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Hey everybody, welcome back to Pathways to Wealth. I'm getting ready to fly out to San Francisco right now for the Startup Grind Annual Conference and there’s going to be a lot of entrepreneurs, venture capitalists, and just really really smart people. They're going to be attending and speaking at this thing and so that got me thinking about entrepreneurship and so for this week’s Wednesday wisdom episode, I want to talk about the different levels or types of entrepreneurship. Thanks to shows like Shark Tank and I guess just an improving education system, people are more aware of entrepreneurship and the message that I’ve been spreading is that is of self-education and just really taking control of your own destiny, your own financial future, and making sure that you live, and strive for true wealth which is owning your time.
A lot of people are interested in entrepreneurship, a lot of people want to work for themselves, make more money, and basically just control their lives and not have to sit in rush hour traffic and listen to a boss that they don’t really respect or whatever. When it comes to entrepreneurship, a lot of people immediately think of Silicone Valley and startups, but there are several different categories of entrepreneurship. There are different types of businesses that you can start.
I've been involved in several different companies and so I just want to break this down and look at the pros and cons of each one and maybe help you figure out which category is best for you. Let’s go ahead and jump right in.
Alright, so let’s talk about the first level or the first category of entrepreneurship, which is one that a lot of people are familiar with, which is that of a startup founder. Think of Facebook, Instagram, a lot of the tech companies that you think of when you think of Silicone Valley which is where I'm headed in just a couple of hours. When people think of that, that business model kind of looks like this, you have an idea, you raise capital from either angel investors like myself or venture capitalists and it has been really easy to do that over the past several years just because of the environment that we’ve been in. The IPO market or going public has been less attractive compared to raising private money and being able to move quickly. It’s a lot quicker to raise money from angel investors or venture capitalists into this to build a company and then go through the process of taking your company public through an IPO, initial public offering.
What does that look like? How does that business work? Step one is you have an idea. Step two is maybe you develop a prototype or some kind of platform that works but maybe that’s not the final product. A common word that is used is MVP, minimum viable product, just get something that works, maybe prove the concept and then go raise capital. That’s what a lot of people do and there’s this funny term called pre-revenue where basically you built a company or you have a product or you have an idea but you haven’t sold anything.
One thing that annoys me is when you have startup founders that celebrate raising money. Yeah that’s a good thing and that gives you runway, that gives you time to build your company but just because you raised money from investors doesn’t mean that you have a successful business. You actually have to sell shit. You have to make money and that’s the type of start-up founders that I look for, ones that value revenue.
Now, what does that process look like? After you raise capital, then you hire a staff and you keep building and you have kind of the end goal of having some kind of liquidity. Either you get acquired by a Google or a Facebook or you go IPO, you go public, or something where you can cash out. You cash out yourself and co-founders and even early employees that have equity stake in the company.
Now, the revenue for a company like that ranges anywhere from zero, there’s a large percentage of startups that don’t make any money ever. They just have a cool product and maybe they have thousands or millions of users which is still an asset. It’s very valuable and I don’t want to downplay this. Certainly, if you can build a site or a SAAS product, software as a service product, or some kind of platform that gets thousands or millions of users, there is real value there, so I'm not going to downplay that, but if that does not lead to revenue in the future, you really don’t have a company. That’s why Facebook put ads. That’s why Instagram is now rolling out ads and even Twitter has ads granted their stock is getting destroyed right now but you have to monetize a company. Just having a cool idea and users isn’t enough.
The revenue range really goes everywhere to zero to billions of dollars. There’s a huge spectrum and the downside is the failure rate is very high. A large percentage of startups don’t make it past maybe a year or two but granted 5 or 10 years. That’s why as an angel investor, I look at 7 years plus, I don’t look to get any kind of return until at least 7 years. Sometimes you’ll have something like an Uber or something that is just widely successful and the valuation just keeps getting bid up, but overall, the risk with starting a startup is that the failure rate is very high. It’s kind of like high risk but also high reward because if you make it, you can make potentially billions of dollars.
So that’s category number one, which is a startup founder, and that may or may not be right for you. What you have to consider, if you want to start a startup, is you're going to have to be a good manager. You have to hire a staff. Very rarely can you build a big company that has the potential to get acquired or go public with just you and a buddy. You have to have developers, customer service, potentially sales. You actually have to have a staff. You really need to dedicate your life to that company. If you're trying to build something big, if you're trying to build a startup in that traditional definition, then that has to be your life. You have to obsess over that and you have to work 16 hours a day for many many years and that needs to be your life. Not everybody’s willing, able, or has the skill set to do that.
For me, I know I don’t really have the desire to build a company where I'm responsible for hundreds of employees. That’s just not what true wealth means to me but I have great friends here in Austin, in California, in New York, in Boston that that’s what they do. They're like, “No. I love it. I love managing people. I love having a big team. I love going to the office every day” and I'm like, “That’s fine.” It’s just our definitions of what true wealth means are a little bit different.
The next type of entrepreneur, which I put myself into this category, is a lifestyle entrepreneur. It’s where you build a business that doesn’t necessarily have the end goal of going public or getting acquired by Google. It’s a business that maybe you want to earn just an income for yourself, maybe $50,000 to $100,000 for yourself or you want to build significant revenue up to, I would say, about $10 million.
It’s very difficult to build a business over $5 or $10 million a year in revenue with just yourself or a small team. I only have seven full-time employees and then several contractors, so my company is very small and that’s the way I like it. I don’t want to have a massive company. I don’t want to worry about HR issues and having employees in an office. You have to pick how you want your life to look.
