A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past.
– Charles T. Munger
Frequently overshadowed by Warren Buffett, his partner in the $484.9 billion Berkshire Hathaway holding company, Charlie Munger is a quiet, reclusive figure. Rarely making public appearances, the unostentatious billionaire spends most of his time as Buffett does: reading, thinking, and managing Berkshire Hathaway from his home in Southern California.
Buffett and Munger have, over the course of a career, amassed a multi-billion dollar empire with a brilliant-in-its-simplicity investment strategy which they took from mentor Benjamin Graham.
Value investing—as practiced by the duo of billionaires—is a process of evaluating the underlying value of a company as if they owned it, adding in a margin of error, and then looking at what the current market price of it is.
If they value a company for an intrinsic value of a billion dollars and the stock price reflects a valuation of 200 million dollars, they’re likely to take a heavy position in that company under the belief that eventually the market will correct its valuation. As the pair only invests when planning on holding the stock for a long time, they’re apt to reap the 800 million dollar market misjudgment.
What’s most notable about Buffett and Munger’s investment strategy is what they don’t do.
They reject many of the basic precepts most investment managers subscribe to.
They don’t try to beat the market on a year by year basis, instead focusing on 40 year time frames. They don’t invest in technology stocks. They certainly don’t day trade.
They also don’t diversify. In Buffett’s words, “Diversification is protection against ignorance. It makes little sense if you know what you are doing.” Munger attributes the majority of their success to “perhaps four or five investments,” over the course of a five decade career.
Simplistic in its brilliance, brutal in its simplicity, a test of willpower and patience in its execution, no one has come close to matching Buffett and Munger as value investors.
Well, at least not in stocks.
Going All In
In 1914, Charles Ranlett Flint hired a young salesman from the National Cash Register corporation to run the newly merged Computing Tabulating Recording Company in 1914.
Starting at just $4 million in revenue in 1912, the company was sued by the federal government forty years later in 1952 in a civil antitrust suit because, at the time, it owned and leased to its customers more than 90 percent of all tabulating machines in the U.S. 100 years later in 2012, it was the second largest U.S. firm in terms of employees and the fourth largest in terms of market capitalization.
The Computer Tabulating Recording Company was renamed in 1924 to it’s current title, which you’re more likely to recognize: International Business Machines or IBM.
The young salesman who ran the company in 1914 was Thomas Watson.
Watson, perhaps unknowingly, perhaps brilliantly, followed the same investment strategy advocated by Buffett and Munger a century later. He saw a single, major opportunity and invested heavily.
Over the course of his tenure as head of IBM, Revenues went from $4 million annually to $897 million and from 1,300 employees to nearly 75,000.
Watson’s sole investment? Knowledge.
Watson, emblematically using the slogan “THINK” for IBM, placed all his chips on the rise of the knowledge economy at a time when it was both scarce and dramatically undervalued. The IBM dress code, a suit and tie, exuded the importance of knowledge work over manual work.
What seems obvious in retrospect was, at the time, a risky investment. Many contemporaries viewed education as a frivolous luxury.
While parents saving for their children’s education including college and increasingly post-college is common practice today, that wasn’t always the case.
At the turn of the 20th century, the biggest challenge most college administrators faced was convincing students it was worth their time. Why go pay to get a college degree when you could get a real job doing industrial labor where you could make money now?
Of course, we’ve adapted to that paradigm. It’s entirely acceptable and frequently encouraged for us to say in school until our mid to late 20’s and accumulate debt investing in knowledge.
Rewarding his foresight, the markets, in relatively short order, proved Watson prescient for avoiding a “real job.”
A hundred years later and despite seemingly massive mistakes over the past few decades—not the least of which was letting some guy named Bill Gates start some company called Microsoft with software they developed—IBM remains a valuable and profitable company.
An Abundance of Knowledge
Much has changed since Watson founded IBM about the underlying value of knowledge as a resource.
First, credentialism, a system for measuring knowledge, has increased dramatically and the market has become more transparent and corrected itself. Investments in knowledge aren’t producing the same returns any more.
The number of college graduates has been climbing steadily since the 1940s. Yet, more than half of America’s recent college graduates are either unemployed or working in a job that doesn’t require a bachelor’s degree.
In 2014, the overall employment rate for law school graduates fell for the 6th consecutive year.
The world has caught up to Watson’s analysis. Knowledge is no longer the scarce resource it was 100 years ago.1
Investing in Entrepreneurship
Once we see knowledge and entrepreneurship as assets or resources, we can apply some very basic economic concepts towards them and start making better, more reasoned decisions.
