Myth: Entrepreneurship Will Make You Rich

48 Comments

iStock_000004934135SmallThis year, I had the opportunity to serve as a mentor at Seedcamp. I hear pitches from wanna-be startups all the time in Silicon Valley, but the teams in London were different; the entrepreneurial dreamers that I met there typically had letters like PhD after their names. As a result, their ideas were especially innovative -– and complex. So a few pitches in, I started to ask the question: Why do you want to build a startup around this technology? Very few of them had an answer.

One of the unfortunate side effects of all the publicity and hype surrounding startups is the idea that entrepreneurship is a guaranteed path to fame and riches. It isn’t. Building a startup is incredibly hard, stressful, chaotic and –- more often than not –- results in failure. That doesn’t mean it’s not a worthwhile thing to do, just that it’s not a good way to make money.

A more rational career path for money-making is one that rewards effort, in the form of promotions, increased security, salary and status. Startups, unfortunately, punish effort that doesn’t yield results. In fact, the biggest source of waste in a startup is building something nobody wants. While in an academic R&D lab, creation for creation’s sake will often get you praise, in a startup, it will often put you out of business.

So why become an entrepreneur instead of developing technology in an R&D lab? Three reasons: change the world, make customers’ lives better and create an organization of lasting value. If you only want to do one of these things, there are better options. But only startups combine all three.

Take this fictional example of a Seedcamp attendee (actually a composite), which I will refer to as Hairbrush 2.0. At the helm of Hairbrush 2.0 are dreamers with deep AI background. Their dream is to use AI to solve some of humanity’s big problems. Originally, they thought they could make a learning engine that would accurately predict consumer preferences, and tell people what products to buy. Imagine a shopping engine that does your shopping for you. Brilliant. And also very, very hard. So like good entrepreneurs, they went searching for an easier problem to start with, namely helping people find just the right –- you guessed it — hairbrush. This idea took them right off the rails.

They were busy building their product as if they were still in a research laboratory. They hired hair-styling experts to feed their expert system. Their algorithms were world-class. And yet nobody was using it.

The worst part? They didn’t know why.

Hairbrush 2.0 didn’t have contact with customers. Not only that, nobody in the company actually had a use for the product they were building. Trust me, these guys did not brush their hair.

There’s nothing wrong with starting small on the way towards a larger or more mainstream product. But to become an entrepreneur, you have to serve customers, stay true to your vision and build an organization — all at the same time. Indeed, that constant balancing of short- and long-term priorities, vision and data, customers and employees is what makes it almost impossibly hard.

That’s not to say the Hairbrush 2.0 team is doomed. They can make up for their lack of domain expertise by putting a product out early, spending a lot of time with potential customers, and being rigorous about measuring how real-life customers interact with it. But in order to do that, they’re going to have to keep two seemingly contradictory ideas in mind at the same time: that their vision is going to change the world, and that their vision is also horribly flawed. Which parts of the vision are which? There’s no way to answer that in the lab.

Attempting to hold two contradictory ideas simultaneously is known in psychology as cognitive dissonance. Most people go out of their way to avoid this sensation. That’s a perfectly normal reaction; our brains are supposed to experience pain when we try to do the possible and the impossible at the same time. Entrepreneurs are wired differently, however. It’s not that they don’t experience pain — trust me, creating a startup is extremely painful — but that they care more about realizing their vision. And there are much easier ways to get rich.

Eric Ries is a serial entrepreneur and author of the blog Startup Lessons Learned.

48 Comments

Mailing Fulfilment

I agree with neil4444’s point. If in fact most start ups fail in the early days then how is this a way of getting rich?! I think entrepreneurs need to be much more realistic.

Jobs in Stratford upon Avon

I notice that a couple of people mention that they would not have started up a company by themselves if they were aware of the pain it can cause. Well i think we all know that starting a new company is a huge responsibility and the individual must be prepared to face anything that is thrown at them down the line. I don’t necessarily agree that entrepreneurship will make you rich, not instantly anyway but i do think that an entrepreneur can live very comfortably.

