Build a profitable business- the baby steps part 1

Welcome to the first part of our guide “Build a profitable business- the baby steps part 1″. We had some major arguments regarding what to call this particular guide, as did we regarding who would be the lead writer. We could pretty much have gone with anybody, since all of the contributors at Richopedia.com are successful entrepreneurs. In fact, when we first had the idea of setting up this website, one of the key strategies was to only include contributors who have been there and done that. Thus, at Richopedia.com there isn´t a single contributor that is not a successful entrepreneur. Most of us have been at it for quite a while, and between us we have experience from a wide range of market sectors.

Some of our guides were very easy to assign to a specific individual at Richopedia.com. For instance, the guides regarding trading the financial markets was written by a contributor who is a hedge fund manager, and who has a 25 years of experience from trading the financial markets. That one was a no-brainer, since nobody else had credentials that even remotely resembled the same level of mastery. But when we started discussing this guide, it soon became evident that each and every one of us had some key insights and knowledge to bring to the table. The solution? We agreed that we would all be part of the creation of certain parts of this particular guide, although only one of us (that´s me) would be the designated writer. That way, we figured we could all add some insights and experience to the process and make this guide as good and comprehensive as possible.

So what does it really take to make it as an entrepreneur? Well, the jury is out on that one. Sure, we had plenty of thoughts on the subject. And we agreed on most of them. But, maybe a better start to the discussion of how to make it as an entrepreneur is to begin at the opposite end of the spectrum. Thus, What does it take, NOT to make it as an entrepreneur. We feel to some extent that all the major ingredients that make a good entrepreneur are supressed by society and by the people who are supposed to love us the most. This is not done intentionally, rather it is an unfortunate side effect of growing up in a society where the majority just don´t get it. Even the best of intentions can be fatal to your future if they are coupled with ignorance.

So what do we mean by ignorance? Well, we could make a list the size of novel on that one. Instead, let´s just summarize it. We are sure you know this list by heart, albeit there are some minor individual differences form person to person. Here is the majority opinion and some of the common misconceptions regarding what it takes to become rich or build a profitable business.

1. Get a good education. Excel in school. Almost all of us know this one by heart. Your parents have probably been stuffing this one down your throat for the better part of your life. We do believe in good education. Many of us at Richopedia.com have pretty solid university educations, but some of us are pretty much self-taught. The point is that while we feel a good education is certainly beneficial to most people, if you don´t have one you shouldn´t sweat it. The best way to learn about business- is by doing business. We rarely use any of the specific knowledge we aquired in school. However, we do feel that the ability to read faster, calculate quicker and learn new concepts is  very helpful in business- and to some degree those skills are enhanced in school. But you can teach yourself that really.

We would also like to point to the fact that quite a few of the most successful entrepreneurs have little education, and in those cases they do have a strong education from a prestigious school they have very often failed to collect their degrees or diplomas. I can relate to that as I didn´t pick up my university degree (to my mothers great horror). And yet, a degree is really nothing but a piece of paper. Sure, that particular piece of paper will (in most cases) give you job interviews, a sense of security and a steady paycheck. Entrepreneurs are not really that into working for somebody else though. I know I wasn´t. As far as I´m concerned, a good education will serve you well- but I truly believe that the life of the entrepreneur is that much more rewarding than life as an employee. By all means get a good education. But you should also look to become the master of your own life and destiny. And the best way we know of accomplishing that is by becoming a successful entrepreneur.

The Problem: There seems to be little correlation between level of education and entrepreneurial success. A good education is likely to land you a “secure” job, but a secure job does seldom lead to substantial financial success.

2. Get a secure job. When I first told my parents I wanted to start my own business they reacted differently. My father thought it might be a good idea. He believed I had a knack for getting things done, and to some extent he is the kind of person who believes you must try everything at least once. My mother? Whole different story. My mother´s idea of the perfect life involved a good education and after that a stable, secure nine-to-fiver with a steady stream of paychecks. She was horrified by the idea of starting your own business. What would happen if I didn´t succeed? What did I know about running a business anyway? Why go for long working-hours and an insecure financial position, when you could enjoy pleasant working hours and a steady salary?

The Problem: A “secure” job is not that secure. Your fate lies in the hands of others. You are always one down-sizing or one re-organization away from realizing “secure” is a relative concept.

3. Work hard, be loyal. Be loyal, hardworking and stay loyal to a large  company  for the next 40 years and you will be rewarded, that´s what my mother figured. Well, I didn´t really subscribe to that idea. First of all, my father had worked for exactly such a company for over 40 years. He was a hard-worker, he stayed loyal to the same company for most of his life, and he never complained. What he got to show for it? Not much actually. Steady paychecks did come in. We lived a fairly decent ordinary middle-class lifestyle. And that´s ok if that´s what you want. But I wanted more. Clearly, hard work and loyalty will not always lead to financial success.

Another important aspect of working for a big company is the underlying conflict of interest. You will be lectured regularly regarding “team play”, “company spirit”, “solidarity”, and “group effort”. When you do your yearly review with your boss, he will probably go heavy on the praise, and light on the cash (i e salary increase). And that´s really where it should get you thinking. The fact is that the less you get payed, the more profits your company will get to keep. In fact, your boss will very often be better off financially if he can keep your salary down as much as possible. That is the conflict of interest I am talking about. You can be as loyal as you like, just remember that companies are not loyal. Companies look to maximize profits, and sometimes the way to maximize profits is to minimize the work force. That is why big companies that fire big parts of their work force can simultaneously enjoy a significant surge in its share price.