First, we can recognize that both knowledge and entrepreneurship are resources that can be gradually accumulated,
Second, we can start thinking about whether or not they makes sense to invest in and to what degree.
Just as Watson identified knowledge as a dramatically undervalued asset in the early 20th century, I believe entrepreneurship is an equally undervalued asset in the early 21st century.
Moving back into the stock market analogy: if you could buy stock in entrepreneurship, then I think today its intrinsic value is $10,000 per share but the buy price is maybe twenty dollars.
Regardless of exact numbers, I believe it’s a massive misvaluation. A misevaluation on a similar order of magnitude to what led to IBM’s success under Watson and Berkshire Hathaway’s success, under Buffett and Munger.
But, why is the valuation so far off?
The Buy Price is Unknown
The place where the value investing analogy falls apart is the buy price in investing.
If you’re buying a traditional stock, you always know how much you can go buy a share of a certain company for. You can plug it into Google and see, down to the cent, what a share in a given company is valued at.
If we’re talking about entrepreneurship or knowledge as resources, however, the buy price is an unknown. You can’t go to eTrade and buy a share of entrepreneurship or knowledge. Instead, we invest them by our life decisions. Choosing to get a degree instead of going to work in a start up or vice versa.
I think many people today see the benefits of entrepreneurship, but they assume, perhaps incorrectly, that the cost of entry is impossibly high.
The fact that there’s no known market rate for entrepreneurship, is one of the primary reasons it’s underinvested in.
When IBM invested in the knowledge economy, it wasn’t clear what the value of knowledge was either. In society at large, a college degree didn’t command the level of respect it does today.
Credentialism, as we know it today, didn’t exist when Watson begin betting heavily on the knowledge economy. It evolved only as we gradually recognized the value of knowledge to us as individuals and as a society.
The question is whether or not we should continuing and investing in credentialism and knowledge. Is it still a “major opportunity, clearly recognizable as such” that we should be betting heavily on?
I would argue that instead we’re at a point with entrepreneurship that Watson was at with knowledge. Entrepreneurship is now relatively scarce and relatively easy, it’s the highly undervalued asset of our era.
Yet, many popular perceptions about entrepreneurship lead us to believe it’s an incredibly difficult resource to invest in. When most people think of starting a business, they believe:
1. It’s expensive and requires a lot of upfront capital
2. It’s probably going to fail
3. No one will hire me after my business fails
The story that many would-be entrepreneurs tell themselves about entrepreneurship is, “I’m going to go spend all my savings take on debt, fail, and then not be able to find a job.”
In my experience, the exact opposite appears to be the case.
The forces which are making knowledge and jobs more competitive resources are facilitating entrepreneurship.
Improving communications technology and educational standards drives globalization, which drives knowledge jobs overseas. while at the same time making it easier and more inexpensive to find, hire, and manage qualified contractors and team members.
The software that’s “eating jobs” is decreasing startup costs, making it easier to start a business. Entrepreneurs can outsource the non-core elements of their business and build the much of infrastructure “in the cloud” so they don’t have to take out substantial amounts of debt.
The internet and inexpensive or free (open source) software has democratized distribution more than at any time in history making it easier to reach potential customers
These technological inventions have given way to social inventions, which are are making it easier to start a business.
As more and more people come into entrepreneurship, the evolution of defined paths means that entrepreneurship is less of a leap and more a stair step exercise so people that may be more naturally risk averse are increasingly able to become entrepreneurs.
Increasingly, the worst case scenario also isn’t all that bad: a “failed” entrepreneur often ends up looking a lot like a high-paid employee.
Instead of “I’m going to go spend all my savings, fail, and then not be able to find a job,” the story seems to be a lot closer to: “It’s easier for me to make something, it’s easier for me to tell people I’ve made something, it’s easier for me to do that without taking on a lot of debt, and even if it all goes south, I’m going to end up with a really good job.”
Let’s examine those claims:
1. Decreasing Startup Costs
One of the largest historical issues and a common objection to starting a business has been that it’s expensive. It requires a lot of capital up front. Would-be entrepreneurs imagine going out and buying a lot of physical equipment, hiring staff, and buying office space.
Rent to Own: The Sharing Economy
Over the last decade, technology has enabled what’s popularly called the Sharing economy. As it relates to starting a business, this means it’s gotten dramatically cheaper—like two orders of magnitude cheaper—to start a business than it was a decade ago.
