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Entrepreneurship

In the United States, 71 percent of people say they would like to work for themselves, but only 8 percent are actually self-employed1. In Canada, the pattern is the same: 58 percent would like to be self-employed, but only 11 percent are. There are lots of dreamers, but very few doers. Still, the doers add up—15,000 Americans take the plunge and start a new business every day2. If they can do it, so can you.

Productivity
Paul Graham is the founder of Y Combinator, an organization that provides seed funding and a 10-week boot camp for budding entrepreneurs. In Hackers & Painters, Graham proposes that the best way to get rich fast is to start or join a startup. A startup compresses your entire working life into a few intense years. It’s an opportunity to achieve more than you ever could as a worker drone in a cubicle farm. How much more can you achieve? Graham estimates that an entrepreneur is capable of being 36 times more productive than the average corporate employee. He breaks down the numbers like this:
  • As an entrepreneur, you’re motivated to work 2 times as many hours.
  • If you focus, you can get 3 times more done in an hour.
  • Without a manager breathing down your neck, you can be 2 times more productive.
  • You are probably 3 times smarter than your job description expects you to be.
Multiply all of these factors together (2 × 3 × 2 × 3) and you get 36 times more productivity. Suppose you earn a salary of $80,000 a year at a big company. As an entrepreneur, you have the potential to produce 36 times the amount of work. 36 × $80,000 = $3 million worth of work. Over the course of a few years, all of this extra productivity adds up to a big reward. That’s why entrepreneurship is the fastest way to make a lot of money.

There is only one way to make a great deal of money; and that is in a business of your own.
-J. Paul Getty

Risk and Reward
Big rewards usually come with big risks. Entrepreneurship is no exception. In the United States, 80 percent of new businesses celebrate their first birthday, but only 56 percent make it to their 4th anniversary3. In Canada, 77 percent of new businesses make it past the first year, but only 60 percent survive past 4 years4. Of the businesses that survive, many are just limping along. Entrepreneurship is risky business. It usually takes a lot of swings and misses before you hit one out of the park.

People mix up entrepreneurship with risk-taking...An entrepreneur is a risk-minimizer, an opportunity seeker.
-Peter Farrell

Experience
Venture capitalists (VCs) are professional investors who fund small companies that have the potential to be the next Google or Microsoft. It’s like looking for a needle in a haystack. VCs fund less than 1 percent of the business plans they review5. When VCs fund first-time entrepreneurs, only 18 percent of the companies are successful6. But the odds of success rise to 30 percent when VCs fund an entrepreneur who’s been successful before.
There’s no substitute for experience. In the medical device industry, researchers found that startups performed better if their founders had previous experience with other medical device companies. Experience also helps with finding new ideas. Inc. magazine found that many entrepreneurs got the idea for their new company while working for their previous employer.

Fred Wilson is a VC with Union Square Ventures in New York. He’s funded over 32 startups, and estimates that two-thirds of his successful investments made partial or complete transformations of their business after he invested7. That’s why VCs would rather invest in an “A” team with a “B” idea, than a “B” team with an “A” idea. Ideas change, but winners find ways to win. For your startup, nothing beats the experience of having tried, and failed, and tried again. Each failure teaches you what not to do the next time around.

Can you really explain to a fish what it's like to walk on land? One day on land is worth a thousand years of talking about it, and one day running a business has exactly the same kind of value.
-Warren Buffett

Chicken Entrepreneurship
Michael Masterson has owned and operated more than 40 companies, including two that grew beyond $130 million. In Seven Years to Seven Figures, he suggests that starting a side business is a low-risk way of becoming an entrepreneur. Here is his advice:
  1. Get a full-time job in the industry in which you want to start your own business. Get paid as you gain experience, and develop a network of customers and contacts.
  2. On evenings and weekends, spend 20% of your time finding or developing a cheaper or better version of a product that’s already in demand. Look for products you can sell for 5–10 times more than what they cost you to make or buy.
  3. Spend the other 80% of your time trying to make the first sale.
  4. Once you’ve made your first sale, figure out cheap ways of getting more customers.
  5. As you get more customers, find or develop new products to sell to them.
  6. There will come a time when your side business brings in more money than your day job. Then it’s your choice whether to quit and work for yourself.

Entrepreneurs do more than anyone thinks possible with less than anyone thinks possible.
-John Doerr

Business Strategy
Clayton Christensen is a professor at Harvard Business School. His “Theory of Disruptive Innovation” proposes that certain innovations change the playing field so much that existing companies don’t want to compete8. There are two types of disruptive innovations: low-end disruptive innovations, and new-market disruptive innovations.

Low-end disruptive innovations find low-cost ways of providing good-enough products to customers who are over-served by established companies. For example, Dollar General provides good-enough products at lower prices than Wal-Mart because they do away with all of the frills and convenience of a full-service store.

New-market disruptive innovations find new applications and new customers for old technologies. The resulting products or services are usually more affordable or easier to use than existing solutions. For example, the first personal computers used the same transistor technology as mainframe computers, but they lowered the price and increased the ease of use to the point where computers could be used in the home. The market for personal computers started small, but now dwarfs the market for mainframes. By using old or existing technology, entrepreneurs reduce their technical risk, and free up their time to find new customers and new markets.

Based on his study of the disk drive industry, Christensen found that disruptive products had a 37 percent chance of high growth, compared to 6 percent for non-disruptive products. For your startup, focus on products that are low-end or new-market. Your goal is to find profitable niches that your competitors don’t want to serve, or don’t know about.

