Why It’s a Horrible Idea to Have a Startup for Most People
For the past couple of years, I’ve had a gut feeling. Entrepreneurs are not equals — and perhaps not everyone should have a startup. Are you thinking about having a startup of your own? Maybe you’re already in the early stages? I joined my first startup in 2010 as an intern. Today, 35 years old, I’ve founded several of my own companies and thought a great deal about what makes some startups succesful.
Disclaimer: The studies referenced in this article provide evidence for my arguments. They are, however, not necessarily generalizable. Many of them were done based on samples/datasets from the US. As always, use your critical thinking when reading anything, including my article.
Setting the stage
It’s really hard to build a business.
I’ve met hundreds of startup founders throughout the years. Some of them have become good friends of mine. Only a small number have had any success. Many of us have a romantic image of what it takes to build a business. Perhaps we imagine ourselves even building an empire.👇
However, the harsh truth is that 99 percent of the companies in the EU (as an example) are small and medium-sized enterprises(SME). The vast majority don’t want to, or can’t push past the growth barrier. If you are looking to build the next big thing, you will have to keep in mind that you are shooting for the top one percent. 🏆
What about technology companies then? If you’ve been around for some time, you’ve likely heard that approximately 90 percent of startups fail. I’ve tried to find where that number comes from without any success. However, I did find some numbers.
“Song et al. (2018) analyzed 11,259 New Technology Ventures (NTV) in the US. After five years, only 21.9 percent of the companies were still around.”
Song et al. (2018) analyzed 11,259 New Technology Ventures (NTV) in the US. After five years, only 21.9 percent of the companies were still around. 😱 That’s very disheartening. Listed companies don’t seem to do well either. Govindarajan and Srivastava (2016) looked at 29,688 companies on the US stock markets from 1960 to 2009. Their findings were shocking.
Before 1970, 90% of the companies had managed to survive for at least five years. However, between 2000 and 2009, the survival rate of a listed company dropped to 63%. If you’re wondering why the big players are panicking, this number should provide a clue.
Many entrepreneurs will want to make an exit and live the good life. Some of them manage to do an IPO or get gobbled up by a giant. Yet, upward of 50 percent of mergers and acquisitions (M&A) seem to fail (Cartwright and Schoenberg, 2016). Even if you make it to an M&A, you’re going up against some real challenges. 🙈
Throughout the years, many have asked themselves if an entrepreneur’s qualities can predict success, and if so, which ones those are. You might want to know, for example, that most successful entrepreneurs are middle-aged. The notion that successful startup founders are young, for the lack of a better word, is a lie.
“A founder at the age of 50 was twice as likely as a 30-year old to make a successful exit.”
Azoulay et al. (2018) looked at 2.7 million people who founded a business between 2007–2014. After crunching the numbers, the team discovered that the average founder age for new ventures with the highest growth was 45 years. A founder at the age of 50 was twice as likely as a 30-year old to make a successful exit. If you’re in your 20s or 30s, perhaps you shouldn’t start a business. 🤔
Then, there’s this one particular idea that just doesn’t seem to die. Entrepreneurs pursuing a venture in an industry with no or limited previous experience are more likely to disrupt it. It doesn’t seem like it. Long experience in an industry is a strong predictor of growth. To sum it up — if you are young and have limited experience in the industry you’re about to enter, you’ll need a miracle.
According to Song et al. (2018), one of the success factors to growing a business was access to resources. That’s not a surprise. Some entrepreneurs manage to grow their business organically, reinvesting money in growth. Others raise money from a venture capitalist or angel investors. 💰
Before going to angel investors, founders may want to ask for money from friends and family. It stands to reason to think that those with low socioeconomic status don’t may have that option.
If friends and family don’t have the capital, you might want to go to angel investors. Now, angel investors are a peculiar group of people. They make decisions under extreme uncertainty. You likely won’t have much data to give them — hell, you may not even have a prototype.
They know that most of their investments will fail. Research suggests that in the absence of data, they will resort to their intitution (Huang and Pearce, 2016). That said, you can’t come empty-handed. You still need some sorts of predictions about where you might be heading.🔮
In the absence of data, they’ll go on what they have — you. Now, that’s a bit wishy-washy, don’t you think? Well, it’s what they have, and it seems to be serving some of the angel investors well.