Because technology has brought trust and transparency to markets, it lets people share existing resources and re-purpose them into higher and better uses, i.e., Investing in entrepreneurship is getting cheaper.
This isn’t something we’re used to, because in the past all business was done via pipe-thinking. The sharing economy is built on platform thinking—one of the tenets of which is that you can create more inventory without creating more supply.
In the past, if there weren’t enough rooms in a city for visitors, Hilton went and built a new hotel. There’s the same number of houses or less now in the U.S. than there were 5 years ago, but AirBnB has created more inventory without creating more supply.
Companies like Digital Ocean have done the same thing with digital real estate by enabling cloud based development.
Uber, Lyft and technology like self-driving cars, increasingly mean less total cars needed, but an increased ability to get where you want, when you want.
Because of the sharing economy, the cost of the tools needed to start a business has dropped dramatically. The infrastructure over the past 10 years has dramatically decreased the financial barrier to entering entrepreneurship. Let’s look at a few specific examples.
Software as a Service (SaaS)
Software as a service means instead of having to go buy expensive equipment or sign long-term contracts, you can buy month-to-month access to all the services that you need.
Instead of buying a server to host your website, you can get a specialized web hosting company like WPEngine to come in and host your website for you.
Instead of buying expensive accounting software, you can use a month-to-month service like Xero for a fairly nominal monthly fee.
Venture capitalist Ben Horrowitz was the CEO of the first cloud computing company, Loudcloud, in 2000 when the cost of a customer running a basic Internet application was approximately $150,000 a month. Running that same application today in Amazon’s cloud costs about $1,500 a month.
That’s a 1000% decrease in cost over 14 years. If we applied that to consumer items like cars or houses, a $50,000 luxury car 10 years ago would cost $50 today and a half million dollar home would cost $500.
Because technology develops faster than biological systems (like our brains), we’re not very good at understanding those kind of changes. Nothing in nature changes 1000% in 14 years, but we’re increasingly living in a black-swan-driven world.
Marketplaces and Contractors
Historically, hiring has been expensive and difficult. It’s been hard to find people that both had the skills you needed and that you could trust.
Platforms like oDesk and Elance allow anyone with a credit card to set-up an account and hire vetted contractors instead of having to go hire a full time employee.
If you needed a branding expert 10 years ago, you had to go ask a lot of people in your network in hopes of getting a decent referral. Now you just search it on oDesk, see reviews from other people that have worked with that person, and then hire them on a trial basis.
Frequently, these guys are experts in their field and provide a better value than the expensive process of hiring and training a full time employee.
This is not to say these marketplaces are perfect or even better than traditional means of hiring, but they’ve certainly. dramatically expanded the options and reduced the cost.
Instead of a large, upfront investment in hiring and training someone you may not know anything about, you’re able to make a small investment, over time, in someone that has been vetted by other people in your industry.
Self-Education and Autodidacticism
In 1984, at the first Hackers Conference, Whole Earth Catalog founder Stewart Brand was overheard telling Apple founder Steve Wozniak the now iconic phrase: “Information wants to be free.”
The internet has done more to facilitate information transparency than any technology since the printing press.
Knowledge that used to be opaque and hard to source is often now just a Google search away.
Fifty years ago, every time you wanted to look up a specific medical study, you had to go to a university library, find the reference book you were looking for, pull it off the shelf, and try and decode the scientific text. If someone was that interested, they might as well just go to Medical school.
When all this information was put online, we witnessed the emergence of the Quantified Self movement, which gave individuals access to all the same resources as professional scientists and physicians. Many of the frontiers of medicine and health are now being expanded by citizen-scientists with access to all the same research papers and tools as professionals.
The same is true of the marketable skills it takes to run a business.
You can teach yourself web development or graphic design using courses like Udemy and Team TreeHouse.
Scott Young put himself through the entire MIT course material in 12 months for two thousand dollars. That’s 98.7% cheaper than of the cost of a degree from MIT.
That’s a hard number to conceptualize because it’s such a dramatic savings compared to a $150,000 degree.
Education is also getting easier because communities are self-organizing. It’s easier and easier to find other people doing the same thing as you online. Online forums and communities of other people in your industry let you learn from other people in the trenches day-to-day.
2. Product Creation Costs Are Going Down
Beyond the advantages of the Sharing Economy, it’s getting cheaper and cheaper to create products as technology improves.
