Business Startups Are Hard Work And Risky

Could we better estimate the future?

Quite likely yes. The pieces are there now, they are not readily observable. It takes a while for things to happen. Typically it was taken 30 years between when a new ability or concept is found and the time it is commonplace in society. Today it is less, but still not instant. Amazon is 24. Google is 19. Facebook is 14. They are tech companies and their time frame is less than ones that must produce a product.

Tech companies have very high margins and very high startup costs. Once they get going they make huge profits, because they cost relatively little to run.

Product companies are different.

I heard a chat with Ben Thompson on Farnam Street recently. He was trying to wrap his head around how a company with a 50% margin could get along. There is a big difference between a company with a 90% margin and one with 30% like many businesses. There isĀ  both an advantage and a disadvantage to being a product company.

The difference

Operational leverage. A business like google has no real, as in you can touch it, offering. The have a fantastically complex infrastructure and amazing software. The advantage is that while it might cost $10 billion to handle the first request for data, it costs nothing, within a rounding error, to handle the second and all the ones after it. Businesses of this type have leverage. It is a little like financial leverage. When it works it is wonderful, but if it does not, they fail. It is called operational leverage.

Businesses like that are very costly to start which means there will be few of them. You cannot start small and grow big. You must start big.

Product businesses can start small and by improving product, operations, delivery and managing overhead, they can grow. Add customers. Develop market share. Eventually build a vibrant business. Because their variable costs are much higher, they cannot grow quickly. They just don’t have the ability to generate huge cash flow, and making a giant investment in the beginning will not speed things up a lot. Opening ten factories in the beginning will fail. The process is not well enough known.

HIgh value, high growth tech companies are the flavour of the month, but how many are there really? How many can their be?

Starting a businesses offering products or services

There will be many of them starting every year. Not all will survive. The ones that don’t will be forgotten, but they will destroy relatively little capital.and few will notice. There will be some highly visible successes too. But few and not many as a share of all that try. The key to venture capital is limiting losses. If you expect to lose all your money on 80% of your investments, it would be a big advantage to only lose on 70%.

If you are starting a business, no point looking at Apple, Microsoft, Oracle, Walmart and their peers. They are all more than 40 years old and they have learned quite a bit along the way. You may know some of it, but startups don’t work like established businesses. Be careful.

In the beginning

Know some things that the established folks have probably forgotten

  1. If you build a better mousetrap, no one will come to your door unless it is easier to use, more effective, and has a lower price. Change is hard. Customers need a clear advantage. You must acquire customers. None will go looking for you.
  2. There many aspects to a business and most founders are good at just a few. Marketing and sales, manufacturing, inventing, finance, inventory management, order entry and delivery, legal, accounting, government forms and regulation, labour standards, and administration come to mind. Most founders are inventors or marketing people. Sometimes they don’t even know about the other needs. A meaningful share of businesses that fail,do so while they are profitable. Tiny details hurt as much as big problems because there are so many of them.
  3. People can work 10 hours a day, 6 days a week indefinitely. A very few can do more. You probably know some of their names. Elon Musk and Donald Trump are two of them. You cannot work every problem to death. As you get more tired, your higher brain functions fail. You get dumber. Not an advantage.
  4. You need emotional support. Be sure your friends and family can cheer you on.
  5. Everything takes longer than you think. Be sure you have enough capital to get through the early period. No pro forma business proposal ever worked out in the short run. Sometimes people go six months with almost no revenue. Banks are accommodating but they expect you to take more risk than they do. They know all new business plans are optimistic.

A successful business is its own reward

People who have created and built successful businesses often have wealth. Beyond a point, they don’t care. The business is like a child that did well. The reward is watching it be successful.

Try it if you think it would fulfill you. Don’t do it just for the money. That’s a trap.

I help business owners, professionals, and others understand and manage risk and other financial issues. To help them achieve their goals, I use tax efficiencies and design advantages to acquire more efficient income and larger, more liquid estates.

In previous careers, I have been a partner in a large, international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you. 705-927-4770

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