Top Ten Myths of Entrepreneurship
Top Ten Myths of Entrepreneurship
This is a guest post by Scott Shane as a follow up to his entrepreneurship test.
He is the A. Malachi Mixon Professor of Entrepreneurial Studies at Case
Western Reserve University. He is the author of seven books, the latest
of which is The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By.
Many entrepreneurs believe a bunch of myths about entrepreneurship, so
here are ten of the most common and the realities that bust them:
-
It takes a lot of money to finance a new business.
Not true. The typical start-up only requires about $25,000 to get
going. The successful entrepreneurs who don’t believe the myth design
their businesses to work with little cash. They borrow instead of
paying for things. They rent instead of buy. And they turn fixed costs
into variable costs by, say, paying people commissions instead of
salaries.
-
Venture capitalists are a good place to go for start-up money.
Not unless you start a computer or biotech company. Computer hardware
and software, semiconductors, communication, and biotechnology account
for 81 percent of all venture capital dollars, and seventy-two percent
of the companies that got VC money over the past fifteen or so years.
VCs only fund about 3,000 companies per year and only about one quarter
of those companies are in the seed or start-up stage. In fact, the odds
that a start-up company will get VC money are about one in 4,000.
That’s worse than the odds that you will die from a fall in the shower. -
Most business angels are rich.
If rich means being an accredited investor –a person with a net worth
of more than $1 million or an annual income of $200,000 per year if
single and $300,000 if married – then the answer is “no.” Almost three
quarters of the people who provide capital to fund the start-ups of
other people who are not friends, neighbors, co-workers, or family
don’t meet SEC accreditation requirements. In fact, thirty-two percent
have a household income of $40,000 per year or less and seventeen
percent have a negative net worth. -
Start-ups can’t be financed with debt.
Actually, debt is more common than equity. According to the Federal
Reserve’s Survey of Small Business Finances, fifty-three percent of the
financing of companies that are two years old or younger comes from
debt and only forty-seven percent comes from equity. So a lot of
entrepreneurs out there are using debt rather than equity to fund their
companies. -
Banks don’t lend money to start-ups.
This is another myth. Again, the Federal Reserve data shows that banks
account for sixteen percent of all the financing provided to companies
that are two years old or younger. While sixteen percent might not seem
that high, it is three 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. -
Most entrepreneurs start businesses in attractive industries.
Sadly, the opposite is true. Most entrepreneurs head right for the
worst industries for start-ups. The correlation between the number of
entrepreneurs starting businesses in an industry and the number of
companies failing in the industry is 0.77. That means that most
entrepreneurs are picking industries in which they are mostlikely to
fail. -
The growth of a start-up 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. Over the
past twenty years or so, about 4.2 percent of all start-ups in the
computer and office equipment industry made the Inc 500 list of the
fastest growing private companies in the U.S. 0.005 percent of
start-ups in the hotel and motel industry and 0.007 percent of start-up
eating and drinking establishments made the Inc.
500. That means the odds that you will make the Inc 500 are 840 times
higher if you start a computer company than if you start a hotel or
motel. 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 ten percent of
entrepreneurs earn more money than employees. And the typical
entrepreneur earns less money than he otherwise would have earned
working for someone else. -
Many start-ups 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 less 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.
>BackTrack<