I remember 2 years ago when I saw the first drag and drop website template.
All you had to do to build a website landing page was drag these big modules in there and type in the text or drag in your images.
If you had told someone doing web development in 2002 that we would have drag and drop website templates in 2012, they probably would have punched you in the face. They were pouring their soul out coding five-page HTML websites—something you can have set up using WordPress in half an hour now.
The 7 Day Startup, a book by Dan Norris, teaches entrepreneurs how to identify, build and test startup ideas in a week. Dan’s own business, WPCurve, which provides WordPress support for small businesses, was launched in 7 days and is on track to hit a $1 million annual run rate by within two year of it’s inception.
It’s Cheaper to Make Widgets! (And Useful Stuff Too)
While it may seem obvious that digital products are getting easier to manufacture, physical products are getting cheaper to make as well.
20 years ago, most small physical product businesses were limited to manufacturing in the U.S.
Manufacturing overseas was simply too difficult. You had to do much larger order quantities and you had to have connections.
It’s getting easier and easier to manufacture in China. Matt Kowalak and Jamon Yerger moved to China a decade ago to start sourcing products, and now host boot camps teaching people exactly how to do the same.
For about one twenty fifth (4%) the cost of an average semester spent taking two electives you sort of find interesting and two finance classes you loathe, you could learn to make stuff in China.
If you took someone in University and cloned them and they met six months later, the introduction would go like this:
“Hi, I understand Accounting 101 and read the same finance book everyone else ever read over the last six months.”
“Oh, that’s cool. I KNOW HOW TO MAKE STUFF IN CHINA!”
20 years ago, that was a multi-million-dollar affair and China was only a realistic manufacturing destination for large corporations. You had to go through expensive sourcing agents and you couldn’t do short run manufacturing.
Now you can source products on Alibaba and can find factories using resources like Product Simple.
Chris Guillebeau, an author and entrepreneur, cataloged the stories of hundreds of people who had managed to start business for less than $100 that paid them an income well above the median wage in the U.S.
But it’s not just getting to above median income. A lot of very substantial businesses have been started for hundreds or thousands of dollars as opposed to hundreds of thousands, and that’s only getting easier.
Ben Hebert, founder of Natural Stacks, started his company in 2013 with money he made from selling a website to someone.
It’s now an international supplement brand.
Eric Bandholz started Beard Brand from his laptop in 2013. It’s now an international men’s hair care product brand.
Back in 2007, two entrepreneurs I’ve worked with started a similar physical product business and needed a $30,000 loan. In less than a decade, the cost and difficulty of making products have dropped dramatically.
3. New Markets Are Created Every Day
Beyond just the cost of entry going down, there are new markets opening up every day.
Markets that never existed before now exist because the internet has made geography less relevant and distribution easier. Markets that used to be limited because of your location are now limited by specialization because of the internet.
Let’s look at how law firms work now versus how they are changing and will work in the future.
Right now you have a local lawyer who you do business with because he’s geographically close to you, but he probably doesn’t have a deep understanding of your business model or industry.
If you were able to work with a lawyer that intimately understood the needs of your business, it would be better for both the lawyer and you.
You wouldn’t have to pay for the lawyer to educate himself on the details of your industry and business. The lawyer would be able to give a better product at a better price.
An online marketplace like UpCounsel will let you find a lawyer with specialized skills who is an exact fit for what you need.
This is true even within geographically local markets.
Have you ever tried to find a gym you’ll like without using Google Maps or Yelp? It’s a nightmare. You spend weeks asking around or driving through your neighborhood.
Gyms are now more specialized because it’s easier to find them, so they compete more on quality than lack of transparency in the market.
They’re also much cheaper than they were 10 years ago as a result.
This is better for both consumers and entrepreneurs.
Why would you do business with a big advertising agency when you could work with a web marketing agency that intimately understands your industry and business model?
You get all the efficiency improvements and so do they. The consumer pays less and the entrepreneur make more money.
An entrepreneur that runs a businesses offering digital marketing services for dentists previously did digital marketing in Cincinnati, but decided to work exclusively with dentists.
By working with a single type of client, dentists, instead of in a geographical area, he gained a lot of efficiencies that he could pass on in value to the clients both in terms of reduced costs and improved results.
Because he understands the industry, sales is easier, they have a smaller group to work with, and word of mouth is more effective. Marketing is easier because other dentists easily identify with existing client case studies.
