What does it take to start a successful business? Myth busting by the “Evangelist of Entrepreneurship”

What does it take to start a successful business? Myth busting by the “Evangelist of Entrepreneurship”
26 September 2018

Entrepreneurship seems to be getting a lot of attention – at least by those who like to talk about it. But how much actual “doing” is taking place? How many of us actually start the journey to becoming our own boss? It seems like there is quite a gap between the two.

There is a fascinating, and rather devastating, statistic about entrepreneurship in the US (which would probably be similar for Europe if such a statistic existed).

Since 1980, the number of professors teaching entrepreneurship in US universities has increased from just 2 to now 6,000. The number of incubator funds increased from 16 to now over 1,600. However, during the same period, the number of new companies being started in the US every year decreased from 700,000 to less than 500,000. Even just based on the 44% population growth that the US have seen over the past four decades, the number of newly started companies per year should have grown to over 1m.

In other words, entrepreneurship is getting more encouragement from the “talkers” than ever before, but the number of “doers” seems to have fallen to half its previous level on a per capita basis. By these measures, the US is now half as entrepreneurial as it was four decades ago.

Has the rise of an entire class of entrepreneurship professors led to young people getting discouraged from setting up on their own?

What happened, where did it all go wrong?

If you go by Professor Carl J. Schramm’s, it’s in part caused by too many myths floating around and people falling for misconceptions and bad advice; much of which is perpetuated by the media, academia and other stakeholders.

This is referring to myths about what it takes to start a company, what the best strategy is to get it funded, or at what phase of your life you are best suited to get your own venture off the ground.

Enter Prof. Schramm’s recently published book: “Burn the Business Plan”

Prof. Schramm likes to describe himself as the one professor of entrepreneurship that the other 5,999 professors of entrepreneur like to hate.

I had the good fortune to attend a book presentation in London back in May 2018, where I could hear it all straight from the horse’s mouth.

Some of the many myths around (successful) entrepreneurship

The Economist once called him the “Evangelist of Entrepreneurship”. Prof. Schramm likes to describe himself as the one professor of entrepreneurship that the other 5,999 professors of entrepreneur like to hate. He has come up with data that is in contrast to commonly perceived notions about being an entrepreneur:

  • The media regularly spreads a romanticised narrative of the young, mostly male, high-tech wizard. The reality, though, is that entrepreneurs who start in their 40s are five times (!) more likely to succeed. Also, the much-hyped tech start-ups actually make up the smallest part of all start-ups (just 5-7%), and they also have the highest likelihood of failure (80% go bust within five years). Every other industry has a lower rate of start-up failures than tech!
  • “The Lean Start-Up” by Eric Ries has become one of the most widely-read books about entrepreneurship. However, the methods it describes mostly relate to only about 2% of the start-up market and simply won’t work (and won’t be applicable) for the vast majority of new ventures being set up. How many people who bought his book knew beforehand that it was never going to be relevant for them? Speaking of the “lean method” is fashionable, but is it relevant?
  • Co-working spaces where entrepreneurs mingle, network and collaborate are promoted as the great breeding grounds for successful new ventures. The statistical evidence is that many of the young companies you can find in those spaces are mere “life-style ventures” aimed at making the founder appear cool and important rather than serious undertakings (until they run out of money and their founders go back to having regular jobs or go back-packing in Bali, Thailand, or Costa Rica). This is probably even more the case in “lifestyle start-up locations” like Portugal and Bali. As Prof. Schramm puts it, the truth is that “most successful entrepreneurs are quiet, solitary people.” They don’t tend to hang around the cider fountain of WeWork nor do they need to be somewhere that offers surfing and sunshine.
  • There is a widespread tendency to glorify bringing angel investors onboard. The reality is that many – if not even the majority of – angel investors are bored individuals who are looking for a hobby or for a way to feed on some of the youthful energy of younger founders. These angels often end up costing the founder more in terms of time and effort for relationship management than they contribute financially.

As Prof. Schramm writes in the preface of his book, through his extensive and varied studying of the subject he realised that “many of the popularly held ideas about when, how and why people start companies are probably wrong.”

What is Schramm’s advice then?

Here are the key points that stuck out to me as being particularly noteworthy.

1: Timing

As Prof. Schramm put it at his book presentation: “Business, like most of life, happens organically. It doesn’t start off a business plan. …. I always tell my students: Get a job in a big company and accumulate skills. Jeff Bezos had seen *scale* at his time in big banks, where he did due diligence on hundreds of companies. Large companies create extremely smart people. We are seeing a renaissance in big companies creating innovation.”

