By Manish Shah
It is believed that entrepreneurs take a tremendous amount of risk. Not so, ac-cording to Amar Bhide, the author of The Origin and Evolution of new businesses. En-trepreneurs are not risk-takers but risk-arbitrageurs. Arbit-rage is defined as the art of exploiting difference in value between two similar instruments and profiting from it. For example, if a rare book is selling in New York for $1000 and the same edition of the book in a similar condition is available for $500 in Chicago, one can buy the book in Chicago and sell it in New York for a handsome profit.
To illustrate how arbitrage works for an entrepreneur, let us take the example of a small town that has no beauty salons. The nearest salon is about 20 miles from this town. Carol seizes this opportunity and opens a salon in her basement. Since Carol’s salon is the only one in her town, she is very successful. Few years later, another entrepreneur opens up a salon in Carol’s town. The arbitrage no longer exists and as a result Carol’s business is not as lucrative.
Scott A. Shane, in his book, The Illusions of Entrepreneur-ship, sheds light on some of the common myths about entrepreneurship. People believe that it takes a lot of money to finance a new business. Not true, according to Shane. A typical start-up only requires $25,000 of capital to get up and running. It is also commonly believed that venture capitalists are a good source for start-up capital. Contrary to this belief, VCs only fund about 3,000 companies per year and the odds are pretty low, one in 4,000, to secure financing from them.
Another assumption is that the angels, who fund businesses, are rich. Research indicates that 32 percent of people, who provide money to start-ups, have a household income of less than $40,000. It is also believed that the growth of a start-up is more dependent on the talent of an entrepreneur rather than the industry in which he operates. This is an absolute contrast to the evidence which indicates that the industry has a huge impact on the growth of a business. For example, over the last two decades, 4.2 percent of all start-ups in the computer and office equipment industry have made it on the Inc magazine’s list of the 500 fastest growing private companies. This is in stark contrast to the 0.005 percent of start-ups in the hotel and motel industry who have been on this list.
It is believed that most entrepreneurs do well financially. Although entrepreneurs create a lot of wealth, it is not distributed evenly. A typical entrepreneur makes a profit of $39,000 per year.
Finally, we all know that starting a business and making it successful is a big challenge. How big is this challenge? Seven years after starting the process of running a company, only 33 percent of entrepreneurs generate positive cash flow for more than three consecutive months.
Despite all the challenges, entrepreneurs have a greater job satisfaction than people who work for others. And that is not a myth.
Manish Shah is the former president of Midwest Law Printing in Chicago. He also worked at Intel, PwC and Motorola. He has an MBA from Kellogg Graduate School of Management, and a MS in Computer Science from Illinois Institute of Technology. He can be reached at firstname.lastname@example.org.