Fulfilling a job is also done more effectively. Instead of having to go through a period of learning a new client’s business every time, they can hit the ground running and start generating results for their clients faster. Their processes are more streamlined and efficient.
In the past, geography kept these kinds of businesses from existing, but that’s no longer the case. He can be based in Seattle and work with clients all over the country.
If you’re a dentist, would you rather meet in person with someone down the street that doesn’t understand your business model or industry at all, or do a video call with someone on the other side of the country that has an intimate understanding of your business and knows exactly how to help you get what you’re looking for?
While many people would certainly still say the former, more and more are starting to say the latter. The dentist gets a better value, and a business that couldn’t have existed a decade ago is now a substantial opportunity.
Communication technology has and continues to make location less and less relevant allowing entrepreneurs to specialize in ways that are more personalized and meaningful. This is a trend that’s not just continuing to grow, but continuing to accelerate.
Google opened it up with their search algorithm by organizing the internet.
Now individual marketplaces like AirBnB are starting to arrive that are creating more and more transparency within specific industries.
We’ve even seen marketplaces emerge off of the back of other marketplaces. In the early days, AirBnB brought in a lot of users by posting their ads to Craigslist.
Mass production is declining and personalization is here to stay because it’s better for both parties.
4. Let My People Be Heard: The Democratization of Distribution
Everyone has a smart phone now. That sounds seems blase.
Let’s try again.
Everyone has a computer in their pocket? Still blase.
Everyone has access to the sum total of human knowledge and resources at their fingertips, 24/7, 365.
You can reach everyone better than ever before.
The internet has made distribution possible now in industries where it wasn’t even a pipe dream 10 years ago.
For two years, I worked for a company that sells direct to consumer portable bars. Ten years ago that industry was handled entirely by relationships with existing distributors.
That meant if you wanted to start a business selling portable bars, you had to:
- Get them manufactured in the U.S. Because, remember, there was no way you were doing short run manufacturing in China 10 years ago.
- You had to have been in the industry, or you had to spend years on the ground making connections with existing distributors. The prior entrant into the industry spent two years going to trade shows before he was able to build up the business.
Now, you need to rank #1 on Google.
That’s not easy, per se, but it’s a hell of a lot easier than spending two years going to trade shows every other week.
Being able to use the internet to go direct to consumer is also a better value to us as customers. If you go to a trade show every year and have inefficient manufacturing processes, you pass those costs along to consumers.
Google is just one example of democratized distribution, however.
John Lee Dumas built his own distribution channel through podcasting, mainly on Apple’s iTunes platform. He publishes his income report and last month he made $253,053.17.
Two and a half years ago, he had never made a podcast or sold a course. But he started strategically investing in entrepreneurship (with a lot of hard work) and he’s seen some pretty decent returns.
As more and more platforms are built, there are more and more distribution channels opening up every day.
5. The Entrepreneurial Stair Step: Decreased Social Barriers
All of the aforementioned changes we’ve discussed are overwhelmingly technological or economic. And while the structural technological and economic barriers are important, they’re only half the equation.
The technological innovations that have reduced the barrier to entry have been accompanied by social innovations that also reduce that same barrier.
In the past it required so much investment—both in terms of time and capital— that entrepreneurship was an “all or nothing” affair
Humans, risk averse creatures that we are, always found that a tough proposition.
It’s increasingly possible to “stair step” your way into entrepreneurship now as opposed to jumping in.
The decreasing technological hurdles to jump over, like lower startup costs and more niche opportunities, mean starting a side business is easier than it’s ever been.
Ramit Sethi, a financial blogger, launched an Earn 1k on the side course to teach people how to earn an extra $1000 month freelancing on the side.
He realized that if he could get people to earn $1,000 on the side, then many of them would gain the confidence to “stair step” their way further into entrepreneurship.
Once they get $1000 month, it felt very achievable to double it to $2,000 per month, and once their side income replaces their corporate income, most of them will leave those jobs.
Clearer and clearer paths are emerging for how you can ease into entrepreneurship.
I’ve seen entrepreneurs go from freelancing on the side, to consulting full time, to proprietary products.
Dave Huss, who now runs an Adwords and Facebook Marketing Agency, started with a side business selling an information product to other students at his University about how to pass a specific test.
He started making strategic investments into entrepreneurship and overtime turned that into a very successful business.
Just as paths emerged around how to enter the knowledge economy-go to high school, take the test for University, go to University, go to graduate school, get a job-we’re seeing paths emerge for entering entrepreneurship.
