Entrepreneur Myths (3 page)

Let me get you out of your entrepreneur fantasy world. The odds of your venture becoming successful are much lower than you and your enthusiasm warrant. Depending on the sector, the chances are stacked against you. In America, four out of five businesses fail within five years of conception — which means that you’ve got a 20% chance of making it. Shit, it’s almost as bad as gambling in Las Vegas.

Before you start your venture, study your sector, and figure out the failure rate in that particular industry. Don’t put your fucking blinders on, thinking you’ll be the exception.

For instance, be very cautious starting a restaurant in today’s economy. Restaurants are a high-failure business so you’d better have enough cash to sustain losses — unless you’re Chef Ramsey. Even some of his restaurants struggled. The competitive intensity in the restaurant industry is enormous. Starting a restaurant to compete against Taco Bell is not easy but Chipotle, Taco Diner and Fuzzy Taco succeeded so far because of their respectively unique product and service differentiation.

The odds of success vary for internet or technology startups, especially in social media. However, their fixed costs are substantially lower than brick and mortar businesses — if they know what they’re doing.

Unless you’re well funded or you have a sugar daddy, focus on starting a venture with low fixed costs. This allows you to test your idea in the marketplace without losing your shorts. If it fails, you are in a position with more options. And for a college student there is no better way to lower costs than by starting a venture out of a dorm room.

Ted Turner is a billionaire because he had no choice. When his father died, he assumed the billboard advertising business, loaded with debt. He had to succeed. He might have walked away and become an employee somewhere, but he chose the path of entrepreneurship, saved the family business, and made billions. Today, he’s the largest landowner in America.

I’ve seen entrepreneurs quit their day jobs and start their venture without first proving their idea had validity or market acceptance. They came to me for money, desperate. Don’t be a brave, stupid-ass entrepreneur like I used to be. Be a smart, low-risk entrepreneur. Backing yourself against the wall is not going to make you work any harder in your venture. It will only make it worse.

I funded an entrepreneur couple in the computer hardware sector. They were so broke when they came to pitch me that they had to leave their car running for two hours during their investor presentation. They couldn’t afford to fix the car and were afraid that if they turned it off, it wouldn’t start again. Lucky for them, I funded their ass. They later told me the story, and we laughed our asses off. Looking back, I wondered why they were so nervous during the meeting.

It’s hard to pitch investors when you’re flat broke. Try not to put yourself into this position. The media glamorizes entrepreneurs who risked it all and won. Please realize these entrepreneurs hit the “entrepreneur lotto.” Yes, those stories are real. However, the media seldom talks about all of the entrepreneurs who risked it all, lost everything and now work at McDonald’s.

Do me a fucking favor.  Try
not
to risk it all. I did it a few times and
sometimes
it worked out, but other times I faced failure of major consequences.

My advice: risk it all while you’re young. If you fail, you have time to recover. But no matter what any entrepreneur says, failure is a fucked up road.

Brain Candy: questions to consider and ponder

(Q1)
Have you risked everything to fund your venture? What was the result? Would you do it again?

(Q2)
Is it better to risk it all when you’re young and inexperienced or when you’re older and experienced?

(Q3)
If you risked it all and failed, how did you recover? Did you come out of failure quickly?

(Q4)
Do you think the media glamorizes entrepreneur success?

(Q5)
If starting and self-funding a venture, how much money is in reserve, based on your personal burn rate? How many months can you survive?

(Q6)
When was the last time you saw a story in the news that started like this: “This is CNN. Coming up after the break, we have a wonderful tidbit of failure to share with you.”

Entrepreneur
Myth 4
| You must have domain expertise to start a venture

Domain expertise, or being an expert in a particular area, is important but it can also be a hindrance. Sometimes knowing too much can make you dumb — it blinds your imagination or outside-of-the-circle thinking. Most people are domain experts in some area, but not every domain expert makes a great entrepreneur — at least not from a leader or founder perspective.

In college, I started an advertising agency as part of my entrepreneurship class.
I went to great lengths to learn the art of advertising. David Ogilvy’s book,
Ogilvy on Advertising,
is a must read for any entrepreneur. When asked what he brings most to a client, David simply stated, “Objectivity.” I didn’t truly absorb what he meant until later. Domain expertise is critical for a startup, but objectivity is equally as important.

When Jobs and Wozniak started Apple, they weren’t domain experts for the emerging computer industry. Bill Gates started Microsoft, but he didn’t come from IBM. When Pierre Omidyar and Jeff Skoll started eBay they weren’t experts in online auctions. Jeff Bezos, founder of Amazon, didn’t come from the book publishing sector. And Mark Zuckerberg wasn’t a social media guru when he founded Facebook.

