Overthrowing the Dreaded Business Failure Rate January 22, 2007
Posted by The Probabilist in : [Articles], Business, Entrepreneurship, Beliefs, Vision, Work, Assets , 2 comments
Nine out of ten new business ventures fail within the first five years. I don’t know about you, but I’m tired of hearing and reading that statement - simply because it just isn’t true! I wrote previously in what ways a business may come to an end and I felt I should make some further clarifications and explanations to debunk the 9 out of 10 failure rule for good. Following I’ll present ten different scenarios for businesses that last for up to five years and conclude a more accurate failure rate analysis from the results.
1. The business is still around. This is the one out of ten that still exists and shows a healthy pulse. Congratulations! I hope the business is treating you well and you’re working less while earning more in comparison to being a full-time employee in cubicle land. Remember that during the next five years your chances of survival are still the same as during the previous five years. These words aren’t even remotely discouraging to you or your efforts since you already feel invincible by now. But please do read the following ones just to give yourself a heads-up on possible outcomes that may not be that bad as the failure statistics try to terrorize us with.
2. The business got sold. If this is considered a failure, then count me in. A great portion of business start-ups launch specifically with the vision of being sold for big bucks in the coming years. This certainly isn’t the aim for my own blog venture, but I do wonder what the founders of YouTube have to say about the sale of their business. I’m guessing they’re feeling a bit down seeing as they failed pretty badly - in the statistics of things.
3. A better opportunity presented itself. This is the case of a business being alive for say, three years doing just fine when suddenly some new idea leaves you sleepless at nights. It might be your entrepreneurship contacts and friends deciding to put all heads together and start a completely new and innovative business that has far more potential than your current, slightly above average cash cow company. For the thrill of things and excitement thereof, who wants to run a business that ended up monotonous after a couple of years when there’s a chance of far bigger deals to be made in something completely different? Statistical interpretation: failure.
4. There’s an entity shift. Consider the previous scenario, but instead of joining or creating something completely different, you simply change the entity form to a more suitable one after you’ve noticed changes in your income generation or business model. Maybe you’re successful enough to make it into a franchise system, or you’ve simply decided to move elsewhere while still doing what you already have found yourself successful in. Statistical interpretation: failure.
5. Retirement or health related hindrance. “You’re old, sick and tired - you have failed.” How’s that for a comment to receive when you shake hands with your successor as (s)he takes over your business from you? Note again how this scenario doesn’t tell you anything about how profitable or growing the business has been before the shift happened. Saying that the inevitable or unrelated (e.g. physical accident) is accounted and marked as a failure is just plain silly.
6. Unknown, other or misc. reasons. While I’d like to let you know all possible reasons for a business to close down, there will always be the entrepreneurs checking this box when explaining the fate of their business. My own interpretation is that it is far more likely that these reasons stem from personal choices rather than failure related causes.
7. Not making a go of it. We’re gradually shifting lower and lower in the greyscale of success and failure, getting to a point quite exactly in the middle of both of them. This scenario means that the entrepreneur seized the business because it wasn’t as profitable as it required personal effort and labour. Working 14 hours per day might not be very motivating if you receive the same pay as being a nine to five employee. Note however that once again there’s no failure involved, only subjective opinion of how much the running of the business is worth to the individual entrepreneur.
8. Prevention from further losses. Now we’re getting very close to what some might define failure. This is the scenario where the entrepreneur is red-lining - losing money month after month. However, the creditors are still getting their agreed-upon payments, which means that only the business owner is the suffering party. Is this a case of failure? That’s up to you to decide. And when it comes to personality, defining yourself as a failure has never amounted to anything good compared to just accepting that you’ve tried something that didn’t succeed. Your creditors want you back for your next venture unless you’re occupied with banging your head against the wall and not realizing that you just have to bounce back.
9. Bankruptcy. Failure at last. At this point I have to give in and define this scenario as a failure. Undeniably, there has to be at least one outcome you want to stay away from knowing that nothing good comes out of it. This still doesn’t mean that the entrepreneur behind the business is a failed human being. You will find it long and demanding to dig your way out of the rubble and after that’s done, the future is up to you. Do you throw in the towel or do you learn from your mistakes?