As entrepreneurship becomes more popular, there are more examples and scripts to follow. It’s easier today than it’s ever been to find successful entrepreneurs to model yourself after.
Looking back on his own experience, Rob Walling, a successful entrepreneur with three software products, created the Stair Step Theory to explain his path into entrepreneurship.
Rob started by quitting his corporate job as a programmer to move into consulting as a programmer. As a consultant, he learned how to better sell himself, manage his time, and understand basics of running a business.
This transition was possible because transparency now makes it much easier for consultants and freelancers to be discovered. His blog, softwarebyrob, and podcast, Startups for the Rest of Us, have let him connect with thousands of other entrepreneurs—many of whom are now customers of one or more of his software products.
Someone with a skillset in computer programming or online marketing can put up a job ad on oDesk tomorrow and start freelancing and consulting. That’s never been possible before.
Once Rob got to the point where he was making a good income doing consulting and freelancing and had more entrepreneurial skills, he started a beach towel business where he learned about selling products and online marketing.
From there, he moved to accounting software with Dot Net Invoice, which allowed him to step away from consulting .
Then he bought a struggling SEO tool, Hit Tail, and revitalized it.
Now he’s building Drip, a competitive email marketing tool.
In each case, he stair-stepped his way up into a bigger and better businesses than before.
That’s never been possible before. You had to drop a lot of cash on a physical location and staff, and the pressure was on. Now you can dip your toes in the water and gradually wade into entrepreneurship. You can start investing today.
The entrepreneurial leap is now the entrepreneurial stair step. That’s not to say it’s easy—you still have to climb the stairs, but not in a single bound.
The Return of Apprenticeships
Another option that is emerging along the path is free work or internships, concepts pioneered and popularized by Charlie Hoehn.
That was how I got started in entrepreneurship. I taught myself a little SEO using Moz’s Beginners Guide to SEO. I paid $20 to get a hosting account from GoDaddy.com and built a website in between teaching English classes. I showed it to a local marketing agency and offered to do some free work for them. That turned into a part-time gig, then apprenticeship, then a full-time job where I learned a lot about internet marketing, project management, and tech.
Then I went and worked in another small entrepreneurial company for two years, where I got to move from SEO to Marketing Manager to running a small (to the tune of one person) division.
I was able to acquire skills and learn a lot about how entrepreneurship by seeing the inside of an entrepreneurial company.
Consciously unbeknownst to me until very late in the game, it turned out I was investing into entrepreneurship.
Many people find free work or unpaid internships exploitative, but find the idea of someone taking out a quarter million in debt to get a college degree and a MBA a smart investment.
Is that a fair assessment? Or is that a legacy of the knowledge economy that we haven’t adapted to yet?
6. The Eeyore Effect
In his book, The 4-Hour Workweek, Tim Ferriss advocates the use of negative visualizations for people considering quitting their jobs. A tradition borrowed from Stoicism, negative visualization (also known as the Eeyore Effect), is the practice of imagining the worst possible outcome as a way to help ourselves make difficult decisions.
What the stoics discovered and Ferris unearthed was the fundamental truth that we frequently avoid making choices not because the outcome is bad, but simply because it’s unknown.
Let’s clearly define the downsides to entrepreneurship:
I would argue that the downsides in entrepreneurship are more limited than most people believe. For most entrepreneurs I talk with, they cite the worst possible outcome, if their business completely failed, as becoming a high paid consultant or employee.
For one, it requires less debt than ever and frequently none at all.
As Venture capitalist Dave McClure says, “1 can only go to 0.”
Opting for a MBA can lead to six figured in debt. Invest a few hundred bucks on the side to start a freelancing business doesn’t put you in quite the same predicament.
In the summer of 2013, I talked Jimmy Hayes, the co-founder of Minaal (now a successful product business selling travel gear).
We were sitting on the second floor of a local restaurant in Vietnam and he was talking about some of the problems that they were running into with their factory.
Would they get the right prototype? What happened if people didn’t buy it when they launched it on Kickstarter?
If everything went South, what was the worst case for Jimmy?
The worst case was that he now understood how to source and manufacture products in Asia. He knew the cultural intricacies of a handful of Asian countries and had relationships with different factories in the region. He had a deep understanding of the high-end travel gear market from both the manufacturing and marketing side.
How hard would it have been for him to go to North Face or Patagonia and work with them or consult for them? He had, by investing in entrepreneurship, developed an incredibly rare and valuable skill set.
