American Express OPEN Forum

Follow:

Highlights:

Employee Management
Money
Social Media
See More
- Topics
  - The World
  - Technology
  - Money
  - Marketing
  - Managing
  - Lifestyle
  - Innovation
- Features
Search

Search OPEN Forum

Search OPEN Forum

I, Entrepreneur

Matthew E. May Shibumi Creative Recent Posts

0 Comment

Tumblr
Email

July 14, 2009

OPEN Forum Message

Business Forecasting 2012

Our special feature on forecasting sheds light on how to choose the right model, offers advice from Jack Stack and more.

Get started

Be the first to comment on this article

I am a confirmed entrepreneur. But just barely. Not because I am a card-carrying member of the free-agent nation (which I have been for nearly a quarter century), but because I just barely squeaked by with a passing grade of 60% on the online test that accompanies Scott Shane’s book, The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By.

I liked this book for two reasons: first, the accessible, common sense definition of entrepreneurship—"the activity of organizing, managing, and assuming the risks of a business or enterprise;" second, because I like anything that dispels conventional wisdom by using facts and data.

That’s what Mr. Shane does quite eloquently to advance his view that “People start businesses based on the myths we tell ourselves about entrepreneurship and then are hurt when confronted with reality. Investors believe these myths and invest money and then they’re disappointed when they don’t hold true. Policy makers make policy based on these myths and then wonder why the economy isn’t growing with all these entrepreneurs now in it.”

That’s an intriguing position to take, so I went to the website and took the test. Where I went wrong is the interesting story.

I was wrong in thinking that a higher percentage of U.S. households owned a business in 2004 (11.5%) than they did in 1983 (14.2%). I was wrong in my image of the typical startup; Mr. Shane proves that they are not innovative, have no plans to grow, have only one employee, and generate less than $100,000 in revenue.

I was wrong in my estimation of employment percentages in new business. New companies, which are those one or two years old, employ only one percent of the population in the United States. Further, new companies comprise less than seven percent of annual new job creation. Meanwhile, sixty percent of the workforce is employed by companies ten or more years old.

I was wrong in thinking the United States leads the world in new business creation per capita. It’s Peru. And I was wrong in thinking that San Jose had the highest per capita rate of new venture formation in the mid 1990s. It was Laramie, Wyoming.

I was wrong in my view of venture capitalists, and I know a few. Stay away from them unless you’re in a high-tech or bio-tech business. These two industries consume over eighty percent of the available venture capital dollars. Beyond that, the odds your start-up will get venture capital are roughly one in four thousand. According to Mr. Shane, you have better odds of dying from a slip in the shower—which may be less painful than working with venture capitalists.

I was wrong in thinking that starting the business is the easy part because keeping it going is the hard part. Most start-ups, paradoxically, don’t start up in any real way—they never get up and running.

Finally, I was wrong in thinking that, on average, entrepreneurs are better off financially than employees. As Mr. Shane points out, while entrepreneurship creates a great deal of wealth, the distribution of that wealth is rather lop-sided. It’s the ten percent of the entrepreneurs at the very top that earn more than employees. Typical annual profit for an owner-managed business is under $40,000. And in fact, the typical entrepreneur earns less than they would have earned working for someone else.

Which brings me to the part (among others) that I got right: it’s not about the money. The reason most people start their own business is not to get rich. It’s not because they have no other alternative. And it’s not to work less. It’s simply because they don’t want to work for someone else.

That was certainly my reason.

For more insights from Matthew E. May, visit his past blog posts at http://inpursuitofelegance.com follow him at http://twitter.com/matthewemay.