When is entrepreneurship not worth it?

[silversurfer]

I read a story several years ago. a teenage girl had been murdered in her trailer park. They interviewed the parents about their loss and one of the things they mentioned was that the parents had a business where they made and sold leather jewelry at flea markets and they used the term "entrepreneur." The article casually mentioned that they made enough money to survive in the trailer park, but just barely.

this always seemed like the absolute cut-off of entrepreneurship. If you can't make enough money to get out of the trailer park and keep your kids out of harm's way, then you should be doing something else other than running your own company.

This actually happened to my father in law. He ran a store for 15 years and ran it into the ground. Every year he got a little deeper in debt until he was 5 figures in the hole and making less profit each year. He's told me some of the decisions he made- threw out a gross, 144, Beatle wigs because the Beatles weren't hip anymore, bought a gross, 144, of these santa legs that stick out of your fireplace that zero people bought because they looked like they'd catch on fire, bought a gross of "slightly" damaged ceramic figurines that never sold. All manner of idiotic purchases that in the pre-web days just sat in a gift shop.

So I think the question to you all is, there are many people here who talk about entrepreneurship, talk about SEO, talk about gross sales, networking and issues that don't relate to making a profit.

When do you decide to stop running a business and try something else? I'm curious to see how you view this?

[akula]

Good question. The answers are difficult.

Never worth it: Strictly speaking, from a quantitative, scientific perspective, entrepreneurship is never "worth it". In other words, risk adjusted investment returns from undiversified, seed stage private equity are inferior to S&P 500, in the aggregate and over the long term.

This means that, if you have $10k, for the amount of your exposure to systematic and unsystematic risk, you will always be better off investing in an index fund, as opposed to buying shares in your seed stage startup. The guys that you hear about who made millions in no time starting with nothing are statistical outliers (i.e. Alex Tew). Their investment results are not in any way representative of the investment returns for the average person who buys seed stage private equity (i.e. an entrepreneur)

Why entrepreneurship? Even though undiversified seed stage private equity is statistically a risk inefficient (i.e. bad) investment, people continue to start small businesses for a range of different reasons. The smart people do it because of insider information, or diversification. The other people (i.e. you, me and everybody we know), do it either because we don't have access to other opportunities, because we receive non monetary benefits from our investment (we love the lifestyle) or because we are victims of confirmation bias (i.e. belief that it's only other people's businesses that fail)

What next? In striving to make their investments in seed stage private equity "worth it", there is a four dimensional challenge for entrepreneurs;

1. Entrepreneurs must manage their systematic risk by acting on insider information (i.e. your father securing distribution contracts prior to buying the santa legs).
2. Entrepreneurs must manage their systematic risk by aligning their opportunity selection criteria, with other market participants, for the purpose of profiting from random error (i.e. getting lucky)
3.Entrepreneurs must manage their unsystematic risk by being good CEOs
4. Entrepreneurs must manage their unsystematic risk via diversification.

I can expand on these points if asked.

[Cole Taylor]

so does deleting my post mean you approve of plagerism?

[akula]

so does deleting my post mean you approve of plagerism?

look, I don't have the upside for flaming you, but I am disappointed. you've been on this forum long enough to know my attitude towards plagiarism. if there was even the slightest reason for me to provide a reference, I'd be the first person to do it; and as far as c/p goes, I always single out any pasted content I use in italics. suffice to say, since there's no italics in my post, I obviously didn't paste it from anywhere.

cole, you will enjoy better karma by avoiding these kinds of misplaced policing efforts.

[rossco1]

cole, you will enjoy better karma by avoiding these kinds of misplaced policing efforts.

haha. i like that.

again more then useful info from you akula. cheers

[akula]

haha. i like that.

again more then useful info from you akula. cheers

thanks bud. it's great that i'm not totally useless.

now, as far startups are concerned, i stand by my previous post.

from a marxist perspective, entrepreneurs are the economic dummies who suffer all the surplus risk in the economy. in fact, the only reason for us having an economy at all, is the entrepreneurs who are there to make unreasonable decisions.

for example, no matter which way you look at it, in 1996 sergey and larry were much better off to just finish off their phd's and put aside all these thoughts of making some sort of a business. however, we can thank these guys because they made the unreasonable decision, took a monster gamble, deferred their studies and gave us google. in their case, things worked out. but in others, they usually don't.

in that sense, the decision to start a business is always an unreasonable decision, unless the decision is hedged by points 1-4

[silversurfer]

I didn't expect this high-level of a discussion, but obviously everything you write follows economic theory (though Marxists tend to separate individual entrepreneurs from those financed through capitalism, something we tend to meld together on this board). I expected some discussion closer to what makes one thing a hobby and something else entrepreneurship.

I started a company at age 18 that never made more than $10k per year. I would have loved to have made that company into something but in general there was no funding nor any prospects of increasing that revenue- and it was taking me 4 hours a night to work it. I have friends who ran part-time companies making $10-50k that today are back to making $5k. So I know people who were the 10th best at something that was popular and are now the 50th best at it.

I tend to be pretty risk-adverse now, I have kids and have a legal obligation to be risk adverse (it can be called child neglect).

I worked for someone else's start-up and lost, so I know from experience that I accepted a fair amount of financial risk by working for such an operation rather than a less-risky established corporation.

I think, if there was one thing that caused be to post this it would be someone posting a message to another board bragging about their #1 SE position on this totally obscure phrase. I posted a reply- you're #1 at that phrase, but how many hits do you get from google on that phrase? They got less than 100 hits last month on that phrase. In other words, it was a very minor victory at best and self-delusion at worst.

And the last thing I want to do is read someone's post, mistake their self-delusion for fact and waste several hours researching a topic before I learn they don't know what they're talking about.

[focalpoint]

"When do you decide to stop running a business and try something else?

when you lose the sight and vision of why you had started your busines in the first place..the day you lose this is the day you should stop running your business.

[GoBIGJosh]

Yeah, when the light dims too much at the end of the tunnel. We all need to get away sometimes.

I'd say, when it starts affecting your life too negatively. This isn't like.. getting out of the ghetto for most people. If it starts to endanger yourself, or your relationship to family. I'd say it's not worth it. It's all where your moral compass lies.

[akula]

you guys totally suck

you should listen to your selves; "lose the sight and vision", "moral compass"

wtf are you talking about?

you're entrepreneurs

you're in the business of managing capital, for alpha returns

you close shop when you results fail to meet the hurdle rate - for the purpose of cutting suck costs and opening the next shop

it's neither an emotional, nor a moral issue

peopelz, where were you educated to be so retarded in your thinking?

[SpencerB]

you guys totally suck

you should listen to your selves; "lose the sight and vision", "moral compass"

wtf are you talking about?

you're entrepreneurs

you're in the business of managing capital, for alpha returns

you close shop when you results fail to meet the hurdle rate - for the purpose of cutting suck costs and opening the next shop

it's neither an emotional, nor a moral issue

peopelz, where were you educated to be so retarded in your thinking?

Thank you... someone had to say it.