10. The statistical anomaly. Some say the failure rate is 80 % and some say it’s 90 %. I say you decide this for yourself. Appoint this last scenario to any of the other nine ones that you’ve found most dominating over the others. If it’s failure to the worst degree then choose the 80-20 rate and if you think it belongs closer to success then choose the 90-10 ratio. This scenario is you in the making as you give birth to your next business venture.
Conclusions
My objective with this article was to turn the failure rate completely topsy-turvy. I wanted to show in a most simple way that the ratio of success and failure is completely inverted in comparison to what you might have believed previously about entrepreneurial success and failure. While the statistics say that 9 out of 10 fail, I state that 9 out of 10 succeed and only one fails. Note that this analysis does not take into account how common the different scenarios are in comparison to each other.
In my previous article I also defined entrepreneurial failure as the choice to stop being an entrepreneur. I’d also like to apply this statement into the 9 out of 10 rule. An entrepreneur that decides never to fail (as in not having the business vanish within the first five years), lives with the mind-set that they are ready to attempt 10 times before making it big. They know that most often you have to go with trial and error, or the ready-fire-aim approach. However, those who don’t share this mind-set are likely to quit after their first attempt.
When you apply this to the given ratio, it gets distributed something like this:
The most important insight you can gain from this article is that you first have to define for yourself what a successful and what a failed scenario is to you personally. Just because the mainstream statistical notion says that only a business running for at least five years is a success, doesn’t mean you have to think in these terms. Some may define the greatest success scenario as running a business for three years, selling it and retiring for good. Some may define success as running a business until their health stops them. And some are serial entrepreneurs and thrive from the thrill of starting fresh on a frequent time frame - while still being tremendously successful at almost every venture. Make up your own mind what you want to achieve, understand what the statistics mean and start creating your own, personal statistics of success. Failing or attempting a few times may be exactly the experience it takes to gain all the wealth and success that come from the business that ultimately succeeds - strictly under your terms.
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Delayed Gratification December 7, 2006
Posted by The Probabilist in : [Articles], Business, Doodads, Emotions, Financial Literacy, Goals, Responsibility, Wealth, Assets, Investing , 9 comments
The concepts of delayed versus instant gratification are undoubtedly one of the most important choices that separate rich thinking from poor thinking. And it isn’t a choice until you’ve consciously identified it as one. Since it’s too often a matter of unconscious repeating of the pattern that your family or closest friends are instilling in you, it’s very important to think it through for yourself. Does no money down with fixed monthly payments really make more sense to you compared to acquiring assets that pay for what you want? Your answer should address both financial and emotional sensibility.
Financially there’s no doubt about which is a more sound decision. The two alternatives both represent a spiralling result. One is an upward/positive spiral while the other one is a downward/negative spiral. By buying first and paying later the monthly expenses keep building up and it’s increasingly more difficult to set a fixed percentage aside, a.k.a. paying yourself first. Most people don’t even think about this aspect to begin with. So, rather using a portion of any monthly income to invest in assets that add more income, the asset itself can increase in value when invested and maintained properly.
Emotionally delayed gratification also serves a better purpose, since it’s a question of worthiness. When are you worthy of something, before you have the money or when you have the money for it? The answer is simple in logical terms, but since people in general aren’t rational beings the emotional reasoning dwarfs the rationale.
But choosing delayed gratification doesn’t have to mean for you to squash the existence of your emotional expression. In fact, it can be used in advantage to gain the mind-set of delayed gratification. See, sometimes you might have got so accustomed to, lost interest of or completely disposed of something that you’re still paying the bills for and those are the emotionally worst ones to pay for. But in contrast if the money needed to buy something is acquired through hard and smart labor it can serve as a much better outlet of emotional outburst once it’s paid for in cash. It’s simply a smarter way to harness the emotional side of wanting something.
The rich always think in terms of delayed gratification. It doesn’t matter if it’s about creating a business, investing in real estate or simply desiring another doodad, to name a few examples. This is the process they all have in common, whatever they put their mind to. Just trying to answer the question of how you can afford something doesn’t mean any answer is the right answer, as with the case of typical jargon like “low down, easy monthly payments.” That’s the middle class trap. Looking good and going nowhere has never been my path in life. Which one is yours?
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