Are You an Entrepreneur or a Business Owner?
A main differentiator between an entrepreneur and a business owner is their cash survival rates. One group can survive the so-called “Valley of Death” better than the other group. But what is the “Valley of Death”?
Valley of Death
The “Valley of Death” is the street smart economic term which refers to the
timeline of cash flows from the initial seed capital stage to the final stage of a public shareholding company. Since the starting company initially has a net negative cash flow for a certain period of time before it starts generating sufficient revenue, it gives rise to a cup-shaped curve named the “valley of death”, on which most businesses collapse when they run out of cash. In this respect, the global numbers are daunting: 50 percent of businesses fail in their first year, 80 percent fail within the first five years, and only 6 percent make it past ten years. So why is there such a grim statistic for a profession that is revered around the world?
Simply put: no-one plans to fail, but people fail to have a plan. At the seeding stage, a company is founded from the savings and personal borrowings of an entrepreneur who is focused on an idea of the business, but without a plan. Soon after, friends, family, and other “fools” may provide further capital to the entrepreneur based on their knowledge, and care for the entrepreneur, but not based on any business plan which has not been formulated yet. Therein the crux of the matter, that providers of this “love money” have no focus on the profit, and have sidestepped review of a business plan. This is further to the fact that research shows that too much money for a business early on does not get spent well. As the business drops deeper in the “valley of death”, there remains a minor possibility that the idea may start generating a revenue for the business, but further capital is needed.
In come the angel investors who are affluent individuals who provide capital for a startup at different stages. Even though it may come as early as the seeding stage of the company, an angel investor often enters after the proof of concept has been completed, or a prototype of a product has been accomplished, which occurs deep in the “valley of death”. However, the angel investor only provides capital after the entrepreneur provides a well formulated business plan. Herein lies the shift in mindset that the entrepreneur experiences in the harsh reality on the world: to focus on profitability.
If the company turns out to be a high impact, high growth – so called “gazelle” – company, then it may experience a high growth phase in which venture capital investors enter and steer the company to further increase its management, and financial efficiency. As the company’s slows growth, both the risk, and opportunity of the company decreases and the company matures. This is often the time to sell the company to the public in an initial public offering (IPO).
The Enemy is You
An inherent element of the failure of startup lies in the entrepreneurs themselves. An “entrepreneur” – which is a loan word from the French language – means an enterprising individual who is willing to launch a new venture through management of risk. Therein lays the risk of the downfall of the entrepreneur who starts a business with no proper business plan that places financial control measures, and emphasizes marketing plans, and an overall strategy. Moreover, as an individual, an entrepreneurs are often type A personalities who are adamant on making their own decisions, and not taking other people’s advice. Their motivation to establish a business is to see their idea come to life, with the focus on generating revenue and profit often coming too late in the life of the business.
It is also noteworthy to differentiate between an entrepreneur, and a business owner. Whereas an entrepreneur is an individual with a new idea of an invention, or application, a business owner is simply a self-employed person. Even though it is more revered, an entrepreneur has a much higher risk of failure since the innovative concept has not been established as a business. If and only if the entrepreneur becomes successful, the business would have the potential to become a high-impact high growth company.
On the other hand, the business owner establishes and runs an already established business model, becoming a self-employed individual. Even though the potential for growth is modest, the risk remains lower for a business owner. This is reflected in the statistics by the Small Business Administration (SBA) in the U.S. that 7 out of 10 new small businesses survive at least 2 years, and that 51 percent survive at least 5 years. Furthermore, the motivation for a self-employed individual is often different that they seek independence, flexibility in the work time, and self-esteem of ownership, rather than profit seeking.
Hence, are you an entrepreneur or a business owner?
Even more importantly: are you well equipped for your profession’s inherent risks?