Entrepreneurship

To Our Clients and Friends:

Entrepreneurship
Ninety percent (90%) of all new business startups fail within the first five years. That statistic is 100% true and yet very misleading!

Statistics
My wealthiest client failed in four prior businesses. Each of his “failed” businesses contributed to that “statistically” accurate 90% failure rate, but he does not consider himself a failure. The question then becomes, What does a 90% failure rate actually mean?

Mark Twain said there are “lies, damned lies, and statistics.” He’s 100% right (pun intended).

Mushrooming Entrepreneurship
According to the Wall Street Journal, new business start-ups increased by 60% in the last three years. This is a completely accurate statistic and, also, misleading.

When statistics are being tossed about in a presentation or an argument, (to paraphrase Mr. Twain) people are attempting to:

1. Obscure their lack of knowledge, or
2. Mislead (i.e. to lie)

In my opinion, the only honest way to use statistics is in presentations of scientific or mathematical data to others trained to understand the limitations and uses of statistical data.

Unless you are trained to understand and use statistics, statistical data is largely useless to you.

Back to the Wall Street Journal
The Wall Street Journal (November 30, 2021) implies that Covid is the driving force in this new wave of entrepreneurship.

Entrepreneurship has been accelerating at increasing rates over a decade, but “Covid Compression” has accelerated many already-existing trends. Remember this term.

“Covid Compression”
One of our key staff people, Rachel Hollingshead, I think, created this economic term. She can’t remember if she created it or borrowed the term.

“Covid Compression” means that the economic trends destined to happen in the next decade are being “compressed” into a single year, creating much disruption and anxiety.

Rachel uses this term to discuss the economics of higher education, an important discussion in Tuscaloosa. Rachel manages several large student housing real estate clients. Their future is very much tied to the rapidly changing economics of higher education.

(I plan to write a newsletter addressing the changing economics of higher education. Very important issues that impact family decisions are quickly developing due to “Covid Compression”.)

Why do people start a business?
By far, the most common reason is lifestyle.

As a young person of 25 years, I started my business as a lifestyle decision. There were three reasons I left traditional employment:

• Economics: I wanted to make more money.
• Family: I wanted to spend more time with Jane and our children.
• Personal Philosophy: I was unhappy with the fluid nature of professional ethics to which I had been exposed with two traditional employers in my industry.

The factors driving modern entrepreneurship haven’t changed.

On the other hand, the Millennials are driving modern entrepreneurship and have changed the landscape in very positive ways.

Economic and social forces
People are distressed by our economy that requires two-earner families. This economy demands jobs that require too many sacrifices of our families, especially our children.

Our Millennials, to their credit, are less likely to compromise on their social and ethical ideals. The Millennials are seeing the sacrificial prices being demanded of them and they are not happy!

The Millennials
Our Millennials are smart, well-educated, team-oriented over-achievers. They are highly motivated and tech-savvy. Best of all, to me, they are family-centric. And they are not afraid to act.

I love our Millennials.

All the statistics you often hear of about “The Millennials” that “prove” how inadequate they are, to quote Mark Twain, are “lies”. To quote me, “it’s jealousy.” Our Millennials are so much better than us Boomers. The Millennials are exceptional!

Our Millennials see the economy as a rigged game. They are very much aware that most of them will never make as much money as mom and dad, and they see that as unfair. With the superior education and skill sets common in the Millennial generation, the economic opportunities are simply not there. It is unfair and they know it!

The Millennial solution: they often start their own businesses.

How do the Millennials beat the 90% “misleading” failure stat?
As a group, the Millennials do a few things better than any prior generation that I have worked with:

1. They plan.
2. They get qualified advice.
3. They act.

When I say they plan, I mean the Millennials assume that they know nothing. They are not embarrassed by any lack of knowledge. One more thing: Millennials assume that what they think they know may not be complete or correct. They research everything. Prior generations are not this humble.

They plan on paper. They brainstorm mostly in informal groups. Then they assume that they have missed critical points and retrace everything. Millennials assume they are clueless and take delight is seeking to remedy that state. I like that.

By the time I see a business plan, it is often on the 13^th or 15^th draft.

When it comes to family and financial matters, they are careful but not fearful. They use groups to hone and sharpen their thinking and focus before they act, but they are not afraid to act.

Failure
Sure, they fail – often. They anticipate failure, learn from it, and move on. They prove that the 90% failure rate is both true and a springboard to success.

I’m not seeing a true sample.
A false sample in “statistics” is called “anecdotal” data. It is true that Millennials who see a CPA early in the process are more likely to be successful. It is also true that Millennials who see a CPA are a select group and not a “statistical” sample.

That does not render my observations inaccurate. The Millennial entrepreneurs who come to see me are far more successful than the mythical 90% failure rate for new business startups. But it is also true in the larger population that Millennial entrepreneurs are more likely to succeed than prior generations. There are good reasons for this improved success rate.

In many counselors there is wisdom
Millennials will come seek my advice as a part of the planning process. If not from a CPA, then from other people they trust. Millennials take my advice and, for the most part, try to apply it.

Minority Citizens and the Poverty Cycle
No matter what I write about the minority poverty cycle, I’m going to get hammered by everybody, left, right and center. For years I have been planning to write an article focused on the minority poverty cycle, but, if I do, I will ask my friend, Tyshawn Gardner, PhD, to co-author with me (to share the heat). There will be plenty of heat to go around. I’ve also considered drafting an article with a respected minority small business owner focusing on his experiences.

Minority business startups have unique challenges.