Wills Online

I don’t agree that entrepreneurial ship will make you rich in an instant. You may have an incredible product/service but you still need to market the product and create awareness. Start-ups will generally have very little money so they can ill afford huge marketing budgets. I’m afraid its a slow slog not instant.

neil4444

If most start ups fail within the first years how is that a good way to get rich.Yes some people make a fourtune this way, but the odds say most people will lose money trying to start a buissness.Why do people perpetuate the myth that everyone can become rich.The sad fact of the matter is that only a small % of the population can be rich at any given time, econmics 101 sorry.

Bee Hobson

I have read in so many places that you need to listen to your audience-potential clients but rarely have I seen an article that gives a very plausible example. And yes entrepreneurs are wired different I am one and my business went online in august-yet to to see a profit. My parents tell me to get a better job but the hope is my vision will lead to a better life. This is definitely not the path for everyone! I’m finding that I must also balance the real world and hold the dayjob-good luck to all those in the same boat!

Brian

Entrepreneurship is about showing your kids that, win or lose, the opportunity at hand is realizing the value of pursuing something you believe in and making an attempt to live within the bounds of what makes you happy versus the world’s message “you’ll make money and be stable” in the herd. Who doesn’t want to be one of the billion dollar front page outliers? But, for the most part, if you’re in anything solely for the money, you’re in the wrong place and the cost/impact to your life will be great.

I’d also say that “rich” is, as others have intimated, a subjective term. For me, entrepreneurship has provided me the flexibility I’ve [also] desired to be a dad and husband at the same time. The startup and entrepreneurship doesn’t (or maybe shouldn’t is the better word) have to be this binary state of sell out or get out. There’s times I think about hanging it up for “a job” but as tough as it is some days, it’s better than “a life of quiet desperation” and as already said, that’s what I want my kids to take away from it.

Dave Huer

But in order to do that, they’re going to have to keep two seemingly contradictory ideas in mind at the same time: that their vision is going to change the world, and that their vision is also horribly flawed. Which parts of the vision are which? There’s no way to answer that in the lab.

I call this place my “event horizon”

Dave Huer
Vancouver, BC

Nick Barker

A provocative post Eric!

I’m with Brian McConnell and disagree with you that it is not a good way to make money. It is. 3 out of my 4 former employer founders have existed with $6-$12m. They were all under 45 at exit and 1st time startup entrepreneurs. None of them were there to change the world but they made solid revenues by providing tech services in demand to local companies. If you aim too high, too early you may miss..

As Paul Graham said “…You have to make a living, and a startup is a way to get that done quickly, instead of letting it drag on through your whole life.”.

A startup is not for everyone but would you rather spend 40 years in employment working towards the goal of a comfortable pension or work for a much shorter period on startups?

Heidi Pollack

I think what Austin wrote is reality and makes a lot of sense and start up entrepreneurs should understand that growing a company has a lot of pain, is very stressful and takes a major toll on your life. You need to understand that the path to getting rich should be seen as the result of the person you’ve become and the company you built. It’s not easy and to be honest if I knew how hard it was going to be from the beginning I probably would of never done it!.

Ian

Entrepreneurship is an excellent way to share your vision, provide a possitive contribution to humanity and make a difference in this world.

To those of you who choose to be an entrepreneur, I salute you!

Rich

Having seen plenty of failed startups I certainly understand the risk. As others have commented, its really about the richness of the journey – do you want the incredibly high highs and low lows that come with self-determination via entrepreneurships? Do you want the incredible buzz of determining your own future, making things happen and the consequent risk and potential return? For the most part people are self-selecting whether they prefer the corporate life or the entrepreneur life

Greg

Maybe better expressed as so: If you become rich, you will likely have done so through entrepreneurship (or inheritance ;-) ). This does not mean that becoming an entrepreneur will make you rich.

