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Author Topic:   Why don't most people understand this part of entrepreneurship?
coffee_addict
Member
Posts: 3645
From: Indianapolis, IN
Joined: 03-29-2004


(1)
Message 1 of 6 (895073)
06-07-2022 12:47 PM


Hello super smart people. I would like to get your opinion on something that I've been pondering about lately.
For background, I went to college, went to grad school, got my degrees in engineering, and spent a decade of my life working as a design engineer. Then about 3 years ago I quit that and started a company of my own. Very recently I took the plunge and started a 2nd company. So now I own and run 2 companies. The first one is starting to mature and bring in a sizable income. The 2nd one is just starting and I've been able to keep my employees working and earning.
If you ask any entrepreneur out there about the beginning of their business, every one of them will tell you the first 2 years suck. The next 3 suck a little less. They don't actually bring in any sizable profit until the 5 year or more. For example amazon.com was operating at a loss for 6 years. Uber after all these years are still operating at a loss. It is simply the nature of the beast.
I belong to several forums for entrepreneurs where we give and receive advice from our peers. Probably the most common theme that comes up is people around us keep questioning why we aren't profitable yet after a month? Divorces have resulted from this. One spouse would start a business and the other just don't want to make the necessary sacrifices anymore.
Every person I have ever talked to has a business idea and thinks they know how businesses work. Just like how every person out there thinks they know more than the evolutionary scientists on evolution. It is the Dunning Krueger effect. And I get it, evolution isn't very relatable to everyday life.
But everything in everyday life is like starting a business. When you decide to body build, you work out at the gym and you don't gain muscle right away. In fact, you're going to be sore and you will feel weaker before you gain any strength. When you decide to career in engineering, you need to spend 4+ years in college not earning anything before you can start earning an income in that career. When you decide to get a house and start earning equity, you're gonna have to spend money to buy the house. When you want to get a taxi car to earn a living, you will have to spend a sizable chunk of money to buy the licenses and the car itself to start working as a cab driver.
In other words, every other aspect of life is about taking 3 steps backward in order to take 5 steps forward.
Why in God's name does most normal people think when you start a business you have to profit right away?
And it goes beyond what the common man thinks about entrepreneurship. I regularly check out banks to see if I can get a business loan. And so far every one of them has told me in order for them to feel safe giving my company a loan I have to show my company earns a profit from day 1.
I've talked to potential investors (aka people with money). One of the most common misunderstanding that I have run into is they think investing in a business is like a pyramid scheme: put $100k in, get $300k back next month. This is one of the reasons I decided to go at it by myself.
There's a lot of brain power here. I know that. Why do you think most normal people can't understand this part of entrepreneurship? Is there a mental block somewhere that prevents a person from applying what goes on with normal everyday life to starting and running a business?

Replies to this message:
 Message 2 by Tangle, posted 06-07-2022 2:18 PM coffee_addict has not replied
 Message 3 by Taq, posted 06-07-2022 4:52 PM coffee_addict has not replied
 Message 4 by dwise1, posted 06-07-2022 5:20 PM coffee_addict has replied

  
Tangle
Member
Posts: 8579
From: UK
Joined: 10-07-2011
Member Rating: 2.9


Message 2 of 6 (895078)
06-07-2022 2:18 PM
Reply to: Message 1 by coffee_addict
06-07-2022 12:47 PM


coffee writes:
Why in God's name does most normal people think when you start a business you have to profit right away?
Because most people are undereducated about business and/or stupid.
Also, most people that start businesses have no money and always underestimate what things will cost and overestimate how much they'll sell. If they ever do any sums at all.
This is all very useful, it means that if know what you're doing, business is not as hard as a day job and can also make you rich.
I would normally advise against running two business.

Je suis Charlie. Je suis Ahmed. Je suis Juif. Je suis Parisien. I am Mancunian. I am Brum. I am London. Olen Suomi Soy Barcelona. I am Ukraine.

"Science adjusts it's views based on what's observed.
Faith is the denial of observation so that Belief can be preserved."
- Tim Minchin, in his beat poem, Storm.


