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:

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

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