Question re: entrepreneurship (NOT a seeking advice thread)

[MetroStyles]

There is statistic that is often kicked around which claims that (90/90/95/fill in the blank) percent of new businesses fail within X years. Although I have a very skeptical view of "facts" like these, I think the general thrust is probably accurate: most new businesses fail.

But to me, this is an uninteresting statistic. It doesn't tell me much. Were these people of above average intelligence? Were they spendthrifts? Did they have a strong background in accounting/financial literacy? Did they do their due diligence? Did they jump into a business because they enjoyed the trade - or because they actually had a plan on how to run a business?

So - for those of you that are entrepreneurs, or have had family members/friends become entrepreneurs, I pose a question:

What is the success rate of entrepreneurs that are highly intelligent, financially literate, thrifty, personable, and that take the time to plan things out, strategically and financially, before jumping in?

And if you have seen these types of people fail - why do you think they have failed? Wrong product, wrong time? Overestimation of public demand? Poor marketing? Another competitor with a better proposition swooped in?

Has it been the idea, or the execution that has led to successful businesses you have witnessed?

Any interesting viewpoints/stories are appreciated.

 

[Hombre Secreto]

I know people that became Restaurateurs and they were incredibly stupid. They had ZERO clue about running a restaurant. Just because they were Cooks/Chefs they thought they could figure out a way to have low overhead, and what's worse is they actually believed restaurants were goldmines. Boy, were they ******* wrong. Those guys were dumb, and really should of just stuck with being employees.

 

[MetroStyles]

Originally Posted by Hombre Secreto

I know people that became Restaurateurs and they were incredibly stupid. They had ZERO clue about running a restaurant. Just because they were Cooks/Chefs they thought they could figure out a way to have low overhead, and what's worse is they actually believed restaurants were goldmines. Boy, were they ******* wrong. Those guys were dumb, and really should of just stuck with being employees.

Yeah, it's those kind of people I'm not asking about. But I take your point.

 

[Rambo]

It really could be any of the above. For contrast I've known two unsuccessful entrepreneurs:

Guy 1 - Extremely smart, multiple degrees, had the whole plan thought out and diagrammed, good product, nice financial cushion, etc.. Ended up losing his shirt in a separate financial deal, had to sell the business and move in with his kids.

Guy 2 - Not so smart but very savvy, great product, great skills, good financial cushion, etc.. Ended up renting in a shop in a poor location (poor visibility, not easy to see sign, etc..) and barely did any business. Lost his shirt after being too stubborn to pull out and start over again.

 

[Hombre Secreto]

My brother had his own construction business and was doing great. He's a contractor and knows the business inside and out, but housing died in California, so now he can barely find work and he's getting divorced. In his case the economy did him in. Some things you just can't control, and when the economy is in the ****... even the brightest fail. Luck plays a part.

 

[volatility smile]

IME, although bear in mind that most of my experiences in this regard are with Silicon Valley/Bay Area startups, so my views are somewhat skewed: 1) Ideas aren't worth ****. Execution (and funding) is everything. You could take the greatest idea ever to VCs or whoever and you'll have barely a snowball's chance of getting funded if that's basically all you've got. 2) Most startups fail because they run out of funding. Plain and simple. There can be a bunch of reasons why that happens, but it's because they didn't know what the **** their customers wanted. Success, however you define it, has next to nothing to do with how intelligent, or how financially literate, or whatever you and your cofounders are -- as long as you have "enough" of those, you're set. I can't emphasize that last point enough. Instead, what you really need is persistence, and some luck. I think it takes a special kind of person to found a startup, and when they fail, it's usually because they didn't have the right people. 3) It's often a lot easier to improve on what's already out there than to go try and reinvent the wheel or conjure new markets from thin air (this is really ******* hard to do. You need lots of money to do this.). 4) Just do one thing, and do it well, but that one thing had better be something people will want to use. 5) **** VCs. **** them all.

 

[BigPoppa]

There's a huge difference between most Silicon Valley startups and the majority of new businesses started each year.


