Chapter 1.4

Should You Start Your Own Company?

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Hundreds of thousands of new

businesses are organized in the

United States each year; unhappily,

most of them fail within the first year

or so.

Since the great majority of

start-up companies are financed out

of the pockets of their founders, the

high failure rate should be a sobering

statistic for would-be entrepreneurs.

It may be fortunate for the

economy as a whole that so few are

daunted by the sober statistics, but it

is hard on the individuals who do not

make it. Nonetheless, available literature on the business aspects of organizing one's

own firm rarely inquires into this threshold issue of whether one should set out on

one's own in the first instance.

Misleading Ebullient Optimism

t can be hard to keep one's head in the face of popular literature extolling the giant

winners in the game—Jobs, Wozniak, Wang, and their peers, creators of new

technologies which dominate the market and return hundreds of times the initial

investment.

The giants are an integral part of the mystique of venture capital, but an Apple

Computer or Wang Laboratories comes along once in a lifetime. The odds against

hitting that big are astronomical. Accordingly, books which record the anecdotal history

of how Ken Olson organized Digital Equipment, how Ed DeCastro put together Data

General, make fine reading, but the home-run expectations they promote can be

dangerously intoxicating.

Life Savings Desire Millions of $

I

Questions Every Aspiring Entrepreneur Needs to Ask

2

NONETHELESS, IT IS IMPORTANT

TO UNDERSTAND THAT IN THE

VAST MAJORITY OF THE CASES—

INDEED, FOR THE MAJORITY OF

THE SURVIVORS—THE RETURNS

ON THE FOUNDER'S INVESTMENT

(AND THAT INVESTMENT MUST BE

CALCULATED TO INCLUDE

OPPORTUNITY COSTS AND SWEAT

EQUITY) ARE MODEST. MANY

FOUNDERS FIND THAT, AT THE

END OF THE GAME, THEY HAVE

EITHER LOST MONEY OR BEEN

WORKING FOR A PEON'S WAGES.

Well, sometimes it does… But…

A founder faced with the "go, no go" decision—whether or not to invest his entire

savings in a new enterprise—is fooling himself if he stacks the reward side of the

equation with the possibility of making hundreds of millions of dollars. The vision of

those sugarplums is not a sound basis for an intelligent investment decision. To be

sure, it remains realistic for many founders to

think of big rewards, perhaps even millions of

dollars, albeit after a period of enormously

hard work and great risk.

There is a saying, attributed to Lord

Palmerston, that many foolish wars have

been started because political leaders got to

reading small maps. Many businesses have

been imprudently started because of the

founder's inability to understand how difficult it

is to achieve a double-digit compounded rate

of return.

Venture investments have, in fact,

outperformed the stock market in the postwar

years and, in many cases, quite handsomely.

There have been periods when 25 percent

compounded rates of return have been

available to the investors; indeed, substantially higher rates have been achieved by

many venture funds, and over long periods of time. But it is an economic impossibility

to compound any substantial sum of money at a 25-percent rate of return indefinitely

unless the investors are entitled to believe they will own all the assets in the world

within one man's lifetime. Enormous returns are contingent and should not be the

foundation of the analytical planning process.

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