The 21^st Century has seen a sharp rise in minority owned new business startups. The motivation is obvious. Building a better life for you, your children and their children is a dream of every family.

Poverty in America is largely avoidable. Multigenerational cycles of poverty are criminal. Until we defeat this multi-headed Hydra, our society can never achieve its potential.

Becoming an Entrepreneur
Start with an idea and plan. And plan some more. Early in the process, get professional advice from a trusted CPA and from other successful people. Truly successful people want you to succeed; they will help you if they can.

You are going to fail and that’s ok
To be an entrepreneur is to know failure. That 90% statistic may be misleading, but it still has teeth. Failure is part of the process. Do not waste a failure; learn everything possible from every failure.

Plan and plan, and plan again
Pencil to paper:

1. What are you going to do?
2. How much will it cost to do it?
3. How will it make money?

Without pencil to paper, there is no plan. It’s not that complicated. The complicated part is vetting the plan. Recruit advisors and counselors early in the process. Your first plan is always trash. Your 12^th or 15^th plan may have merit. If you can’t trash your first plan, you’re not doing it right.

Carefully vet all your many plans.

Create your process to enhance the possibilities of success
The process could look like this, but it needs to be your own process, your creation.

1. Find people who are successful and create a mentorship. In many counselors there is wisdom.
2. It takes hard work and time. There are a ton of get-rich-quick schemes floating about. None of them are worth a thin dime! If it’s too easy, it’s a scam.
3. If the income projections are too good, you have missed something vital to your success. Look again. Ask for help!
4. To-Good-To-Be-True is, well, we know what it is.
5. Be very skeptical.
6. Learn to put yourself in the pathway of luck. Learn how to create luck and forge connections. Luck, in the business world, is not a random event. Good connections matter. Luck can also be called opportunity. Good connections and good luck are the same thing.
7. Persevere. Learn from failure. Fail and fail and fail again, but don’t quit.

Your process can be created in collaboration with trusted advisors, but it must be your creation.

There are four reasons why people start a new business.
The four demarcations listed below are a bit arbitrary and certainly fluid. A Lifestyle business start-up can become a Legacy and so on.

1. Lifestyle
2. Legacy
3. To Sell
4. A Philosophy

Lifestyle
I discussed “lifestyle entrepreneurship” on page 2. It is, by far, the most significate reason that people start a new business.

Gina Allen, now my editor, was at one time a key employee of our CPA Firm. Gina started her small business to spend more time with Mr. Allen and their first-born son. This is a perfect example of “lifestyle entrepreneurship”.

Legacy
An entrepreneurial legacy is a deliberate multi-generational move into the middle class. An example would be a business started by mom and pop that creates a platform from which the children (and their children) can start their own business or become successor owners of mom and pop’s business.

A good example of legacy entrepreneurship in practice is the fact that we have fewer Chinese restaurants and why that’s good for the economy. The children do not want to operate mom and dad’s Chinese restaurants. Economically, they have moved on. Asian Americans are a driving force in American entrepreneurship and have become essential to the national economy.

Building a multi-generational economic legacy is the second most common reason the start a business.

A lifestyle business start-up, such as a Chinese restaurant, can become a legacy start-up as the children start a modest manufacturing company – parents paving an economic road to success for their children.

To Sell: part 1, the individual.
Starting a business with the intent to sell as an exit strategy is the third most common reason to start a business.

I have one much-loved client that has brought me five or six business plans that end with, “… this will make $30- or $40-million dollars and then we can sell it!!”

Nothing ever worked out until now. Now they have a legitimate business that can be sold at a substantial gain. Five business failures for one very significant success.

These venture-oriented risk takers are aware that most of their business plans will fail. They have a preconceived loss ratio that they can live with, such as 5 failures to 1 success. Or 3 failures to 1 success, depending on the context of the business plan. Even Warren Buffett had 15 highly publicized failed investments.

Do not be afraid to fail.

To Sell: part 2, an existing business can be entrepreneurial
Entrepreneurship is not unique to individuals. Existing businesses can and often should be entrepreneurial. A former Google CEO, Eric Schmidt, had a well-known rule for internal entrepreneurship called the “70-20-10” rule. He spent 70% of his time on the core business. 20% of his time was spent on legitimate entrepreneurial planning and opportunities. 10% of his time was spent on the weird, wild, and wonderful. Not bad.

CEO Schmidt was willing to take a 1 in 5 success rate on the 20% investment in entrepreneurship. He was willing to take a 1 in 10 success rate on the weird, wild, and wonderful investments.

Most businesses explore new product introductions. When framed as acts of internal entrepreneurship, the success rate of these business expansions are much improved. Asking for a 1 in 3 success rate on new product introductions is appropriate.

Internal entrepreneurship can organize a long-term pattern of success for existing businesses.

A Philosophy
I started my business, in part, due to a personal philosophy. My first two jobs as an accountant taught me that our industry had serious problems with the ethics and work-life balance offered in the traditional CPA employment. I simply could not work in that environment, so I created an environment where I could work.

There is a bit more to it than this simple retelling. The philosophy that drives our firm is:

• External: Our clients’ welfare comes first.
• Internal: We seek a healthy balance between family and work.

We do this legally, ethically, and with a high degree of professional competence.

The value of a philosophy
A philosophy helps create a sense of mission and purpose. We teach more than job and technical skills to our staff. Mentorship is required to help people understand what our philosophy is and why it matters.

As a result, we have technically competent professionals of the highest ethical standards. And we are here to serve you.

Sincerely,

Steve Richardson, CPA

Steve Richardson & Company, PC
2618 8th St
Tuscaloosa, AL 35401
(205) 349-3580