
The Entrepreneurship Myth - dshah
http://www.businessweek.com/smallbiz/content/jan2008/sb20080123_809271.htm?campaign_id=rss_smlbz
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nostrademons
A little more economics and a little less statistics would've helped his
argument immensely.

Entrepreneurship flourishes when there are diseconomies of scale and dies when
there are economies of scale. It's not hard to see why: if things get cheaper
as you get bigger, then the first company to get big will gobble up all the
smaller companies, and you end up with a monopoly or oligopoly. If things get
more expensive as you get bigger, then no firm will grow larger than a certain
limit, and after a certain point the most productive employees will leave and
start their own businesses, because they can make more money that way. (If
costs stay roughly the same, as in most professional services, the industry
trends toward many small firms because of the psychological benefits of
working for yourself.)

Software is the perfect example of a business with diseconomies of scale.
Every experienced software engineer knows that adding people to a project
makes it go _slower_. The only reason why a large software company might be
more efficient than a small one is if there's an additional factor of
production that has large economies of scale: for example, data centers
(Google/Yahoo), logistics & warehousing (Amazon.com), buyer eyeballs (E-bay,
Facebook), or retailing (Microsoft, Borland, Ashton-Tate, and all the boxed-
software manufacturers of the 80s). Other than that, there's no economic
reason why big software companies should exist.

Big companies buy little companies when there's a market that they want to get
into and apply their economies of scale to. They can't develop the product in-
house, because small teams of programmers are more productive than large teams
of programmers and so the startup would continually outpace them. But the
resulting merger would be more economically efficient, because the startup
could take advantage of the large company's datacenters & warehouses. So they
trade money for product; the small company's founders get rich, while the big
company buys a product that can make more profit under the large firm than as
an independent firm.

It's probably also worth mentioning that technology developments can
fundamentally change the structure of an industry. Intel single-handedly
destroyed the minicomputer industry, because those firms had relied on their
economies of scale in manufacturing to justify their size, and Intel brought
_greater_ economies of scale to the thousands of ISVs who could then produce
software more cheaply than the big proprietary vendors. The RIAA held a
distribution lock on the music industry for years, but when the Internet came
along and made distributing music free, power shifted to the independent bands
who have significant _diseconomies_ of scale. The Internet looked like it was
heading towards a universe of big firms with large datacenters, but then
LiveJournal and Flickr published their scalability approaches and made it
possible for everyone to scale out for free.

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noonespecial
He seems to have missed one very important fact about startups. If it doesn't
work, you can try again! I think the odds are pretty slim for everyones first
startup but you learn from it and have another go. Its like saying that
everyone has a very low chance of getting over 10' on thier first pole vault
so its bad policy to have it in the olympics.

Just to offer a counterpoint. Our startup has grown far less than we hoped. We
have only one large cororate account and 5-10 smaller local offices. There's
only three of us and we're half-way thru year 4. BUT we've already made what
we would have made in 10 years at the jobs we quit.

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mixmax
From the article:

"I hate to deflate egos, but on the other hand I want people to have a
realistic understanding of things. The industry a person picks to start a
business has a huge effect on the odds that it will grow. If you go back 20
years or so, about 4% of all the startups in the computer and office equipment
industry made the Inc. 500, 0.005% of startups in the hotel and motel
industries made that list, and 0.007% of startups in eating and drinking
establishments."

This ignores cause and effect. Presumably a lot of business in the hotel and
motel industries are simple mom and pop shops with no intention of growing.
This is almost never true for "the computer and office equipment industry"
Also presumably there there is a significant difference in the capabilities of
founders in these two industries.

I hate when writers cannot see beyond their numbers, and cannot distinguish
between cause and effect.

That being said I found it interesting that "you have to hit the top 10% to
have income as an entrepreneur better than what you would have gotten working
for other people."

Maybe if I hadn't done those startups I would have a red ferrari by now ;-)

~~~
mechanical_fish
_Presumably a lot of business in the hotel and motel industries are simple mom
and pop shops with no intention of growing. This is almost never true for "the
computer and office equipment industry"_

Well, I don't think you can assert that without statistics. I wouldn't be
surprised if the "median" computer company is a one-person consulting firm --
a services company.

 _Also presumably there there is a significant difference in the capabilities
of founders in these two industries._

Well, there, I agree -- I suspect that the average grocery store owner has a
_lot_ more business skill than the average computer-industry founder. ;) By
necessity -- the grocery business is more complex, with literally thousands of
moving parts; there's more competition, and the margins are a lot smaller.

Having said that, your basic point is correct -- computer startups have a much
better chance of making big money, for reasons that have been explored _ad
infinitum_ around here -- low overhead, low cost of volume manufacturing,
cheap distribution, large and international markets, etc. And that's exactly
what this guy is saying when he suggests that you "choose the right industry".

His argument isn't addressed to the folks around here. It's primarily
addressed to the "average" founder -- the person who founds a corner store, a
dry cleaner, a hair salon, or a decorating business. These are the folks who
go to "entrepreneurship" seminars (featuring lots of photos of the guys from
Yahoo, Google, McDonalds, and Pepsi) and imagine that any chain of hot-dog
stands could lead to similar financial success -- whereas, in fact, it's
likely to cost them money. Of course, running your own company also makes you
_much_ happier, on average -- a point which the author readily concedes.