It ended up working out and they raised $350,000 on Kickstarter. But asking what the “worst scenario” is can help make the decision a lot clearer.
Jacob Puhl runs Firegang, the digital marketing agency for dentists mentioned before. Before that he worked for the Yellow Pages and left that job because he saw an opportunity to start a business that could deliver better ROI to local businesses than the Yellow Pages.
That led to him and his partner starting a marketing agency which eventually started serving dentists. About two years in, they got an offer from someone to acquire their company.
The acquiring company offered Jake a buyout to come work for them at a salary double what he had been earning before leaving his job.
I’ve talked to other people that have had the exact same experience.
In the last 10 years, leading technology firms like Google, Facebook, Cisco and Apple have pioneered acqui-hiring, combining mergers and acquisitions with recruiting in an attempt to bring more entrepreneurial resources into their firms.
Yahoo paid nearly $1 billion to acquire the team from Tumblr. That’s billion with a B.
Companies are starved for entrepreneurial talent and they’re willing to pay for it.
From the perspective of many entrepreneurs in business today, the worst case scenario they imagine is ending up as a high-paid employee or consultant, which is EXACTLY what was going to happen if they had stayed in a job. One could argue that they’d be likely to make more money when they go back to their job because they’ll be more entrepreneurial.
The worst possible financial outcome of starting that business you’ve been thinking about? It might just be a raise.
7. A Tale of Two Businesses
In an attempt to cobble all this together, let’s look at an example of someone starting a website development company to build websites for small businesses today versus 10 years ago.
2004
First, they would probably have had take on some debt and a decent amount of financial risk forcing them to jump, not stair step.
They would have had to go lease office space and buy servers to keep in the office space. They likely couldn’t have worked from home, because 10 years ago a “real business” wasn’t run out of a home office and co-working spaces were still almost non-existent.
Most clients were probably local, because distribution and marketing online was less developed and people were less trusting of buying from others over the internet.
They would have had to hire a designer and a developer because building a website was still relatively complicated, and in order to hire them they would have had to work their referral network to find someone local. They were probably going to be expensive because they had to know a variety of programming languages, and in order to do that, they either had to have worked at a company that built websites, or you had to have gone to school for it, or you had to buy these massive books on how to do it
Their friends all thought they were totally crazy. Saying things like, “I can’t go out tonight, I’m bootstrapping,” probably conjured up images of a cobbler.
The business was more likely to fail since business failure percentages were higher 10 years ago than today. If it did, they ended up with a lease that was hard to get out of, a bunch of physical servers to sell off at a loss and a handful of people on payroll that were depending on them.
2014
Now, they start by freelancing on the side, working nights and weekends from home. They find their clients on sites like Elance and oDesk. Or maybe they start a blog and talk about problems in a specific industry to attract clients.
They host and build all their sites on cloud-based servers, which are a fraction of the cost of buying actual physical servers and can be cancelled any time on month-to-month contracts. They’ll either do all the design and development themselves because they can learn using tools like Team Treehouse.
Or, if they want to focus on finding and clients hire someone else to build the websites, they can go on sites like oDesk or Elance and hire contractors there with established track records that you require full time employment contracts. They just have plug and play contractors that you can find from your computer.
They can also leverage past experience to target a market they understand online instead of being confined to their local area.. If they used to work in a chiropractors office, they could be the chiropractic website guys (like these guys)—no one builds better websites for chiropractors than they do.
That’s definitely a 7 and possibly an 8 figure business now. They don’t have to fly around to every chiropractic office in the U.S. to get them as customers. They can call them up or write articles about how chiropractors can increase conversions on their websites. They’ve probably got friends doing entrepreneurial stuff now, and if they don’t, they can find them in online communities (like this one for nomadic entrepreneurs, this one for eCommerce store owners or this one for writers), so they don’t feel like they’re on an island.
If it takes off, then they can phase out of whatever else they’re doing. They can expand into other industries or maybe they find out that chiropractors have other problems around web technology that they can solve and expand within the industry.
Even if it all goes to pot in a year (though they’re more likely to succeed now than 10 years ago, many business still do fail), they were using contractors, so they don’t have to fire anyone and put them on the street. All the infrastructure was cloud and subscription based, so they just cancel all of it to shut it down.
And guess what? They’re now the one of most qualified person on Earth to go run a chiropractic chain’s tech and marketing department. They can call up their favorite chiropractor and say, “I just spent a year working with chiropractors around the world on how to increase their website conversions and get more people into their offices, can I come work with you?”
