We’re used to associating entrepreneurship with great financial success, but the reality is that many entrepreneurs are financially worse off than their peers who chose a safe job.
The harsh reality of startups is that the majority fail. The remaining minority survive, but only a fraction are resounding successes.
The media shows a selection of notorious success stories or infamous frauds. We rarely see the moderately successful entrepreneurs or the silent failures. Thus, it’s easy to believe that all entrepreneurs are financially successful.
Most entrepreneurs also don’t follow the profit-first advice to pay themselves market rates and take their monthly percentage as profit. Taking profit or being paid market rates is also a technical impossibility for startup founders who take outside investment; VCs fund you to grow to be the next big success, not take money out of the company for yourself.
As a result, entrepreneurs are paying themselves worse than their peers who take a job, don’t generate a profit for a long time, and often have their businesses fail. Even when their business survives, generating sufficient margin for the entrepreneur to take above-market salary and profit takes a long time.
Businesses also go through cycles, and when times are tough, the owner is often the first to get a pay cut or forgo the profit; this is what Simon Sinek calls “leaders eat last” and is necessary for the business to survive, so it can then thrive when the cycle changes. Small companies have no large workforce to cut while paying bonuses to the C-level.
Optimism is a pre-requisite of entrepreneurship, so when founders face hard times or a complete failure of their company, they are irrationally optimistic about the future and refuse to give up; like gamblers, they are sure that success is just around the corner.
If the company succeeds, they have a substantial upside, but that’s not guaranteed and relatively rare.
Conversely, people who choose to get a stable job earn more for a long time and have a better work-life balance.
If they manage their finances well, employees can save money each month, grow a savings account, and invest in buying a home earlier. They don’t have the same potential windfall an entrepreneur has, but their outcome is more predictable.
You shouldn’t start a business if your principal goal is to make money and have a stress-free life. You should start a business if you want complete autonomy and have an insatiable desire to build a business.
We know smart entrepreneurs who worked tirelessly for 20 years and, after their third failed business, are financially in the same place they were when they started. Financially, the missed opportunity cost compared to taking a job is enormous, but this was their passion, and nobody could have talked them out of starting a business.
If starting a business is not for you, don’t feel guilty; you went for the safe route, and your net worth will show this reward. Freelancing can be an option, but we’ll write a separate article on this topic.