This message is a reply to:
 Message 1 by coffee_addict, posted 06-07-2022 12:47 PM coffee_addict has not replied

  
Taq
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Posts: 8525
Joined: 03-06-2009
Member Rating: 5.0


(1)
Message 3 of 6 (895084)
06-07-2022 4:52 PM
Reply to: Message 1 by coffee_addict
06-07-2022 12:47 PM


coffee_addict writes:
Why in God's name does most normal people think when you start a business you have to profit right away?
Presumably, that's been their experience their entire life. They work for two weeks and they get a paycheck a week later. Some may even live paycheck to paycheck, and would expect a business to support them in the same way.
They are probably also suffering from what I call the problem gambler's psychology. The rare stories of people making huge profits their first month overwhelms rational decision making and causes them to ignore the normal outcome, which is a slow grind to steady profit. I tend to have the opposite reaction. I hate losing money so I don't enjoy gambling, and starting my own business would probably stress me out to the point of psychosis. The only way I would start a business is if I had a large enough bankroll to lose a fair amount of money for 2 years.

This message is a reply to:
 Message 1 by coffee_addict, posted 06-07-2022 12:47 PM coffee_addict has not replied

  
dwise1
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Posts: 5187
Joined: 05-02-2006
Member Rating: 3.0


(1)
Message 4 of 6 (895085)
06-07-2022 5:20 PM
Reply to: Message 1 by coffee_addict
06-07-2022 12:47 PM


I have a hard time believing that bankers and investors, who should be knowledgable in business matters, would be so naïvely ignorant of such basic concepts.
I worked for eight years during high school and college for my father, a general contractor -- ie, light construction like home building, repairs, and remodels, store-fronts (eg, restaurants, take-out (AKA "carry away"), shops), etc. As such, he learned a lot about what new businesses had to deal with. Also, he required that I take business administration classes in college, so I took Accounting 101 where I learned principles that I still retain half a century later (even though I'd be hard pressed to reconstruct the entire structure of account types (eg, assets, liabilities, revenues, expenses) and in which kinds a credit or debit would be an increase or a decrease * -- eg, when you buy a delivery van with a car loan, you increase your capital and also increase your liabilities, one of which is a credit and the other a debit, but I forget which is which nor do I really care).
One thing my father told me is that when you open a new business you must be prepared to operate (and live) for at least two years before you have any chance of making a profit. That is true even if you have the best product or service (eg, a really great restaurant that's filled with diners every day). He said that he had seen so many really good businesses die within a year because they had not planned for how they would survive that initial period of making no profit. And of course the longer it takes to build up your clientele the longer that initial dry spell will be.
Starting a business entails a lot of start-up costs. According to high school capitalism, those start-up costs are covered by selling stock to investors and by taking out bank loans, both of which will increase your liability accounts. Over time, you want to decrease those liabilities (and indeed are required to pay off some over time) -- in the case of stock, there's the old "51% rule" from the movies where you want to always own at least 51% of your own company's stock or else you no longer own that company.
Basically, Profit = Revenue - Expenses. Revenue would come mainly from sales which depends on sale price times items sold (or whatever depending on your business). Practical reasons constrains how high your prices can be, because if they are too high then you won't sell as much. The factor which can vary the most would be the expenses, which would include fixed and variable expenses (variable including the cost of manufacturing each item) as well as the expense of paying on your liabilties. The more your expenses are, the less your profit will be. Early in the business, expenses (especially the ones due to your liabilities) can very easily exceed revenues, leaving you in the red.
The word that keeps coming to mind is amortization. For example, research and development (R&D) on a new product is an expense that yields no immediate revenue but is essential to the future of the company. That expense accrues until the product can come to market. At first, you need to sell that new product at a higher price, which includes a small percentage of the cost of development. Then over time as those development costs have been amortized you can bring the price down. For example, a new drug is very expensive to develop (and test), so its initial price is high, but then over time the price can come down and much less expensive generic forms can start to appear -- CAVEAT: that's how it should work and does not account for predatory price-gouging of insulin, et alia.
So the need to amortize your start-up costs will keep your expenses high and your profit non-existent at first. Then after a few years you can start to creep up into the black.
But the banks and investors should know that already! What's wrong with them?
Another factor is in sales, which depends on gaining and keeping clientele. My father remembered a downtown shoe repair shop (I grew up when all the major businesses were downtown; ie, before the Coming of the Malls). He had a good business with lots of customers, but then he moved quite literally across the street for a better deal on his rent. He lost nearly half his customers because of that move. Why those he lost couldn't be bothered to cross the street, we could not understand.
And in the case of a new business, it's going to take time to build up that clientele, especially if it's something new.
History Channel has a surprisingly interesting series: The Food That Built America. Normal format looks at a particular type of food product (eg, donuts, fast food, cookies) and follows the founding and growth of well known companies as well as how those companies competed with each other. For example, Debbi Fields, AKA "Mrs. Fields", opened a stall in a mall food court to sell her homemade cookies, but everybody just walked past her. This was because this type of cookie was something new (Oreos and Hydroxes and all store-bought cookies were hard and brittle) and the idea of buying a single cookie was nothing that anybody had done. So she stood in front of her stall and handed out free samples to everybody, which started to bring in customers.
This is all just common sense, or should be.

