The Top 7 Myths of Entrepreneurship

Many Entrepreneurs believe in certain myths about the industry that simply aren’t true. Based on starting a few companies and research conducted by Professor Scott Shane, the following list highlights the top 7 myths that you should know:

1.    You require a lot of capital to get a business going. Albeit this depends on the industry and product; the successful Entrepreneurs find unique ways of achieving their goals. They borrow instead of purchasing, rent instead of buy, pay with commissions instead of salaries, and turn fixed costs (costs that are not dependant on activities of the business ie: salary or rent) into variable costs (are volume-related and paid per quantity ie: materials for each product). On average a typical start-up requires approximately $25,000 to get going.

2.    Venture capitalists are a good place to get start-up money. This only holds true if you if you are starting an extremely high capital intensive company like a biotech or a computer manufacturing company.  Computer hardware/software, semi-conductors, and biotechnology account for approximately 81 percent of all VC capital, 72 percent received that money over a course of 10 to 15 years. About a quarter of all the VC funded companies are considered seed or start-up stage; realistically, the odds of start-up company getting VC money is 1 in 4,000 – that’s worse odds than dying from a plane crash. Start small, get the company going and then explore your options.

3.    Start-ups can’t be financed with debt. In reality, debt is more of a common practice than you might think. According to the Federal Reserve’s Survey of Small Business Finances, 53 percent of companies that are 2 years or younger have debt as opposed to equity investment. A lot of entrepreneurs are using debt as opposed to equity to fund their companies.

4.    Most Entrepreneurs start businesses in attractive industries. Unfortunately, the opposite of this statement is true. Most Entrepreneurs start their companies in the worst industries for start-ups. The mathematical correlation between the number of entrepreneurs starting business in an industry and failing companies in industry is 0.77. What does that mean? Sadly, Entrepreneurs are picking industries that are going to fail.

5.    The success and growth of a start-up depends more on an entrepreneur’s talent than on the business that he chooses. Not to stir the pot here, but the industry in which you start your company greatly affects the outcome of growing and succeeding. Over the past 20 years, approximately 4.2 percent of all start-ups in technology and office equipment made the Inc 500 list of fastest growing private companies. In the United States 0.005 and 0.007 percent are start-up in the hotel/motel industry, and eating/drinking industry, respectively. What does that mean? Well, the odds of you becoming a Inc 500 company are 840 times higher if you start a tech based company rather than a motel or restaurant. There has been no true discovery on the effects of entrepreneurial talent that has a similar magnitude effect on the growth of starting a new business.

6.    Most start-ups achieve sales growth and projections that equity investors are looking.  Based on data provided by the U.S Census, out of the 590,000 new businesses founded every year less than 200 of them reach $100 million in sales in that 6 year benchmark commonly set out by VC’s. About 500 get to $50 million and about 9,500 companies reach $5 million in sales in that amount of time. 

7.    Starting a business is easy. Talk to any Entrepreneur and he would have said that I should have put this as the first thing on the list. A hard fact, 7 years after beginning the process of starting a business, only 1/3 of people have a new company with positive cash flow and the salary and expenses of their people for more than 3 consecutive months.

In conclusion, be smart, be flexible, and be an out of the box thinker. Getting your start-up to where you want it to be is a daunting task, but when you do, it will all be worth it. You can then come back to this post and figure out where you fit in the Entrepreneurial statistics.

Hope you make it in the top 5 percent.

If you have any comments/questions, be sure to shoot me an email or post a comment.

Best of luck,
Ashkan
** The facts presented in this post were obtained from a book called: “The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By” by Scott Shane.