When Wendy Kaufman started her business four years ago, she got a lot of input from people she knew-some useful, some not. The worst detractors cited statistics about small-business failure. "They tell you 90 percent of small businesses fail within five years," says Kaufman, the 43-year-old president of Balancing Life's Issues Inc., an executive training company in Ossining, New York. "It's like the cancer stats."
Kaufman tried to tune out the naysayers. "You end up being very careful about whom you talk to, because if all that negativity hits you on the wrong day, it can be very potent," she says. "You have to be the kind of person who says, 'I'm not going to listen to it.'"
More startup entrepreneurs should resolve to ignore those stats because there is no truth to the widely cited figures indicating such high failure rates. In effect, they and some other widely held ideas about entrepreneurship are urban legends--misconceptions that discourage or mislead people who are starting or trying to grow businesses.
The small-business failure legend purports to show that half of startups fold in the first year and 80 percent to 90 percent succumb after five years. But nobody seems to know where this stat originated. In fact, several well-documented studies indicate that starting a small business offers a much more reasonable chance of success. For instance, the SBA, using U.S. Census Bureau data, reports that almost half of new firms with at least one employee survive beyond four years.
This urban legend also suggests that businesses that closed were all failures. But the SBA, using another set of Census data, says a third of new businesses that closed in their early years were financially successful when they shut down. Jeff Williams, a business startup trainer in Arlington Heights, Illinois, says small businesses close for many reasons, and financial failure is not the main one.
"When I was researching my business concept, I interviewed owners of 100 businesses that had closed," says Williams. "I found that three-quarters were nowhere close to failing financially. They closed because of highly personal reasons, such as a health crisis, or they just woke up one day and [realized they] didn't enjoy it any longer."
The small-business failure myth is just one of many similar misconceptions that afflict entrepreneurs. Some tend to inhibit would-be business owners from taking the plunge to start their new ventures. Others unduly encourage them, or just point them in wrong directions. Here are some of the most common and pernicious urban legends of business ownership, along with the truth.
Myth #1: Do What You Love, and the Money Will Follow
Everybody agrees that entrepreneurs should feel strongly about their businesses, products, employees and customers. The belief that all you have to do is start a business you love is no less widespread, but a lot more controversial.
"I hear it a lot," says Jason Felger, managing director of the Chicagoland Entrepreneurial Center, a nonprofit organization that assists emerging businesses. "They say if you're passionate about something and love what you do, then success will follow. And I do think passion or enjoyment of what you do is essential to being a successful entrepreneur, but it's not number one."
What's more important? Customers, to start with. "I don't care how passionate you are--unless somebody's going to want to buy what you're selling, there's no point in doing it," stresses Felger.
Too much passion can actually be dangerous. "A lot of people who feel that passionate about their business put on blinders about the economic viability of the business," says Kelly Mizeur, director of finance at the Women's Business Development Center in Chicago. "Just because they love it and need it doesn't mean the rest of the world does."
That level of passion can also be a problem when it comes to raising capital, since it can leads to unrealistic expectations, adds Peter Russo, director of the Entrepreneurial Management Institute at Boston University. "I've heard from many people [who think] that because they have a good idea, the money will come," says Russo. "But you also have to have a good network and be able to attract investors just as you would customers."
Even entrepreneurs agree that untempered passion can be a liability. Jacqueline Church Simonds had a yen to write a historical book about female pirates. "Because no one seemed too keen on a novel about a woman pirate captain, I became a publisher," says the Reno, Nevada, entrepreneur. She was passionate, but she was also able to expand her place in the market: After publishing her novel, Simonds began publishing other writers' work, then started distributing books for other small presses. Today, Beagle Bay Books generates $500,000 annually, largely from selling an array of publishing services such as typesetting and cover design--far different from Simonds' original vision.
"What you think you're going to start out doing can morph on you," she says. "If it's not working, pay attention to the opportunities. I've seen a lot of people fail because they got rock-headed and wouldn't pay attention to the opportunities."
Successful entrepreneurs seem to blend passionate belief in the destiny of their venture with practical realizations. "Without the passion, to go into business would be a mistake," says Paul Rich, principal with Rothstein Kass Business Consulting Group, a New York City consulting firm. "But to have [only] passion is not nearly enough."
Myth #2: You'll Miss the Security of a Job
Is owning your own business less secure than working for somebody else? Many would-be entrepreneurs absolutely see it that way, according to Russo. "For people drawing a paycheck, it's difficult to [conceive of consistently] generating the revenue necessary to pay themselves."
However, jobs don't necessarily provide more security. The latest figures from the Bureau of Labor Statistics show that in January 2004, the median length of time workers had been with their current employers was four years. When you compare that to the fact that only about half of new employer companies will be around for more than four years, self-employment doesn't look so risky. "The safe job? There's no such thing," says Mizeur.
Entrepreneurs don't consider having one job nearly as secure as having many customers. "When I quit my job, people were telling me I was crazy," says Jeffrey Henning, co-founder of Perseus Development Corp., a $10 million, 62-employee enterprise feedback and management solutions provider in Braintree, Massachusetts. "I told them they had the illusion of security."
Henning argues that employees can be pink-slipped at any time, for reasons unrelated to individual performance, and thereby lose their sole source of income. "We have 20,000 customers," he says. "If I lose a customer, it isn't 100 percent of my income."