What if you don’t have a great idea for a business just yet? “You’ll simply know when an idea sneaks up to you.” If you live an active life and you are deeply immersed in an industry that you are passionate about, chances are that ideas for a new company will come into your mind sooner or later.

2: Plans

Prof. Schramm’s book is called “Burn the Business Plan”, which was probably chosen by marketing people and isn’t an accurate (or even fair) description of the book. But he does recommend not getting too carried away with planning.

There is the old saying: “In war, no plan survives first contact with the enemy.”

Prof. Schramm’s book puts is as follows: “The approach to planning suggests that entrepreneurs can achieve success by pursuing a linear, rational, critical path model, one completely unrelated to the spontaneous trial-and-error process that characterises the inevitably messy early years of every start-up.”

Put another way, “Plans are for investors”, which takes us to his next point.

3: Investors

“Most entrepreneurs are self-funding”, according to Prof. Schramm’s studies of the market.

Interestingly, there is no statistical evidence that founders who bring onboard sophisticated, experienced venture capital investors do any better than founders who don’t have such professional investors at their side.

“The chances of a venture-backed start-up surviving five years, which is less than 50%, is the same as for all new companies, regardless of the source of funds. In some instances, in fact, the interferences and demands of active professional stakeholders can be the reason that a start-up falters or fails.”

What’s definitely worse – akin to a kiss of death – is to receive funding from a public venture fund. Prof. Schramm found a statistic that of the 236 publicly supported local venture funds established over the last 20 years, only one (!) had produced a positive return to its taxpayer investors. Put another way, publicly supported venture funds are the ultimate dumb money and any company that has to rely on this sort of funding has a higher likelihood of failure.

Personally speaking, I find any company (or charity/NGO) that accepts public funding to be a toxic proposition. I’d never get involved with any such entity. Trying to get public funding is the wrong philosophy to start with and it inevitably leads to unnecessary complications that will stand in the way of success.

4: Focus

“Be all in. … as many as 70% of all new entrepreneurs attempt to mitigate the risk of starting a new business by continuing to hold down a full-time job. Being a part-time entrepreneur, however, is highly correlated to a lower probability of success.”

To add my own anecdotal observation, I cannot even count anymore the number of people I have met in life who described themselves as “really” wanting to set-up their own business “but only once it’s safe to do so”. They always have reasons not to start right now, e.g., they first want to have enough initial clients, or build up enough savings in the bank before starting, bla bla bla. Needless to say, none of them ever gets anywhere and I have long stopped arguing with any of them because the discussion is always – 100% – futile and a waste of time. You will never change anyone’s mind on that matter.

Being a part-time entrepreneur is highly correlated to a lower probability of success.

The book adds someone else’s observation: “So certain is he that an entrepreneur must be entirely committed to his startup that Paul Graham, the founder of Y Combinator, once observed: ‘If startup failure were a disease, the federal Centers for Disease Control would be issuing bulletins warning entrepreneurs to avoid day jobs.'”

5: Mental flexibility

“As every entrepreneur discovers, … planning a new business is more complex than most future events that we attempt to coordinate.”

Building a new business is, by nature, situational. It requires fast learning, regular evaluation, and an ability to let go of ideas quickly and pivot towards a new idea.

Anyone who does not have this kind of mental flexibility in them will struggle with being an entrepreneur. Although to some extent this skill can also be acquired, e.g. through running a monthly diary for evaluation, and critical, internal discussion about what needs to be done differently.

“Make a job, not take a job”

There are only so many ways to skin a cat, and I had come across dozens (maybe hundreds) of books about entrepreneurship before.

His book busts a lot of myths, but it primarily carries a positive, can-do message.

Nevertheless, I enjoyed reading Prof. Schramm’s book and a few of the points and statistics it mentioned stayed with me. He was a highly likeable and credible speaker at his book presentation in London – quite unlike many a professor! His figures are US-centric, but the core messages would be the same for any country really.

His book busts a lot of myths, but it primarily carries a positive, can-do message. A tagline used on the back of the book should really be on its cover: “What does it take to start a successful business?” This sentence sums up the real essence of this book. It is written to encourage you to get started!

As the book also points out, “a 2013 global survey reported that successful entrepreneurs are among the happiest people on earth.” For anyone wanting to achieve that degree of happiness, and everything else that comes with successfully starting, building and operating your own company, Prof. Schramm’s book is well worth the investment. It offers real, practical information and concrete guidance aimed at advancing you towards your entrepreneurial goals.

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