Most new businesses aren't breaking new ground: they're restaurants, or retail stores, or manufacture small consumer products (clothes, toys, artisanal cheeses, whatever). The most important things for them are:

1) Realistic business model that can turn a profit if well run (a lot go off the tracks right here, as with the aforementioned idiotic restauranteurs)

2) Sufficiently thrifty/knowledgeable owners who can make the best of opportunity and keep down overhead

3) Sufficient cash reserves until business gets to breakeven point (businesses that can be run almost entirely by owners and that don't require high rental locations have huge advantage here)

4) Fortuitous meta factors (economy doesn't crash, Starbucks doesn't open up across street from your coffee shop, etc)



OP: Assuming business has #1, 2, 3 (which you are), I'd guess that the failure rate is drectly proportional to how daring/innovative the idea behind it is. Trying to launch a new sport (like Burton did for snowboarding) or a product that fills a previously non-existent niche (like FedEx or Netflix) can be massively rewarding, but the failure rate is correspndingly massive. A well thought out and market researched sub sandwich shop in a neighborhood you know well won't make you rich, but its success rate will be a lot higher.

 

[Blackhood]

I read somewhere that most millionaires have been bankrupt 2.4 times before making their money.

From what I've seen if someone has all the traits you're stating then they will be fine, as long as market forces ect dont **** them up.

I've known guys with all the brains and passion but who failed because they over-spent at start up and dried up their cash flow. On the other hand I've known people whose attention to detail bordered on maniacal, but when it came to actually selling their product they were crap.

If and when I come to starting my own company I will be looking for a partner, I know I can sell, am business minded, but I also know that my grasp of financial detail is poor.

I think they key is in having all the attributes you posted, can you name a single person who honestly has all those qualities? I'd say maybe 1 in every hundred people has all of them, so if 95/100 businesses do ok, then 4 people are there just based on luck.

 

[Don Carlos]

Originally Posted by Blackhood

From what I've seen if someone has all the traits you're stating then they will be fine, as long as market forces ect dont **** them up.

This is probably a bit of an exaggeration. There are plenty of unpredictable and uncontrollable factors, beyond just macroeconomics, that can dash a startup on the rocks. The emergence of a well-funded and previously unknown competitor, for example. This happens all the time in tech startups. It's pretty much a rule of thumb in Silicon Valley that, if your idea is solid enough and you've got decent funding, there are 20 other startups doing the exact same thing with even more funding. Not to mention that Google or Facebook is also doing it as a side project, but with enough ****-you money and in-house engineers to blow you away just for the sake of doing so.

Even in non-tech startups and small businesses, competition plays a huge part. Marketing plays a freaking enormous part, as well. In my experience advising or working with friends who start small businesses -- highly intelligent, savvy, and credentialed people, mind you; many of them T1 MBAs with 5+ years at McKinsey or Goldman, etc. -- everyone takes marketing for granted. "If we build it, and we build it here, they will come" seems to be the mantra. This is a horrendously misguided assumption. Customer acquisition, retention, and growth should be the most important parts of your businesses in the early stages and even in the pre-planning stages. Without customers, you will not earn cash, and when you run out of cash, your business will die. It seems like a simple enough concept, but nobody takes it seriously until it's too late.

I guess what I'm saying is that experience, or lack thereof, plays an enormous role. And how many people out there are willing to invest their life savings into two, or even three, failed startups before they've built the knowledge base sufficient to succeed with their next one?

I've known guys with all the brains and passion but who failed because they over-spent at start up and dried up their cash flow. On the other hand I've known people whose attention to detail bordered on maniacal, but when it came to actually selling their product they were crap.

In my experience, 99 people out of 100 fail at the latter part. Overspending is a big problem, but is really just a symptom and not a cause of failure. The cause of failure is always, at its core, that the business ran out of money. And you don't run out of money solely because you've spent it all (unless you're an idiot, I guess). You run out of money because you did not have enough money to survive the ramp-up to breakeven or because that ramp-up was never going to happen, for lack of customers.