The Problem: Large corporations are not as kind as they make themselves out to be. They are in it for the profit. Their profit. As an employee you represent nothing more than a mobile cost-center. Your boss is trained to feed you regular doses of corporate bullshit to keep your morale and output high, but the truth is that big companies are not really loyal. Big companies are profit oriented. And the less the big company pays you- the more it can ultimately keep for itself as profit. If you want more than a gold watch and some corporate bullshit to show for your 40+ working years, you should consider your options.

4. Save. If you only save a certain percentage of what you earn (usually 10-20%) and invest it wisely you will be able to retire a rich man. That´s what the general wisdom claims anyway. In all fairness, there is some truth to this statement. While we are all for saving part of your income and investing it wisely, we would merely want to point to the fact that there are far better and quicker ways to reach financial independence. We don´t have a problem with the “pay-yourself-first-10%-of your earnings”-gospel per se. What we don´t approve of it that it is often accompanied by the notion that you should spend the better part of your life working as an employee, earning a salary and saving away in order to reach the goal: retiring rich.

Our version of this whole philosophy is radically different. While we do belive you should save a portion of your income each month, there are some things we would like to stress. First of all, we would recommend that you save more than a mere 10-20% of your income. We believe you should put away a lot more than that, and really practice living the frugal lifestyle for a while. Second of all, you should only do this for a limited amount of time, not until you reach retirement age. Instead of putting away 10 % for 40 years and investing it conservatively, we are asking you to put away maybe 50-60% of your income for a limited period of time, wait for an opportunity and then use your savings to exploit that opportunity to the fullest. In case you haven´t figured it out, we recommend you to use your savings to pursue a business opportunity that crosses your path. That way you can work your butt of for the next couple of years and retire rich, rather than waiting for the next 40 years to pass by.

The Problem: Saving a portion of what you earn every month is great. But don´t subsribe to the belief that you should be working for the next 40+ years in order to (maybe) retire rich. Wouldn´t you rather go for a method where you get rich while you´re still young enough to enjoy the money to the fullest. Being frugal is more rational if the goal is to start a business and catapult yourself to wealth. Don´t waste 40+ years pursuing something that can be accomplished in only 4+ years.

5. Invest. Most of the “get rich-books” out there tell us we need to invest our surplus wisely. If we do they claim we can easily be making 10-20% per year on our investments. We are all for investing. But investing is a lot more complicated and risky than all those get-rich books make it out to be. We know investing. One of us at Richopedia.com is a professional hedge fund manager. He finds these books entertaining, but for the wrong reasons. If we knew of anyone who could make 10-20% per year with little or low risk we would give them all our money. That includes the one of us who is a hedge fund manager. He has been a student of the market for the last couple of decades and he feels such a return on a regular basis is a monster achievement. And yet, every time we read a “get-rich” book the author claims that you can easily rack up those kind of numbers. We beg to disagree.

The Problem: Achieving solid rates of return can be a lot trickier than most “get-rich” authors make it out to be. Also, you need to make a high level of return to offset the true level of inflation, which is almost certainly higher than the fairy-tale levels of inflation that government is feeding us with. And the stock market doesn´t always go up, even though conventional wisdom says so. We have been fortunate enough to live in times where prolonged and severe stock market crashes have not been around. If you were unlucky enough to invest your money in 1929, you would have had to wait until 1954 until your stocks had regained their losses. That´s 25 years of anxiety, worrying, and waiting. Maybe, the market doesn´t ALWAYS go up. Maybe some of the conventional wisdoms aren´t that conventional after all.

6. Avoid risk. Society in general does not respond to risk in a good way. Most people are risk-avert. The paradox is that most people are willing to put on risk when they shouldn´t, but they tend to avoid risk when it makes the most sense from a mathematical point of view. Thus, when it comes to risk it is fair to say that people are not behaving in a rational manner. Also there is the case of what is perceived as risk and what is not. A good education and subsequently a good job at a large fortune 500 company is generally described as the low risk career choice, whereas the road of the entrepreneur is considered very high risk indeed. We have a different take on this altogether. If you take into the account the fact that entrepreneurs can affect their situation a lot more than employees and also consider that the potential upside of an entrepreneur is generally much bigger the risk/reward starts to look a bit different. If you also consider the fact that an entrepreneur that fails can choose to become an employee in the end, there is very little that should stop you from trying your wings out as an entrepreneur.

The Problem: Speaking from a mathematical point of you the emploee is the one taking the risky bet. The entrepreneur´s choice may seem riskier at first glance. But entrepreneurs have more control of their own fate, and have a higher upside to offset the extra  risk. The game-changer, of course, is that a failed entrepreneur can always go back to being an employee, thus eliminating much of the negative side-effects of the initial choice. When you embrace risk, by trying your luck as an entrepreneur, you are in fact reducing the overall risk of your long-term wealth.

Well there you have it. These are the five steps most of us get peppered with during our upbringing. While most of these “truths” are actually sound advice, it is important to  adhere to them in terms of the right context. And the right context is that it is quite alright to get a good education, a good job and save some money- as long as your longer-term goal is to try your entrepreneurial wings. Don´t go for wealth 40 years from now, go for wealth 4 years from now. Don´t work hard for someone else for the next 40+ years. Work harder than you thought possible for the next 4 years, but work for yourself!

Being an entrepreneur is far less risky than trading the better part of your life for a wealthy retirement. reduce the risk in your life by embracing risk. Avoid working hard for someone else, and instead work even harder for yourself. Reach your goals in 4 years, don´t give up 40 years of your life for them. In the next part of our guide, “Build a Profitable Business- the baby steps part 2″, we will continue our journey together and learn more about what makes and breaks a profitable business.