8. The Entrepreneurial Long Tail
If this is the case, then wouldn’t we expect to see an early proliferation of these types of small businesses and start ups. Even if the stock price is low, it should still be adjusting, shouldn’t it?
The Long Tail, a concept popularized by Wired editor Chris Anderson, shows that because of technology, the cost of distribution is going down, making products that previously weren’t commercially viable a real possibility.
CD Baby, a company run by Derek Sivers, entrepreneur cum philosopher, rode the long tail to a $22 million acquisition by Amazon.
CD Baby, started in 1998, distributed records for independent musicians that in the past had never been able to get their record into record stores.
In a world where distribution is controlled by record stores and the costs of holding inventory are fixed, there’s a cutoff point for where it makes sense to stock record stores. They have to pay for more shelf space, so if a record doesn’t sell enough copies, then they can’t afford to stock it.
Because CD Baby was selling online, though, the cost of holding more became a variable cost that rapidly approached zero. Once they’d built the website, the cost of adding another product page was negligible and decreased with each product.
We’re now seeing the long tail phenomenon come to businesses as a whole.
Just as technology made it viable for small bands to sell their records online, it’s also made it viable for anyone to start a business online.
As expected, the number of Small Businesses is up 49% since 1982.
What’s interesting is that the rate of small business failures is declining in lockstep.
While the long tail explains why the number of small businesses is increasing, what explains the rate of failures declining?
Could it be that just as we learned to invest in and accumulate knowledge as a society, we are now learning to invest in and accumulate entrepreneurship?
Terms like “freelancer nation” have entered the national dialogue as over a third of American workers now consider themselves freelancers.
It seems starting a business is becoming safer and having a job more risky. At some point, the two will intersect.
Have we reached a point where stating a small business and entrepreneurship is a “safer” path than corporate employment? I don’t know, but I suspect we’re closer than is popularly believed.
Even as more and more corporations shed full time positions to hire temps or contractors, there are more and more businesses, and they’re doing better and better with every passing year.
Has the dominant societal institution shifted from corporate CEOs to individual entrepreneur?
Are we entering the Entrepreneurial Economy? Perhaps we’re already there, it’s just not evenly distributed.
9. Caveat Emptor: On Selling The Dream
My analysis of and reflection on entrepreneurship comes from the point of view of someone who invested fairly heavily in knowledge. I didn’t get a graduate degree, but I did invest a lot of time in both high school and college to “win” at that game. I graduated Magna cum laude and Phi Beta Kappa which is the fancy way of saying I was considered pretty good at accumulating knowledge as a resource. I was, at the end of it, unhappy with the options it left me.
I don’t have any regrets about going to college. I studied a subject I’m still passionate about and through a combination of hard work, decent decision making, and mostly good fortune was able to graduate without debt, an atypical outcome for most of the people I know.
I’ve painted a very rosy picture above which you could criticize, not unfairly, as selling the dream. Because this is based on my personal experience, there are certainly strong elements of selection bias.
I’ve certainly heard stories of people pursuing entrepreneurial ambitions and having it end badly. One of those, a friend of a friend that ran a chain of car dealerships was hit in 2008 and, unable to cope with the stress, fell into drug addiction and abusing prostitution, was left by his wife, lost his business and eventually chose to take his own life. Tragically, there are certainly more stories of individuals like him.
I don’t pretend to say entrepreneurship will solve all your life problems. For me, it has solved some and created others that didn’t previously exist. At least for me, these have been “higher quality” problems.
At no point do I say that Entrepreneurship isn’t hard — only that it’s less hard than popularly believed.
And there’s a huge difference between impossible and really hard. Once something goes from not within a circle of possibility to at the every edge, that’s a paradigm-shifting change. At least, it was, and still is, for me.
I don’t claim to being a great or even good entrepreneur. I am, and hope to remain, a student of the practice of entrepreneurship.
I do, however, believe that entrepreneurship offers an opportunity to create more freedom, wealth and purpose in our lives, the lives of those we love and the world at large.
Just as investment advice articles conclude with, “This only an opinion, please consult your financial advisor before making any investment decisions,” I’ll conclude by again confessing that I certainly don’t profess to have all the answers. This is only my opinion based on anecdotal experience, observation and a bit of consideration.
Please consult your strategic life advisor.
Buy Low. Sell High. Or Not.
Either way, the market is moving.
Disclosure: As of the writing of this article, I am long into entrepreneurship.