~~~
zaidf
"I wouldn't be surprised if the "median" computer company is a one-person
consulting firm -- a services company."

This is one thing pg has been very clear about: a start-up isn't about taking
away a monthly paycheck. It is about scoring big.

If your _start-up_ is helping pay for your apartment, that is good but hardly
the goal of your start-up. Founders know that.

When your _consulting firm_ is helping pay for your bills, the end goal is
reached. Little growth happens once you reach that goal.

There are exceptions--and almost any business can be transformed into a start-
up(doesn't mean it will succeed). Infosys would be a good example of starting
out as a small consulting firm and transforming itself into a start-up and now
a giant.

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mnemonicsloth
_The median startup is a business that's capitalized with about $25,000. The
financing of that business comes from the entrepreneur's savings. The business
is a retail or personal service business, a hair salon or a clothing store,
that kind of thing. The founder doesn't have expectations of a very high
growth business, in fact [the entrepreneur is] probably thinking a goal of
$100,000 a year of revenue is a good goal._

The economist guy isn't wrong -- it's the article's title that's misleading.
It _is_ hard to bootstrap your own gas station or hair salon. I'd argue,
though, that developing new technology is a fundamentally different
undertaking.

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anaphoric
Of course I don't agree with this guy, but I think we need to dissect the
common entrepreneurial statement "I don't want to work for others". Now I am
sure that we all agree that entrepreneurs do in fact need to "work for
others", namely the customer!

But yes there is something different about doing it in the role of supplier
rather than employee. I think in general what entrepreneurs are after is about
"controlling their creative outputs and at least having the chance of being
highly rewarded". Sure you can do that to an extent as an employee, but
putting your heart and soul into something as an employee makes one feel like
a chump. Especially when you are surrounded with all the loafers and parasites
within the common organization. (Sorry if that sounds harsh)

Since the guy in the article didn't really make any concrete policy
recommendations, he could consider suggesting reforms within larger
organizations to reduce alienation.

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goodgoblin
I don't think anyone on here is starting a hair cut business (unless its like
robot hair stylists or something)

~~~
noonespecial
The suck-cut! As you can see, it sucks as it cuts...

~~~
umjames
You mean the Flowbee? <http://www.flowbee.com>

~~~
brent
No, I'm pretty sure he meant suck-cut: [http://www.free-press-
release.com/news/200509/1125942792.htm...](http://www.free-press-
release.com/news/200509/1125942792.html)

~~~
noonespecial
HA! Its real! Priceless!

I actually meant the "Suck Kut" from Wayne's World... Who'da thunk someone
would actually try to build one!?

Thanx for that link. Made my day.

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nkohari
There are two kinds of businesses. First, there are so-called "lifestyle"
businesses, like bars, restaurants, B&Bs, etc. that people start because
they'd rather work for themselves than someone else. Most owners of these
types of businesses aren't interested in expanding or getting rich -- just
doing what they enjoy. Then there are "growth" businesses, like (most)
technology startups. Many people who start tech startups are interested in
working for themselves, but they are more likely to be interested in expanding
the business as well... not to mention the most important fact, that
technology companies can expand much faster than other types of companies. As
demand increases for, say, a website, it's much easier to scale up the
infrastructure by adding new computers than it is for a hotel chain to build
new hotels, or a "brick and mortar" retailer to build more stores.

~~~
hhm
But you can have lifestyle tech companies too, or can't you?

~~~
bootload
_"... he most important fact, that technology companies can expand much faster
than other types of companies. ... But you can have lifestyle tech companies
too, or can't you? ..."_

Facebook & Apple for example?

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jamiequint
I think this article misses the point of the book. The reviews on Amazon seem
to frame a different picture of what he is actually writing than this Business
Week article does.

"Scott has clearly and entertainingly shown why policy makers, entrepreneurs
and investors should focus more attention on high growth, high potential
start-ups and less on the ''me-too'' new companies than is currently the
case."

I think this is something that most people here would probably agree with.

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mynameishere
_I think part of it is that we're trying to make sense of this paradox--that
we really like it, but financially it isn't so great._

What? No one told him the oldest cliche in the book, that money doesn't buy
happiness? Is it a mystery that so-and-so would be happier making 40K and
owning a business than another person doing inventory at WalMart for 50K?

~~~
curi
It's not a paradox. The more unpleasant a job is, the more you have to pay to
get people to do it.

~~~
ivankirigin
Rock star?

~~~
curi
The most famous rock stars, and actors, and sports players, are paid a lot due
to high demand and low supply. (Plenty of supply of willing people, but not
plenty of supply of people with hundreds of thousands of fans.)

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bfioca
"It shows the average new venture will fail within five years, and even
successful founders usually earn 35% less over 10 years than they would
working for others." -- That's fine, that's not why I'm starting a company
anyway, I don't want to work for others.

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sabat
There's something very simplistic and reductive about this guy's reasoning.