Never do anything, if you can help it, that someone else is doing. Why compete with one person or many other persons in any occupation or line of business so long as it is possible for you to have a monopoly in some other field?
-E.W. Scripps

Second is Best
In sports, first across the finish line is the winner. But when it comes to new markets, it’s better to be second than first. In a study of 500 brands in 50 product categories, the failure rate was 47 percent for the first products in a new category9. Even when they survived, pioneers only averaged a 10 percent market share.
 
Instead, the best strategy was entering the market after pioneers had identified the opportunity, and focusing on sales and marketing. On average, these followers started 13 years after pioneers, but became the leaders in 53 percent of the product categories, and had a market share of 28 percent. Follow Michael Masterson’s advice: spend 20 percent of your time on the product, and 80 percent of your time on sales and marketing. Without customers, you don’t have a business.

Networking
It’s a small world out there, and random meetings can pay big dividends for your business. Swedish researchers followed a group of 380 nascent entrepreneurs for 18 months, and found that being a member of a business network accelerated the time to first sales and first profit10. Formal business education did not make a difference. So forget about getting an MBA. Instead, go to networking events, and tell everyone about your business.

Entrepreneurs Club
In business, the most useful thing I’ve ever done was starting an Entrepreneurs Club. It’s a great way to make connections, get advice, and find cofounders for your business ideas. Here are some tips from my experience:
  • Meet your fellow entrepreneurs once a month at a coffee shop. More than once a month is too often.
  • Add new members by invitation only. An existing member has to personally vouch for someone new.
  • Members must be running their own company. This filters out “wannabe” entrepreneurs.
  • Revoke the memberships of people who skip meetings or don’t contribute much. This maintains the quality of the group.

Automatic Business
Your goal is to build a business that can eventually run on its own. It’s nice to take vacations without worrying that everything will fall apart. The secret is recruiting excellent people to fill key management roles. For each role, someone must have the authority to make decisions, and the responsibility for mistakes. These roles are listed in the table below11.

TITLE ROLE
Chief Operations Officer Overall responsibility for coordinating people and systems to achieve the company’s goals
VP Marketing Figures out what customers want, and how to make a profit by satisfying their desires
VP Sales Figures out a system for finding paying customers
VP Operations Ensures that the product is built right, and delivered on time and on budget
VP Finance Ensures that customers pay on time; ensures that the company pays its suppliers on time
VP Research & Development Improves existing products and develops new ones

When you’re starting out, you may be responsible for all of the management roles by yourself. But as your business grows in size, there will be too much work for just one person. To avoid burn-out, you must recruit good people, and delegate authority and responsibility. Your business will also need systems and procedures for training new employees quickly and efficiently. Your ultimate goal is a system that enables average people to achieve superior results.

Coming up with product ideas is not the hard part of entrepreneurship. Figuring out how to sell those products profitably—that’s where the genius comes in.
-Michael Masterson

Your Way, Right Away
Have you noticed that McDonald’s always tastes the same? Whether you’re in Pittsburgh or Prague, you know exactly what to expect when you order a Big Mac and fries. The credit goes to Hamburger University. Since 1961, Hamburger U has graduated more than 80,000 restaurant managers and owner/operators11. Students learn how to set up systems and procedures for repeatable service, quality, and cleanliness.

Every McDonald’s uses the same systems, and that’s why you can count on consistency around the world. For your business, have you written down exactly how to make your product? Do you have a training program for delivering perfect service every time? It takes a lot of effort to develop good systems and keep them updated. But it’s worth it in the long run because you won’t always be around to watch everything.

Personal MBA
You can easily spend $100,000 for an MBA degree12. Not to mention the cost of not earning any money for 2 years. Instead of sitting in a classroom, why not learn the theory in your spare time and apply it right away in your business. Out of hundreds of business books I’ve read, here are my top 12 recommendations. Go to your local library or bookstore, and get started on your personal MBA.

Startups
Sales & Marketing
Finance
Strategy
Inspiration

You wasted $150,000 on an education you coulda got for a buck fifty in late charges at the public library.
-Will Hunting (played by Matt Damon), Good Will Hunting

References
  1. Blanchflower DG, Oswald A, Stutzer A. (2001). Latent entrepreneurship across nations. European Economic Review. 45:680–691.
  2. Fairlie RW. (2006). Kauffman index of entrepreneurial activity. National report 1996-2005. Ewing Marion Kauffman Foundation.
  3. Knaup AE. (2005). Survival and longevity in the business employment dynamics data. Monthly Labor Review. May 2005:50–56.
  4. The Daily. (2000). Failure rates for new firms: 1984–1994. February 16, 2000.
  5. Industry Canada. (2002). Canadian venture capital activity: an analysis of trends and gaps, 1996–2002. Cat. No. Iu4-57/2002E-PDF.
  6. Gompers P et al. (2006). Skill vs. luck in entrepreneurship and venture capital: evidence from serial entrepreneurs. NBER. Working Paper No. 12592.
  7. Schonfeld E. (2007). VCs: What’s your failure rate? TechCrunch. November 30, 2007.
  8. Christensen CM. (1997). The innovator’s dilemma: when new technologies cause great firms to fail. Harvard Business School Press.
  9. Golder PN, Tellis GJ. (1993). Pioneer advantage: marketing logic or marketing legend? Journal of Marketing Research. 30(2):158–170.
  10. Davidsoon P, Honig B. (2003). The role of social and human capital among nascent entrepreneurs. Journal of Business Venturing. 18:301–331.
  11. Gerber ME. (1995). The E-myth revisited: why most small businesses don’t work and what to do about it. HarperBusiness.
  12. Kaufman, Josh. (2005). The personal MBA: mastering business without spending a fortune. http://personalmba.com/recommended-business-books/

Copyright © 2009 by Paul Lem, M.D.
Buy the book at www.MasterLifeFaster.com
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