Entrepreneurship Isn’t Risky
I can’t remember what book it was I read, but there was a statement that blew my f*cking mind the first time I read it.
Every client you have is an additional source of income.
What I realized with that statement was a concept that was nagging at me, pushing me in the direction of entrepreneurship from a young age, but I couldn’t put my finger on the rationale behind it.
It was bigger than “not wanting to work for someone else.”
What I realized was that if you want to have enough money to retire, getting there with a job is riskier than being an entrepreneur.
More on this later, but what was explained in that chapter was that a job, while stable, is only one source of income. Of course, some jobs are far more stable than others, but the days of the young guy starting as a clerk at company A, only to remain with that company 30 years later are practically extinct.
Fact is, most jobs are stable short-term, risky long-term.
According to Cameron Keng at Forbes, people who stay in a company longer than 2 years average 50% less lifetime earnings. Also, according to Pew Research, real wages for the vast majority of workers have remained stagnant for at least half a century, and that doesn’t even tell the whole story.
There are three huge factors that contribute to the demise of the common worker.
- Tuition cost hikes
- Higher percentage of workers with a college degree, meaning higher competition for the same level of pay
- The majority of actual wage increases going to the top 20% of workers
In 1993–94, about half of bachelor’s degree recipients graduated with debt, averaging a little more than $10,000. This year, more than two-thirds of college graduates graduated with debt, and their average debt at graduation was about $35,000, tripling in two decades.
What is happening is that more people are taking longer to pay off school debt, which means less young people buying their first house, getting out of debt and creating a retirement fund.
Speaking of retirement funds, millennials need 2 million or more to retire, and since inflation rates have been lower than the 100 year average the last few decades (and that 100 year average includes the great depression) you can expect that number to be even higher. See the chart below:
If you’re not setting yourself up for a $2 million+ retirement account with your stable job earnings, you’re comfortably prolonging the inevitable.
Assuming I have your attention now, let’s talk about why entrepreneurship isn’t nearly as risky as people think it is.
I’d like to preface my argument with two extremely important points.
One is that starting a business is not for everyone. You will be tested. You have to have a level of integrity above what is required for most jobs, especially when transacting the hard-earned money that clients are willing to give you. You also have to become accustomed to failure.
Two is that different businesses offer different levels of risk. Entrepreneurship, as with anything, can be better or worse for you depending on the amount of calculation you put into your decisions. You should never start a businesses without mapping out a path to follow; a path that shows a clear direction to hit your goals. You also shouldn’t invest too much of your own money unless you’ve proven that the business is viable.
Disclaimers out of the way, as long as I have a choice, I couldn’t imagine staking my financial future on the stability of the job market.
To illustrate what I’m trying to say, let us consider two scenarios:
Joe gets a job out of college, at 22 years old, making $40,000/year. After spending almost $112,000 (the national average for public schools) on total tuition at a 4 year public university, working full time the entire time and living at home, Joe graduated with the exact average amount of college debt, at $35,000 (WOWSERS!)
Joe works at this job for 5 years, with annual raises of roughly 3% a year, which is around the average for a middle income person. Joe was smart and thrifty with his money, and was able to pay off $30,000 of this debt in the 5 years at his job before he is laid off. Joe was smarter than most, and decided to save money for a rainy day. He has $10,000 in savings, and could last 6 months without a job.
Joe looks for a job for 3 months and gets no offers. He gets worried. Joe decides to get a temporary job at a coffee shop until he can find something real. He’s making $10 an hour, or $20,800/year. Because Joe is single, has no kids, and lives in a relatively inexpensive city, in an inexpensive apartment, with inexpensive spending habits, he is able to coast by for another 1 year until he lands another job, making $50,000 a year.
Joe is now 28 years old, making $50,000, with $5,000 in school debt, $3,000 in savings, well on his way to having a net worth of $0.
Joe is doing fine.
Jane Decides to skip college after high school, and work on business ideas. Jane is 18 years old. Jane also decides to live at home. Jane spends her first 2 years working at the coffee shop across the street from where Joe would work 9 years later, making $20,800/year. During those two years, Jane tries and fails on 3 different businesses, spending an average of $3,000 on each venture, which is most of her spending money. The first idea failed spectacularly. Jane tried to sell a new product to a market that didn’t exist. She never got one client. The second idea, a T-shirt business, almost got off the ground, but after a few thousand in sales, a big online retailer stole her idea and drowned her out. Jane didn’t have the resources to fight this. Jane’s third idea failed again, as she misjudged what her profit margins would be, and was working for free.
