Actually, entrepreneurs are not risk-takers
Every group has its own mythology. For entrepreneurs, the prevailing mythos is that, to a person, they are all daredevil adventurers. When they’re not heli-skiing or bungee jumping, they approach their business decisions with the famous Branson screw it, let’s do it attitude. The business press is full of stories about ventures where the principals supposedly closed their eyes, made a breath-taking gamble, and won.
Don’t you believe it for a second.
For every entrepreneur who claims to have hit the jackpot with that kind of approach, there are dozens more that flamed out spectacularly. Insofar as we can rely on stats about privately-owned ventures, the numbers tell the tale: StatisticsBrain suggests that 24% of businesses fail in the first year, with up to 44% failing by their 3rd year. In Canada, StatsCan posted a 5-year survival rate for new businesses at a measly 0.36. The US government data puts businesses started in 2010 at 668,861 firms, and the business exit rate for that same year at 690,504 firms.
The numbers are worse in the tech category, where 3 out of 4 start-ups go kablooie. And before you go blaming economic conditions, remember that the story was the same back in the 90s, when money flowed like wine. In true dot-com fashion, there was even a website dedicated to chronicling the blowouts.
So why the discrepancy between the media reports and the reality? And is that a bad thing?
The media question is easy. First, the media loves a sexy story, and at the moment, there’s nothing sexier than stories about slightly nerdy young people who become overnight billionaires. Entrepreneurs are hawt, and it’s the outliers that get the coverage.
Second, there’s a lot of active myth-building going on by the people behind the success stories. That’s only natural. After all, when a reporter comes calling, what’s going to get you the most ink? The tale of how you spent hours tweaking your projections in an Excel spreadsheet, or the (ahem) slightly (cough, cough) exaggerated story of how you jacked yourself up on espresso to program a killer app, scored VC funding over a bottle of Jack Daniels, and went skydiving, all in the space of a month?
But is that bad? You bet it is, because it leads a lot of people into business who really, really shouldn’t be. And that by itself wouldn’t be terrible, except that failed businesses hurt more than just the wannabe entrepreneurs. They leave vendors unpaid, landlords with vacancies, and good people suddenly unemployed.
The truth is that real entrepreneurs only take calculated risks. Even the ones who appear to do everything on intuition are really just very, very well-versed in their fields and can do the math in their heads, while the rest of us have to commit it to paper. And all of the entrepreneurs that I know that are really bankin’ it measure the crap out of everything, and leave as little as possible to chance.
What does that mean for your business idea? Before you bet the farm, and with apologies to Desi Arnaz: you’ve got some plannin’ to do.
You’ll want to start with originality: you need either a new product or service, or a new way to produce an existing product better, faster or cheaper. And if you’re doing the latter, it had better be orders of magnitude better, faster, or cheaper, because otherwise, you’re an also-ran, and they become statistics, fast. That should be obvious, but I can’t tell you how many times I’ve seen a pizzeria open in a city where there’s already one on every block; likewise don’t try to start a new job-hunting website when there are already several big guns and dozens of smaller competitors in the field.
You’ll want to continue by figuring out how to make a profit. You’ll notice I didn’t say revenue. That’s because it’s actually quite easy to make money; keeping it is quite another matter. If you don’t have a solid plan for profitability in place before you launch, you’ll soon find yourself on the wrong side of the ledger with no clear way to get back. (VC funding you say? Nice if you can get it. But know this: VCs sleep like babies. That is, they wake up crying every two hours. They’ll want a return on any money they give you, and fast.)
Finally, you need to figure out what it all looks like one year, three years and five years out. If you have no idea what the end looks like, you won’t be putting the right things — staffing plans, growth projections, safeguards — in place now. Begin with the end in mind.
There’s nothing more dazzling and seemingly romantic than the entrepreneurial lifestyle at the moment, especially when job security seems so tenuous. However, there’s no such thing as a fairy tale existence; there’s a great deal more that has to come before and after that bit about “they lived happily ever after.”
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