This message is a reply to:
 Message 1 by coffee_addict, posted 06-07-2022 12:47 PM coffee_addict has replied

Replies to this message:
 Message 5 by coffee_addict, posted 06-08-2022 9:31 AM dwise1 has not replied

  
coffee_addict
Member
Posts: 3645
From: Indianapolis, IN
Joined: 03-29-2004


Message 5 of 6 (895106)
06-08-2022 9:31 AM
Reply to: Message 4 by dwise1
06-07-2022 5:20 PM


quote
I have a hard time believing that bankers and investors, who should be knowledgable in business matters, would be so naïvely ignorant of such basic concepts.

Regarding bankers, their understanding is very selective. They are in the business of loaning money to people who DON'T need it. I have an entrepreneur friend who used to be a VP at PNC Bank. He knows exactly how the banking system works when it comes to lending money. If you already have money and you got a background like family with money, the standards are vastly different than if you start out with nothing.
Regarding investors. You have to understand that not all investors know what is going on. A lot of them inherited money and just start calling themselves investors. I had a woman contact me and wanted to "invest". From what I gathered, her husband died and left her a sizable sum. I declined her involvement after figuring out she thought she could triple her money in a month like a pyramid scheme.
When people think of start up and investors, they always think of the tech startup in silicon Valley that turn into a billion dollar industry in a year or so. No one ever thinks of the millions of startups that have nothing to do with a new revolutionary tech. My primary company was started because I found a gap in the real estate market that wasn't exploited. Real estate is notorious for needing HUGE amounts of money for initial investment. But with a gap, any normal person can go at it without either having a huge sum of money or doing it slowly for decades while still holding a w-2. I went in without either.
Here is another double standard. Rich people exploit tax loopholes all the time to avoid paying taxes. And banks love that. When my company exploited some tax loopholes to minimize my taxes, a banker heavily hinted that I don't do that if I wanted to get a loan.
You could say it is the same thought process as what happened with the gamestop stock and robinhood. When billionaires play the system to manipulate the market, it is just fine. But when normal people use the same tactics, they out the hammer down on the normal folks hard.
So, how hard was the first 2 years for me? At one point I was behind on my own electric bill while owning a million dollars worth of assets. And when I say own, I mean own. No loans. This whole thing has been completely self funded.

This message is a reply to:
 Message 4 by dwise1, posted 06-07-2022 5:20 PM dwise1 has not replied

  
ringo
Member
Posts: 19752
From: frozen wasteland
Joined: 03-23-2005
Member Rating: 2.9


Message 6 of 6 (895133)
06-08-2022 12:53 PM


Hint: Capitalism requires capital.
I 've talked to so many people who say, "I'm a capitalist," when they don't have the price of a cup of coffee.
Business floats on an ocean of capital. Business is just a means of extracting income from your capital.

"I call that bold talk for a one-eyed fat man!"
-- Lucky Ned Pepper

  
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