
The Dark Side of Entrepreneurship - asnyder
http://boss.blogs.nytimes.com/2009/07/08/the-dark-side-of-entrepreneurship/
======
lionhearted
Some decent points in there. But also the most misunderstood and
misrepresented business statistic of all time:

> Some 70 percent of businesses fail within seven years, according to the
> Small Business Administration.

Wrong. Very wrong. 70% of businesses _are not going concerns_ within seven
years. Doesn't mean they "failed". They might have been acquired, or closed,
or a different project might have taken the entrepreneur's focus. If a guy
starts two companies as small side projects, and one takes off, he closes the
other. That'd be reported as a "50% failure rate" for people who can't get
their head around the statistics. But they didn't fail - they served the
entrepreneur during that part of his life, he learned lessons, hopefully made
some money, and then moved on to bigger and better things. Starting a business
is hard, but it's not this impossibly bleak predicament that people make it
out to be.

~~~
alex_c
Another thought occurs:

What percentage of jobs "fail within seven years"? I wouldn't be surprised if
it's a comparable percentage. Yet, somehow, no one ever says "Are you SURE you
want to be looking for a job? X% of jobs are terminated within seven years,
you know".

~~~
caffeine
Yes, _but_ : you rarely put up your house as collateral on starting a job.

~~~
dan_the_welder
Yes, but: you often make financial commitments on starting a job.

------
boris
This shows two important rules of running your own business very clearly: You
need to understand every aspect of what's going on in your company. And don't
hire friends and relatives.

Had the subject of this story kept at least some basic track of his financial
position, I am sure he would have been able to flag the problem much earlier
and probably avoid the disaster. Something basic like how much money comes in,
goes out, what's owed to you and by you.

~~~
pg
Another important rule: don't borrow money.

~~~
nostrademons
And if you do, do it under the corporation's name so you aren't personally
liable for the debts if it fails.

~~~
apowell
I believe it is nearly impossible for a small business to borrow money without
a personal guarantee or collateral.

~~~
mynameishere
And that's why you plow every spare penny into the retirement account.

[http://en.wikipedia.org/wiki/Individual_Retirement_Account#B...](http://en.wikipedia.org/wiki/Individual_Retirement_Account#Bankruptcy_status)

------
skmurphy
More background
[http://www.cepro.com/article/baumeister_goes_out_of_business...](http://www.cepro.com/article/baumeister_goes_out_of_business_after_19_years/)

His average contract was about 100K, he lost control of his cash flow in the
worst recession in at least three decades, perhaps six. He must have done a
lot of things correctly to run a well respected business for 20 years, I don't
understand the strongly negative tone of the article.

His conclusion "He is no longer a business owner, but I suspect he is doing
what he should be doing" implies that someone who ran a business for 20 years
with 40 employees wasn't cut out for business.

~~~
rjurney
He focuses on the negative because most businesses fail, and as entrepreneurs
are eternal optimists, many don't fully consider the downside of starting a
business. Right now MANY small businesses and startups are failing. Its
important to understand the potential negative consequences of starting a
business. Most people, and especially around here, are in denial about this
basic fact: by the numbers, your startup or small business will most likely
fail. Thats ok. Your job is to do everything you can to beat those odds.

Also, most people don't have the luxury of 'capital light.' When small
businesses fail, families usually suffer. That is part of the game, and its
worth talking about once in a while, in between articles about guys that hit
it big.

~~~
MicahWedemeyer
Very true. We constantly hear the "I woke up rich the very next day!" type
stories, and it skews the perception of what running a business is like.

I have a lot of sympathy for old-school businesses that need a lot of
operating capital. Putting your house in danger to support your business is a
choice I hope I never have to make. In my case, that would essentially be the
same as putting my marriage on the line.

~~~
rjurney
Interesting quote I heard last week, from Stephen Fleming, successful VC and
now Vice Provost of Georgia Tech. It was something like, "I've never seen a
married founder bootstrap a company to a large exit and had the marriage
survive."

~~~
skmurphy
I think it depends upon what value of large. One counter-example: Greg
Gianforte bootstrapped RightNow technologies to 100M in revenue, still runs
the company, and is still married. Two others would be Bill Hewlett and David
Packard.

~~~
rjurney
Its not that there aren't outliers. Its that bootstrapped divorce is very
common - maybe more common than not.

------
kolya3
Quick summary: Guy starts a successful business but outsources the accounting
to his wife's friend's brother. The accountant books unfinished business as
money in the bank. Economy sours and the truth comes to light. Guy goes out of
business.

So the "dark side of entrepreneurship" is losing your business because you
outsource a critical component and don't bother to double check the results?

I often wonder if the high 90% startup failure statistic is a result of
negligence and lack of common sense. I hope to put my money where mouth is and
find out on my own in the near future. Can anyone on the other side of the
fence chime in on this?

~~~
mediaman
Negligence is not always obvious.

Most entrepreneurs with a technical background should take a class or two in
managerial accounting before they start. They should work hard at
understanding it and developing financial models for their business. And they
should pay as close attention to their business as they do their product.

Perusing HN you see how few articles there are about managing the receivables
cash flow cycle, negotiating with vendors, forecasting financial performance
and cash flow, dealing with the legal aspect, working with banks,
documentation, managing salespeople or negotiating sales relationships, etc.
But there are many companies with decent products that fail, and many are
caused by one of those problems.

~~~
billswift
A course in accounting isn't necessary. The first few chapters of a
"Principles" text and PAYING ATTENTION is all that is needed if you're not
doing the actual accounting yourself. EDIT: "Accounting the Easy Way" is a
good book for anyone who just wants/needs to understand it rather than doing
it.