Examples of lifestyle entrepreneurs would be bloggers, marketers, traders, real estate entrepreneurs, hustlers, people that are doing the business of real estate. Anybody that is building a site or a platform with the goal of making it— think of it, lifestyle entrepreneur. You're trying to support your lifestyle. You're not trying to go public and then have a big cash out liquidity event.
The pro there is the success rate is much higher than a startup founder because you can go out and you can build something and you can earn an income for yourself. It’s much easier to make $100,000 than it is to build a billion dollar company. That’s what we’re talking about with lifestyle entrepreneur, it’s creating an income for yourself, something that you can stat cash away and then ultimately move into being more of an investor. So, that’s the second type.
The third type is what we call a freelancer or just an individual hustler where you basically have no employees, it’s just yourself but you are an entrepreneur in the fact that you're providing a service and you're working for yourself. You're more of a contractor. That could mean, maybe you specialize in sales or you're a developer, or finance, or administrative stuff, maybe you're a really good supporter and you're a good admin to an executive or a team of executives. But the key here is you still work for yourself and that could range anywhere from $10 an hour to a couple hundred thousand dollars a year as a freelancer.
The downside to that is that if you're a freelancer, you're kind of at the mercy of other people and other people’s industries and businesses. So you're going to need, in some cases, to have more than one partner, more than one person giving you business because it’s going to be really difficult. If you're a designer and you only get one design job, maybe you make $10,000 or $20,000 and then that’s it, so you have to constantly be promoting yourself. So you would still have a website, you’d still promote yourself.
The difference between that and a lifestyle entrepreneur is that lifestyle entrepreneurs are typically building products and services whereas a freelancer, you are the product. You are the service. You're fulfilling whatever is needed to be done.
Let’s just review. Step one or category one is startup founder. Huge potential upside but big risk too and you need to really dedicate your entire life to a company like that or it’s destined to fail. Step two or category two is lifestyle entrepreneur where you can have a smaller team, you're going for a revenue anywhere on the low side a few hundred grand up to $5 or $10 million. And then a freelancer is somebody who, you're just working for yourself, you have the freedom—and we talked about this in the last episode where we talked about alternatives to college and I think a great alternative is to develop a skill set like coding, marketing, or blogging or something like that and then go out and market that skill. Put that skill out there and be a service to people and work online. Travel the world, be a freelancer. It’s a great lifestyle.
And then, the final thing that I want to touch on which is still in this realm of entrepreneurship but you might be saying like, “Chris, I don’t really have the desire or the confidence” or maybe you don’t feel like you have the skill set to start a company. Not everybody’s meant to be number one in an organization. I want to put out a warning. Now that entrepreneurship is cool, when I was in high school and young, nobody really cared about entrepreneurship, it was go to college, get a good job, it was still that narrative and now it has changed and everybody wants to be an entrepreneur but the problem is that not everybody’s meant to be number one.
It’s okay to go work for somebody else. In fact, you might thrive and love your life as a startup employee instead of trying to be a startup founder because being a founder, being an entrepreneur, being number one in an organization can suck sometimes. It can be emotionally and physically draining. There’s significant financial risk that you sometimes have to put on the line, it takes a lot of work. If your natural ability is that of maybe of a supporter or an engineer or a mechanic type mindset, maybe you're better in a role like that but at an entrepreneurial autonomous company. Meaning, you don’t want to go work at Microsoft and be a corporate employee and have a suit and tie, that’s okay. You can go work for a startup here in Austin or in the bay where maybe you get equity in the company if you're in early and maybe you have the autonomy to work from home or to travel, just experience that kind of startup lifestyle, that startup environment.
And then, kind of the final thing is the old school way of business, brick and mortar. Not everybody’s meant to be technical, not everybody’s meant to build an online business. You can go and create a brick and mortar business, a car repair shop, a restaurant, a bar, something physical, my first business, car detailing.
If you're willing to go out and hustle and say you're not really technical, you're not tech savvy, that’s fine. There are so many different skill sets but building a brick and mortar business, the upside to that is it’s physical, it’s tangible. You actually have something in a local market. If your market is good and you have population to support your industry, great. if you're in a smaller town where maybe what you're trying to provide isn’t thriving, you need to move somewhere else, it’s more location based.
The downside to that is, again, risk of failure in a restaurant or a bar is really really high, so you’ve just got to consider your options and consider the lifestyle you want and decide what true wealth really means to you. Are you okay with being strapped to an office or being strapped to a location or do you want to travel the world or do you want to just be able to work from home online, think that out first and then build a business around that. That way, you don’t back yourself and build yourself into a company that you're like, “Man, I hate this.” I've talked to several guys that— there was one guy that owned a metal scrapping company and the guy was making millions and millions net and he hated his life. He was like, “Dude, I hate my business. I hate the industry. I hate my employees. I hate my customers.” I'm like, “That’s not the way to live man.” Hopefully, he’s out of that. But again, the point is figure out your skill set, figure out what you love to do, figure out what you want your days to look like and then build your business around that.
I hope this is helpful guys. I've got to catch plane to San Francisco. I'm going to be doing some live Periscopes and catch me on Snapchat as well. Thank you guys for watching this episode of Pathways to Wealth. I hope it was helpful. I know it’s a quick one but for anybody that is interested in entrepreneurship, I would really encourage you. It’s worth it. it’s a really great lifestyle. It’s challenge. It gives you a reason to be excited when you wake up every day.
Again, shoot me questions, shoot me comments. Let me know what you think of this and I will see you in the next episode. Take care.