Brian McConnell

I have founded four companies since moving to California. Two had successful outcomes. One was a trainwreck. The fourth is a work in progress.

I think the author needs to get his facts straight. The fact is that, outside of certain industries like finance, your potential to build real wealth working for someone else is quite limited. Thanks to the miracle of “at will” employment, your job can be taken away from you for any reason or no reason at all. The idea that working for someone else is risk-free is simply not true.

By starting a business, even if it’s a cafe, you assume ownership of your job. Yes the business can fail, but if it survives, it will generate an income for a long time, during which your job and livelihood cannot be arbitrarily taken from you by some HR person. If the business does fail, you probably built up a network of clients and contacts that you can bring along to the next project so you can salvage value even if the business was a failure.

Entrepreneurship is not for everyone. You need to be able to handle a lot of stress, unpredictable income, and be stubborn. If you’re passionate about what you want to work on, then I highly recommend it. Whether you succeed or fail, you’ll learn a lot from the experience.

photohand

You don’t become an entrepreneur, you are a born entrepreneur or not. If are one, it help to gains some experience working for a successful entrepreneur before you start your own business, but you certainly don’t go for an MBA or PHD. It’s a totally different path in life.

Shankar Saikia

TECH ENTREPRENEURSHIP VERSUS SELF-EMPLOYMENT

Tech entrepreneurship can lead to a lot of wealth, but is risky and so your chances of building wealth are low. On the other hand self-employment, while equally difficult from an effort perspective, is a more likely path to higher income. Self-employment can lead to wealth over time, though it is unlikely to lead to the Google-type of billions. Self employment also will give you more control over your work, though you will still have to deal with corporate politics, though in a different way from that experienced as an employee.

Before you go into entrepreneurship or self-employment (the two overlap) you have to ask yourself why you are doing it. If you want to make money then I suggest you approach it as self-employment. Self-employment will enable you to build something of value and a lasting organization (do tech entrepreneurial efforts really lead to a lasting organization?? Of course not – take a look at all the acquisitions highlighted on this blog. In fact, I will bet that most tech entrepreneurs do NOT want a lasting org and instead wish that their company gets acquired!!!) On the other hand if you want to change the world then you can opt for tech-focused entrepreneurship.

neonovo

So your telling me to be a corporate mindless sheep that does what it’s told for the rest of it’s life until retirement?

take into consideration the people whom cannot live like that. an office cubicle until enough promotions get me a window?

no, sorry.

David R.

I disagree with the people who are taking a dump on the OP. He points out quite rightly that people shouldn’t want to start up a business with only a vague explanation for their rationale. You have to be motivated as all-get-out when you start something, have a clear expectation of what service/product you are providing and WHY people will want or need that product/service.

I do grant that the headline is a bit misleading and colors the content of the post. If you’ve read “The Millionaire Next Door,” you’ll know that entrepreneurs dominate the ranks of the wealthy.

Peter Evans-Greenwood

I’m not sure that the problem of cognitive dissonance, as it’s really a question of having a little humility and admitting that you don’t have all the answers. While you might have a clear goal in mind, taking an idea to market is a journey and not simply a project. If your mission is to make the world a better place then you’re likely to have more success than if you mission is to impose a new world order.

r.

PEG

Shaan Batra

I often hear people saying that a start-up should have some vision for ‘changing the world.’ I don’t think this needs to be the prerequisite for success. In fact, I truly do believe that starting a business for the sake of making a lot of money can definitely be the goal. Although it is true you can make a lot of money climbing the corporate ladder, one does not have the potential to make as much money nor make it as fast as when starting a company. There is most definitely a distinction between making a six figure salary and being a millionaire or even billionaire.

Furthermore, besides the money, one has the ability to take complete control of his/her fate. One may decide to start a company that requires him to work less hours than at his/her previous job and has the potential to make the same salary.