------
Sam_Odio
We need more articles like this on HN. Pursuing a career in entrepreneurship &
startups is a long, hard, and unglamorous road. If you're prepared for that at
the beginning it won't make things much easier but it might give you the
resolve to not give up.

I've see too many founders (myself included) quit this lifestyle because they
weren't an instant success.

Beware the "trough of sorrow."

------
emontero1
We all know entrepreneurship entails huge risks. However, that's no reason to
not forge ahead. Most people can't seem to understand that entrepreneurship is
not about money, fame or power. Those are all secondary things.
_Entrepreneurship is about an idea and its development_. It's about developing
a thought, a concept only you and maybe the 2 other people starting the
venture with you understand. It takes balls and passion. It takes courage. But
more importantly, it takes unrelenting love. Love for the idea behind the
venture, love for the concept of creating something valuable out of just
abstractions, and, ultimately, love for the better world you're helping shape
with the economic impact of your plan.

I'm not downplaying the importance of following sound economic principles
(e.g. do NOT put your house as a collateral for a loan). Nonetheless, if
you're going to be deterred by the economy, your wife, this article, or a
friend, then you clearly don't have, and probably never had, what it takes.

~~~
shard
Of course, sometimes "what it takes" involves a degree of ruthlessness which
allows you to put not only your finances, but you marriage and your
guardianship of your children at stake. Different individuals have different
scales on which they decide whether that kind of ruthlessness is worth the
reward, even if they did have the capacity for it.

~~~
emontero1
I agree. Tolerance for risk is another big aspect of all this. I'm not
married. I don't have kids. So my real only concern is myself right now.
Others aren't as lucky.

~~~
shard
Hah, I think a large number of people would disagree with you that not being
married and not having kids is lucky.

~~~
emontero1
In the context of starting your first startup while you're still young and
single: yes, you'd be lucky. Life in general: that's actually unfortunate. =)

------
mr_luc
The end of the article is overdoing it:

> "Was it worth it? It comes down to deciding what horrifies you more: the
> possibility of waking up one day and realizing you never took a shot at your
> dream or the possibility of losing your house."

For _him_ , it came down to that. Okay, granted. But this:

> "That’s what entrepreneurship is really about."

Is it? I'm starting a web-based service business, and my fixed costs are well
under $100 per month ongoing, and under $500 to start up. I'm financing it by
working 3 months per year doing blue-collar work, and spend 9 months per year
doing volunteer work in the third world.

I'm right and the New York Times is wrong.

#

~~~
robryan
Obviously a one person web based start up that doesn't pay wages is going to
be a lot less risky than a 40 employee business that is buy supplies in
advance for each job.

~~~
mr_luc
I don't understand the downvotes here.

I mean, obviously, you're correct.

But the NYT just said that entrepreneurship means caring more about your
dreams than a house for your family.

Really? That's the decision people have to make to start a business? If you
don't do that, you aren't an entrepreneur?

It's a great cautionary tale, but as you yourself point out, not all kinds of
business have that risk. And as others point out, his problems were avoidable.

So, the NYT is wrong. Right?

------
DannoHung
No liability for the negligent accountants?

~~~
bonsaitree
Likely the financial (and social family) cost of "gross negligence" litigation
would well exceed any measurable benefit. If the owner has a strong case, a
private settlement for 30-50% damages is the most likely outcome.

Even in the unlikely event the accounting firm broke/abused their fiduciary
duties AND a circuit/general court tort verdict was in this owner's favor, it
would take years for the funds to work their way through the system.

------
asdf333
i think the key is the last sentence:

"Was it worth it? It comes down to deciding what horrifies you more: the
possibility of waking up one day and realizing you never took a shot at your
dream or the possibility of losing your house."

~~~
endlessvoid94
absolutely. it amazes me how many people there are (that i meet) who fall
under the umbrella of fearing for themselves rather than proactively pursuing
their passions and gaining invaluable experiences in the world. better to live
at home and minimize risk so you dont die.

fuck that.

~~~
shard
I think it changes things a bit when there are two kids with you in said
house. Living at home and minimizing risk so your two kids don't die suddenly
doesn't seem so amazing.

------
brown9-2
First of all I have to admit that that I'm pretty clueless when it comes to
startups, entrepeneurship, running a business (of any size), etc. Zero
experience or first-hand knowledge.

I have two questions that are likely pretty basic after reading this article:

1\. If the company was successful enough to be around for 20 years and have 40
employees, isn't that "successful enough" to be able to incorporate the
company or form a LLC so that all debt is taken out in company name, and that
the owner was on the line for debt personally?

2\. Is there no recourse for hiring accountants (especially a firm) that
completely failed at it's job to properly book revenue?

~~~
gscott
And instead of just shutting it down cold-turkey why not try to see if he
could borrow money from the employees to keep the business afloat. I believe
the article writer, his friend pushed him too fast into closing the business
down especially when he had customers already and a robust work force that he
could have paired down.

~~~
brown9-2
I don't know if that would have been a viable solution - sounds like the owner
might just have ended up losing the employee's money too in the end.

------
udekaf
This is a very informative story. I'd like to give it a summarization so that
the rest of us would not go into the same trouble.

1\. Keep a very keen eye on your customers and selling. Mr. Baumeister sold
high-end products. With economic downturn, fewer people spend money on
luxueries. He should predict that when economic was going down.

2\. Pay constant attention to cash flow and balance statement.

3\. As a startup, don't outsource critical component. If you have to, always
double check it. Seems the incompetent accounting firm played a significant
role in failure of his business.

------
acangiano
There is a second moral to this story: the person you marry will significantly
determine your success or failure as an entrepreneur. In my opinion, a nagging
wife who is quick to judge and blame you is one of the worst threats to your
startup/business.