People wanting to start businesses should think of their seed money as a timer. Find out the increments at which your timer ticks. Is it days? Is it weeks? Is it months? You're on a race against this timer. Your goal is to get to breakeven (and beyond) before the timer counts down to zero. Stretching your dollars and being frugal helps slow down the timer. Good marketing/sales helps you speed up while the timer maintains its current speed. These are the two levers you work with: slowing the timer and accelerating yourself. But sooner or later, the timer will win if you can't start making money.

 

[Blackhood]

Its strange, this thread is a living example of why large corporations need Directors and CEOs. A one-man-band operation seems almost bound to fail, but with enough specialists guiding their own portion of the business, the pit-falls should be relatively easy to avoid. Now I've just got to get a great idea, £500k start up money and 4 like-minded-but-very-different friends to go allong with me....

 

[Thomas]

I know an entrepreneur who started his own business and eventually cashed out. I work for him, actually, at his son's business, who is likewise an entrepreneur on his own.

I can tell you about the father. He claims to be very unsavvy, but once you've tried to BS him you quickly learn better. He learns everything he can about anything that costs money (within limits) and watches the money pretty tightly. He knows what a process costs, and he's always walking around checking on everything. He's a planner, but he also takes chances, once in a while. He looks hard for the right lever to pull in each situation. He's demanding as hell but knows when to back it off. If you've read Kitchen Confidential, he reminds me of Bigfoot, quite a lot.

I can be more detailed via PM if you like.

 

[MetroStyles]

Originally Posted by Thomas

I know an entrepreneur who started his own business and eventually cashed out. I work for him, actually, at his son's business, who is likewise an entrepreneur on his own.

I can tell you about the father. He claims to be very unsavvy, but once you've tried to BS him you quickly learn better. He learns everything he can about anything that costs money (within limits) and watches the money pretty tightly. He knows what a process costs, and he's always walking around checking on everything. He's a planner, but he also takes chances, once in a while. He looks hard for the right lever to pull in each situation. He's demanding as hell but knows when to back it off. If you've read Kitchen Confidential, he reminds me of Bigfoot, quite a lot.

I can be more detailed via PM if you like.

I'll take you up on that if I actually pull the trigger. I'm a lot of talk and not a lot of action, sometimes.

The reason I ask all this is because I've always been pretty good at everything - but have never been great at anything. I think that when you are trying to make it in an industry (corporate), you need to be really good at something to stand out. Unless it's management, where being well-rounded is a benefit. However I think that being well-rounded but not a star at anything can actually help me in entrepreneurship.

I've never been one to try to change the world, even though I get far-fetched ideas. My dream is simple: create a boring business, cash out for $3MM one day, and call it quits. I know, not very ambitious, but I guess I just don't really want anything more than that.

 

[Thomas]

Originally Posted by MetroStyles

I'll take you up on that if I actually pull the trigger. I'm a lot of talk and not a lot of action, sometimes.

The reason I ask all this is because I've always been pretty good at everything - but have never been great at anything. I think that when you are trying to make it in an industry (corporate), you need to be really good at something to stand out. Unless it's management, where being well-rounded is a benefit. However I think that being well-rounded but not a star at anything can actually help me in entrepreneurship.

I've never been one to try to change the world, even though I get far-fetched ideas. My dream is simple: create a boring business, cash out for $3MM one day, and call it quits. I know, not very ambitious, but I guess I just don't really want anything more than that.

Sounds good - you know how to get hold of me.

Actually, I forget, I worked for an owner/manager before the current gig, and I had line-of-sight into the exec suite at the one before that. In every case, I'd highlight focus and determination and a thick skin as their main strengths. Pretty well all of them were quite single-minded. Intelligence and well-roundedness varied greatly.

Now that I think a bit more, my uncle left Shell and bought a few small companies that he owns and operates. He's fiendishly smart (Ph.D Chem-Eng), and outlandishly handy. Really nice guy, too.

 

[MetroStyles]

Can you talk more about the thick skin part?

 

[randallr]

Originally Posted by MetroStyles

Can you talk more about the thick skin part?

Are you worried you may be too sensitive?