Guy Kawasaki had a guest post from Scott Shane late last week. I would have noted this earlier on this blog–because it’s a direct hit–but I was on airplanes all day. The post is titled Top Ten Myths of Entrepreneurship.
Scott Shane is author of The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By, and several other books in this vein. He teaches at Case Western.
Here are some highlights, with excerpts from Scott’s post plus, in some cases, my commentary.
- It takes a lot of money to finance a new business. Not true. The typical startup only requires about $25,000 to get going.
And I’ve seen some articles that list the average at even less: $10,000.
- Venture capitalists are a good place to go for startup money. Not unless you start a computer or biotech company. VCs only fund about 3,000 companies per year and only about one quarter of those companies are in the seed or startup stage.
- Most business angels are rich. Almost three quarters of the people who provide capital to fund the startups of other people who are not friends, neighbors, co-workers or family don’t meet SEC accreditation requirements. In fact, 32 percent have a household income of $40,000 per year or less and 17 percent have a negative net worth.
That surprises me. I thought securities and exchange law requires that investors who aren’t friends and family be wealthy in SEC-accreditation terms. I’d like to know more about what’s going on here.
- Startups can’t be financed with debt. Actually, debt is more common than equity. According to the Federal Reserve’s Survey of Small Business Finances, 53 percent of the financing of companies that are 2 years old or younger comes from debt and only 47 percent comes from equity.
- Banks don’t lend money to startups. This is another myth. Again, the Federal Reserve data shows that banks account for 16 percent of all the financing provided to companies that are 2 years old or younger. While 16 percent might not seem that high, it is 3 percent higher than the amount of money provided by the next highest source–trade creditors–and is higher than a bunch of other sources that everyone talks about going to: friends and family, business angels, venture capitalists, strategic investors and government agencies.
And this one also surprises me. What Shane isn’t mentioning, I suspect, or that the statistics perhaps don’t reveal, is that this bank financing is backed by owner assets, such as home equity. Banks aren’t supposed to take the risks involved in startup companies because of laws intended to protect depositors. So I suppose I’m one of the propagators of that myth.
- Most entrepreneurs start businesses in attractive industries. Sadly, the opposite is true. Most entrepreneurs head right for the worst industries for startups. That means that most entrepreneurs are picking industries in which they are most likely to fail.
- The growth of a startup depends more on an entrepreneur’s talent than on the business he chooses. Sorry to deflate some egos here, but the industry you choose to start your company has a huge effect on the odds that it will grow. There is nothing anyone has discovered about the effects of entrepreneurial talent that has a similar magnitude effect on the growth of new businesses.
- Most entrepreneurs are successful financially. Sorry, this is another myth. Entrepreneurship creates a lot of wealth, but it is very unevenly distributed. The typical profit of an owner-managed business is $39,000 per year. Only the top 10 percent of entrepreneurs earn more money than employees. And the typical entrepreneur earns less money than he would have earned working for someone else.
Thanks Scott, not pleasant news, but important. This is what I see, too. So many of us want to start our own businesses, and for good reasons, but you have to know what you’re getting into.
- Many startups achieve the sales growth projections that equity investors are looking for. Not even close. Of the 590,000 or so new businesses with at least one employee founded in this country every year, data from the U.S. Census shows that (fewer) than 200 reach the $100 million in sales in six years that venture capitalists talk about looking for. About 500 firms reach the $50 million in sales that the sophisticated angels, like the ones at Tech Coast Angels and the Band of Angels, talk about. In fact, only about 9,500 companies reach $5 million in sales in that amount of time.
- Starting a business is easy. Actually it isn’t, and most people who begin the process of starting a company fail to get one up and running. Seven years after beginning the process of starting a business, only one-third of people have a new company with positive cash flow greater than the salary and expenses of the owner for more than three consecutive months.
Amen to that.
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