Symbolic actions that help investors to form an impression of you seem to help. Symbolic actions such as conveying yourself as credible, professional organizing, organizational achievement, and the quality of your stakeholder relationships determine if you’ll get money. I won’t detail all of these, you can read about them in the study.
The point of this is that you have to acquire specific knowledge and skills and be self-aware of how you present yourself. These things take years to learn and hone.
I hypothesize that entrepreneurs that are exposed to environments from an early age have a competitive edge. If you haven’t been around other entrepreneurs, you’ll have a big learning curve ahead of you. It’s not one you should take lightly.
“Yours truly was a refugee, growing up with a single mom who worked with social welfare services.”
Yours truly was a refugee, growing up with a single mom who worked with social welfare services. There were no books at home to read, and entrepreneurship was never mentioned as an option to pursue. It wasn’t until after I finished my second degree that I got interested in building my own business.
And then we have the damn Dunning–Kruger effect. People tend to overestimate their abilities and seem unaware of it (Kruger and Dunning,1999). Many of us, including myself, have failed hard just because of this. To mitigate this problem, I started setting learning goals for myself.
What you can do about it
Play the long-term game. Duh.
There’s probably a lot to take in. The evidence is clear: Not everyone will enjoy success. What can you do about it? Well, here are my initial thoughts about how to approach the lousy odds and uncertainty:
- Start a side hustle to acquire critical knowledge and skills. Your primary return on investment (ROI) should be about learning, not money. Ask yourself what you need to learn and how you can learn it most effectively and efficiently possible.
- Invest heavily in honing your relationship-oriented behaviors. How well you manage your relationships with people — in particular stakeholders — will determine if you can acquire resources in the future. If you have a poor history of building and maintaining relationships, I’d recommend that you make this a top priority.
- Select an industry that you want to be in for the long run. Industries get disrupted and change over the years. That said, having been a part of the change will provide you with valuable experience. It’ll give you a head-start when developing a new product or service as you’ll be more attuned to your future customers’ needs.
- Team up with other people. I’ve seen a fair share of entrepreneurs thinking that they can make it on their own. Good luck with that. Make sure you surround yourself with people that have experience, knowledge, skills, and networks that you lack. Building meaningful relationships takes time, sometimes years.
- Plan for having alternative income streams. I burned through all of my savings for an idea that had some success but ultimately failed. Instead of relying on having a business as your only source of income, think about other ways to create wealth, like investing in property.
Azoulay, Pierre, et al. “Age and High-Growth Entrepreneurship.” American Economic Review: Insights, vol. 2, no. 1, 1 Mar. 2020, pp. 65–82, 10.1257/aeri.20180582.
Cartwright, Susan, and Richard Schoenberg. “Thirty Years of Mergers and Acquisitions Research: Recent Advances and Future Opportunities.” British Journal of Management, vol. 17, no. S1, Mar. 2006, pp. S1–S5, 10.1111/j.1467–8551.2006.00475.x.
Govindarajan, Vijay, and Anup Srivastava. “Strategy When Creative Destruction Accelerates.” SSRN Electronic Journal, 2016, 10.2139/ssrn.2836135.
Huang, Laura, and Jone L. Pearce. “Managing the Unknowable: The Effectiveness of Early-Stage Investor Gut Feel in Entrepreneurial Investment Decisions.” Administrative Science Quarterly, vol. 60, no. 4, 16 July 2015, pp. 634–670, 10.1177/0001839215597270.
Kruger, Justin, and David Dunning. “Unskilled and Unaware of It: How Difficulties in Recognizing One’s Own Incompetence Lead to Inflated Self-Assessments.” Journal of Personality and Social Psychology, vol. 77, no. 6, 1999, pp. 1121–1134, 10.1037/0022–35184.108.40.2061.
Song, Michael, et al. “Success Factors in New Ventures: A Meta-Analysis*.” Journal of Product Innovation Management, vol. 25, no. 1, 7 Dec. 2007, pp. 7–27, 10.1111/j.1540–5885.2007.00280.x.