Of course, with all start-ups there is a huge risk of complete failure. But, as they say, high risk = high reward. The idea that you should only start a company to ‘change the world’ is not the right way to look at it. If you have a good idea, see a business model in it, and are focused on long term sustainability, then that is all you need. I am sure that if you stick to these basic principles, you have the power to ‘change the world’ as they say.

les madras

the author of this post appears to be clueless.

Fact: Enterpreneurship stands far and above other pursuits in the creation of wealth. any wealth management professional will tell you that no other pursuit comes even close.

Fact: Confusing bad startups with all startups is a sign that the author is confused. Nothing else.

Please, please try out your storyline before you write.

Peter Evans-Greenwood

Net wealth across the population, yes, entrepreneurship creates more wealth than most pursuits. Individual wealth, no, most entrepreneurs don’t make serious cash from their efforts.

Ask any VC what percentage of their investments pay off. It’s not a large percentage.

Jay

Dude you are comparing the wrong things…the point is that entrepreneurship pays better than a number of other professions…So compare the chances of making rich as a career work for somebody else vs entrepreneurs.

I think there is no doubt the entrepreneurs would come out ahead of most…

I agree with les that the author seems clueless about the bigger picture and available options…

-Jitendra

James

Great article!

One thing that Timothy Ferris talks about in his book 4-Hour Work Week is the notion that not all start-ups are created equal. That is to say, a web startup is very different from a green tech start-up, social enterprise or “muse” business.

What I take away from this is: Yes, most businesses will not make you rich – but if that is specifically one of your goals; you should acknowledge that up front and (choose &) build your business/startup accordingly. The end result may be entirely different that if you were going to “make the customers as happy as possible” or “change the world”.

If you’re looking to make a lot of money – you’re absolutely right: a web start-up in an over crowded space might be a not-so-good idea but that doesn’t mean there aren’t a lot of possibilities for monetization on the web or other industries.

Nwokedi Idika

“A more rational career path for money-making is one that rewards effort, in the form of promotions, increased security, salary and status.”

What are some concrete examples? Moreover, it appears you’re suggesting that entrepreneurship is more risky than an alternative career path. However, on this issue, I agree with Jim Collins in that entrepreneurship is less risky but more ambiguous when compared to an alternative career path.

(See: http://www.inc.com/magazine/20090401/in-times-like-these-you-get-a-chance_pagen_2.html )

ladyleet

hairbrush 2.0 is a great example of why it is so important to understand the business you are in before you build a product for the customers. join the customers and join your community while you’re building, if not before.

Ed

Entrepreneurship may not be a guaranteed path to riches, but it sure as heck gives you a better shot than slaving away at a corporate job. I was a middle manager making low six figures but realizing that unless I wanted to climb to the VP level, my odds of ever being financially independent and living the life I wanted were low. Now, owning my own small companies that are mostly service-based and web-based, I have the work-life balance I want. Instead of begging my boss for a raise, I go out and sign a new client that could mean an extra $25k per year revenue. The power of increasing my own income is the part I find the most rewarding.

The article is right in that it is hard and not for everyone. I have friends who’ve tried and gone back to the routine of corporate life; nothing wrong with that at all, to each their own.

Chris

I think you ended this post a paragraph too early. What are these “easier ways to get rich?” Do tell…
I imagine you would bring up job titles like lawyer and doctor, both of which are hardly easy professions to qualify for and to make money with. But please share…

COP

May be coz getting a PHD takes only 3 yrs in Euro where its N years in US.

Jayalal Gopi

Hi Eric Ries,
Excellent observation. Hope this will help guys who want to make “quick” money through startups.
Regards
J

JJJ

I dont quite understand this post.

From what I gather, most likely entrepreneurship won’t make you rich, but you also shouldn’t develop products as if you were in an academic lab?

I guess ideas are 2 nickels a dozen, but it has to start from somewhere, right?

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