the same, as in most professional services, the industry trends toward many small firms because of the psychological benefits of working for yourself.) Software is the perfect example of a business with diseconomies of scale. Every experienced software engineer knows that adding people to a project makes it go slower. The only reason why a large software company might be more efficient than a small one is if there's an additional factor of production that has large economies of scale: for example, data centers (Google/Yahoo), logistics & warehousing (Amazon.com), buyer eyeballs (E-bay, Facebook), or retailing (Microsoft, Borland, Ashton-Tate, and all the boxed-software manufacturers of the 80s). Other than that, there's no economic reason why big software companies should exist. Big companies buy little companies when there's a market that they want to get into and apply their economies of scale to. They can't develop the product in-house, because small teams of programmers are more productive than large teams of programmers and so the startup would continually outpace them. But the resulting merger would be more economically efficient, because the startup could take advantage of the large company's datacenters & warehouses. So they trade money for product; the small company's founders get rich, while the big company buys a product that can make more profit under the large firm than as an independent firm. It's probably also worth mentioning that technology developments can fundamentally change the structure of an industry. Intel single-handedly destroyed the minicomputer industry, because those firms had relied on their economies of scale in manufacturing to justify their size, and Intel brought greater economies of scale to the thousands of ISVs who could then produce software more cheaply than the big proprietary vendors. The RIAA held a distribution lock on the music industry for years, but when the Internet came along and made distributing music free, power shifted to the independent bands who have significant diseconomies of scale. The Internet looked like it was heading towards a universe of big firms with large datacenters, but then LiveJournal and Flickr published their scalability approaches and made it possible for everyone to scale out for free.

nkohari 19y ago

There are two kinds of businesses. First, there are so-called "lifestyle" businesses, like bars, restaurants, B&Bs, etc. that people start because they'd rather work for themselves than someone else. Most owners of these types of businesses aren't interested in expanding or getting rich -- just doing what they enjoy. Then there are "growth" businesses, like (most) technology startups. Many people who start tech startups are interested in working for themselves, but they are more likely to be interested in expanding the business as well... not to mention the most important fact, that technology companies can expand much faster than other types of companies. As demand increases for, say, a website, it's much easier to scale up the infrastructure by adding new computers than it is for a hotel chain to build new hotels, or a "brick and mortar" retailer to build more stores.

hhm 19y ago
But you can have lifestyle tech companies too, or can't you?
- bootload 19y ago
  "... he most important fact, that technology companies can expand much faster than other types of companies. ... But you can have lifestyle tech companies too, or can't you? ..." Facebook & Apple for example?
- imsteve 19y ago
  But when you can sell tech companies for 10x yearly income, who's going to hold on to their successful company for that long?

mnemonicsloth 19y ago

The median startup is a business that's capitalized with about $25,000. The financing of that business comes from the entrepreneur's savings. The business is a retail or personal service business, a hair salon or a clothing store, that kind of thing. The founder doesn't have expectations of a very high growth business, in fact [the entrepreneur is] probably thinking a goal of $100,000 a year of revenue is a good goal. The economist guy isn't wrong -- it's the article's title that's misleading. It is hard to bootstrap your own gas station or hair salon. I'd argue, though, that developing new technology is a fundamentally different undertaking.

anaphoric 19y ago

Of course I don't agree with this guy, but I think we need to dissect the common entrepreneurial statement "I don't want to work for others". Now I am sure that we all agree that entrepreneurs do in fact need to "work for others", namely the customer! But yes there is something different about doing it in the role of supplier rather than employee. I think in general what entrepreneurs are after is about "controlling their creative outputs and at least having the chance of being highly rewarded". Sure you can do that to an extent as an employee, but putting your heart and soul into something as an employee makes one feel like a chump. Especially when you are surrounded with all the loafers and parasites within the common organization. (Sorry if that sounds harsh) Since the guy in the article didn't really make any concrete policy recommendations, he could consider suggesting reforms within larger organizations to reduce alienation.

deleted 19y ago
[deleted]

jamiequint 19y ago

I think this article misses the point of the book. The reviews on Amazon seem to frame a different picture of what he is actually writing than this Business Week article does. "Scott has clearly and entertainingly shown why policy makers, entrepreneurs and investors should focus more attention on high growth, high potential start-ups and less on the ''me-too'' new companies than is currently the case." I think this is something that most people here would probably agree with.