In the meantime, Jane has no debt, she has not been promoted, but she hasn’t gotten a raise either, so she still makes a little less than $21,000/year. Finally, Jane launches her 4th business, a coffee subscription box, where she generates around $10,000 in sales per month after her first few months in business. Jane profits around $3500 a month, and decides to quit her job at the coffee shop to work on her idea full time. Jane was able to quit her job about one week before her 21st birthday.
By the time Jane is 28 years old, 7 years later, Jane has started 15 additional companies, of which 4 remained. Jane has 4 active businesses running, no college debt, with an income of $175,000 on $1,000,000 of total business revenue.
Jane is doing well.
If you look at these two scenarios, you may call Joe the safe one, and Jane some type of lucky business prodigy, or at least well above-average at building companies. You’d be incorrect.
The commonly-held assertion that 9 out of 10 businesses fail is wrong.
According to the Small Business Administration, which cites from the Bureau of Labor Statistics, around 50% of all new establishments survive 5 years or more, and about 33% survive 10 years or more. Jane started roughly 20 companies over the span of 9 years, and only 20% of those companies exist after 7 years.
While Jane has achieved close to an average level of business success rate, her income is in the top 3% of people in her age bracket. How is this possible?
Let’s go back to that original mind-blowing statement. Every client you have is an additional source of income. No matter how you slice it, having a job is more stable than having one particular client, but a job is only one source of income.
When you rely on a job as your main source of income, your risks actually increase as your income increases. The higher your pay rises, the fewer jobs there are available to meet your salary requirements going forward. If you’re crazy enough to match your lifestyle with your earnings, a sudden loss of your one source of income can spell financial ruin very quickly.
As someone that has been let go from a job unexpectedly, this fact will always resonate with me.
So when Joe lost his job, he was forced to rely on the job market to replace his one source of income.
Jane, on the other hand, has over 1,000 clients across her 4 companies that pay her at least once a year. Even though each client pays her the equivalent of $175 (in personal income), Jane is far more secure than the guy that is making $300,000 a year, from only one source.
If Jane loses a client, she loses 1 out of 1,000 sources of income. If Joe loses his job, he loses everything (except unemployment benefits?)
When I realized this, my entire thinking changed. I now have multiple companies running, with (you guessed it) over 1,000 clients combined. I absolutely cannot be fired from my job today, tomorrow, or anytime soon. Frankly, if all of my businesses were to somehow collapse at the same time (which is a lot less likely than me losing a specific job) I would see it coming several months in advance, allowing me to plan accordingly, or perhaps start another venture. Also, I spent less than 10% of your typical college tuition costs combined to start my current list of companies.
The final consideration here is that while saving your money and investing is a requirement to retirement regardless, a profitable business is also worth money. If Jane were to continue to build or maintain her companies over the next 30 years, she might end up with a portfolio of companies that generate $400,000/year in profits, which would be worth between 1–5 million dollars in equity.
If Jane ever decided to quit, she could sell her companies for a nice chunk of change (a lump sum retirement) or hire people to manage them for her (a passive retirement.)
The reality is, once Jane gets her businesses going, she has a lot of options, whereas Joe does not.
So what’s the best way to prepare yourself for success?
Unless you are a very high income earner, you should start a company, no matter what. Companies do fail, so it’s best to have multiple ventures running as a hedging strategy, much like having different types of investments in a diversified portfolio.
Don’t spread yourself too thin, but work on one company at a time, until you grow something to the point where it can run itself. Then start the next one. If something isn’t working after 3 years, you should most likely abandon it and start something else. Our time on earth is finite, and sticking to something that is failing for too long is usually an ego problem.
It is never too late to start something, but it is far better to start while you’re young, with lower expenses and less financial obligations/people to take care of. If you start now, you’ll be surprised at what you can achieve in 30 years. Chances are, your retirement account will be more substantial than what you can earn from savings alone.
Don’t prolong the inevitable. Eliminate future risks by setting up income streams that will save your financial future.