These founders were not domain experts because the markets were emerging but that didn’t stop them from starting ventures that created marketplace disruption and revolution in their respective industries. For example, the computer industry parallels the auto industry of the 1900s. Henry Ford didn’t start out as an automobile genius or manufacturing expert, but he is responsible for developing the mass production system, which had a significant effect in most industries. When Steve Jobs came back to fix Apple in 2002, he was not a music mogul or telecommunication expert. However, he changed the dynamics of the music and mobile sectors by introducing iPod, ITunes, iPad and iPhone. I wonder what is iNext.

Don’t worry if you’re not a domain expert. You may be in a better position to recognize an opportunity. You can always hire domain experts. The hardest part in entrepreneurship is having a clear vision you can transform into reality.

Domain expertise can be applied to a non-related sector. For example, my friend Steve Cinelli founded Primarq, the first exchange for investing in owner-occupied real estate. Previously, he was founder of Offroad Capital, a financial marketplace. He applied his domain expertise in finance, banking and market exchanges to another industry. You might do something similar.

When I started my first venture fund, I didn’t have a finance degree. But I had studied complexity science for 10 years as a hobby so I applied those principles to the highly volatile stage of startup investing.

Look at it this way, in order to think outside the box, you have to think outside the circle

This is one time when being dumb has its advantages. Not being a domain expert causes you to ask simple, dumbass, obvious and silly questions. Besides, there is no such thing as a stupid question, only ignorant people who don’t want to bother answering them.

As another hobby, I spent time learning the Toyota Production System (TPS). I was applying it before most lean business experts in the U.S.

Taiichi Ohno and Shigeo Shingo developed TPS for Toyota. They were geniuses — true all-time business greats. They don’t get enough credit for developing a business and manufacturing process that is transforming every industry. The Toyota Production System or, what is commonly called in America, just-in-time or lean manufacturing transformed Toyota into one of the largest automobile manufacturers.

Ford said, “You can buy any Ford you want as long it’s black.” Ohno and Shingo’s philosophy was that products should be made
when
the consumer wants them,
how
they want them and
when
they want them. TPS’s continuing goal is to reduce or eliminate waste in every stage of the process while offering customers what they want, when they want it. The founding principle of the TPS system is to ask simply “Why?” Ohno was famous for asking why multiple times. Sometimes, he drove people around him fucking nuts. When you ask why, you force yourself and other people to think. On the average, people have a tendency not to completely think through a question. Shit, thinking is hard work.

Ask why

Why do particular processes contain unnecessary inventory at various stages? Why can’t we build a car according to a consumer wants and deliver it within five days? Why can’t we make products one at time and just in time in most industries? Asking a simple “why” question numerous times on a specific problem enabled Ohno and Shingo to develop agile, flexible, scalable and adaptable business processes at every level of the Toyota value chain.

I had lunch with Elon Musk, founder of PayPal and Tesla Motors, around the time he launched SpaceX. He explained to me that because he didn’t start out as a domain expert in those sectors, he saw those sectors with a fresh set of eyes and was able to transform those industries. Elon asked why banks should be the only businesses transacting money online. Why should NASA be the only organization to transport into space? Why can’t a private enterprise do the same and even better?

Basic “why” questions help form billion-dollar enterprises. From an investor perspective, don’t hold judgment against any entrepreneur whose domain expertise is in another sector. They are most likely applying lessons from another field. I know of one investor who turned down funding Paypal in its early stages. I bet he’s still kicking his own ass today. I also know an investor group that turned down Mark Cuban when he was seeking funding for his company Broadcast.com. His startup focused on broadcasting sporting, presidential and other events over the internet. Cuban came from high tech and was not a domain expert in sports broadcasting. The investor group was greedy, but it didn’t matter to Cuban. He refused the deal and later sold the company to Yahoo for $5.8 billion. That investor group still regrets blowing off Cuban.

“Why” can change an industry.

Why can’t a startup company outside of the automobile industry build a line of electric automobiles for the masses? Tesla Motors is doing it today.

I funded a team of entrepreneurs who designed an electric bike when the green movement was just taking off. Like Musk, they had the attitude of “why.” They asked, “Why can’t we build an electric bike that goes more than 20 to 30 miles before the next charge?”

Don’t be afraid to question everything and anything. 

Why does film distribution operate in its current state? Why can’t we change the film distribution model and compete head-on against Blockbuster? The “why” caused Netflix and Hulu to change the entertainment business model and compete directly and indirectly against Blockbuster — putting them on the ropes.

Why did consumers switch from using MySpace to Facebook? Google questioned why consumers should only use Facebook and came out with Google+. Why is Apple successful in entering new markets where other companies struggle? Why do consumers buy a certain product or service? Why can’t we change the product’s appearance to appeal to a different market? Why is the product manufactured in a specific way? Why can’t we lower its cost? Why can’t we manufacture the product locally or regionally instead of overseas? Why is the product distributed in some channels and not in others? Why do buyers buy it? Why do things work the way they do? Why can’t the industry work differently? Why not? Why can’t I sell direct instead of through retail channels?