We spend so much time chasing promotions at our employers for a title bump or a small raise. We get in the race with everyone else. We’re in the crowd, jockeying for that performance position. When we win, we feel great. We’ve won the game and received our just reward, the golden handcuffs.
Well you are playing your employer’s game. There is certainly nothing wrong with that. I’ve done it, and been very happy to have played it. It’s safe, the cash flow is consistent, there is recognition, and contribution. However in this post I ask you for a moment to think about being the business owner, your employer.
Know the game you are playing
If you were running the business, would you hire people if you didn’t make more in revenue than it cost you to hire that person? Sometimes the answer might be yes if you are aiming to grow a company to the point where that becomes the case. In general though, an employer is never going to pay you more than you actually earn for the company. Companies can’t exist if this formula doesn’t hold true. The revenue your effort brings in excess of your pay is what pays for growth, investor returns, and shareholder value. That’s right, capitalism is a pyramid scheme. The more people you have working for your company where that formula holds true, the more money the company will make off the efforts of its employees.
Now this isn’t a reason to resent your employer. They are taking on the risk of hiring you, and in many cases if a company fails, the only ones who get to keep any of the investment dollars are the employees in the form of their salaries. The point here is simply to be aware of the game. Employment is a safe harbor. It’s consistent. It’s harder to get hurt. Chances are high that you will be fine. However the upside is also limited. Your time will be beholden to your managers in exchange for that safety. Your income has a ceiling as the rewards of a growing company go to the owners, not the employees.
Leaving the safe harbor
To truly own your own time and destiny, you will have to work for yourself and be the business owner. Most new businesses fail. If 8 in 10 fail, that means you are likely going to have to start 5 before one of them will work out. I have started 4 businesses in the last 13 years. Three are still operating. One has made money, so I am just barely ahead of the curve. None have made more than I have made as a full time employee for another company in a year because I too have not left the safe harbor of full time employment and run them on the side.
When I think of my future and look back on where I am now, the way forward is clear. I know the only way to reach the levels of performance and success I want will require me to devote my full time and attention to a business. A business has the potential to scale by the very mechanism I mentioned earlier. You can hire employees that apply their time to leverage more profits that stay in the business. As an individual you cannot leverage your time. Only an organization or team can do that.
I consider myself a cautious person. My first business was wildly speculative and I spent a lot of my own money on it. It made sense at the time, but I was young and idealistic. If it worked, it would have made me a young millionaire. It didn’t. I went back to work for a company, but that didn’t stop my desire to build a business. Instead I shifted gears and built a ‘boring’ business.
When you are frustrated in your cube and dreaming of building your own business, it’s usually something exciting that will change the world. Why not right? That’s one of the key reasons we want to build businesses. The problem with this approach is that speculative and new businesses are even riskier. Very few people if any have figured out how to make new types of business work. You don’t know how either. So the risk you are taking on to build such a business is high. We only hear about the rare cases that worked out in the media whereas chances are you will fail.
I’ve discovered another approach. It’s not as exciting, but it gives me the change to take more shots. Your first business should be a boring one. It doesn’t have to be explicitly dull, but it should be an old business idea that has been done before with a clear path to success. Think plumbing, real estate, garbage collection, lawn care, or anything else that has been around for more than 50 years that can’t be automated by a computer. Many people have successfully built these types of businesses and reliably made a good income.
This type of business has a much higher chance to succeed financially. Consider it your training wheels business, because you are not likely to try just one business in life. That business will teach you how to manage. You will learn to run books, allocate capital, and even when to expand. You will learn what your cost basis needs to be in order to make a desired margin, all with a predictable and old school business model. If you can make one of these boring businesses work, then you will get two critical things.
- Experience – Now you have some success and a basis for running your next business
- Passive Cash Flow – A successful business can run at least to some extent on automatic. It should generate revenue for you without your time or at part time.
If you are spending 40+ hours a week on your business, you have just built yourself a job. Only once it is running on automatic with employees generating you cash do you have a cash flowing asset. Only then are you ready to take on your exciting, or new business idea. Because now you have time and an asset to fall back on. If it doesn’t work, and remember 4 out of 5 don’t, you have the resources to try again.
In the short term this sounds like a longer path. It is. In the long run though it will keep you from having to go back to an employer, save up cash for several years only to take on that much risk again with your saved salary earnings. Each time you eat your savings, you are forfeiting your future. Along the way, whether you are employed or building a business, you should always be growing your wealth. You don’t want to end up at 65, broke after three failed business starts with no savings.
Every time you take a shot at a new business, your net worth should be higher than it was when you took the last shot. Don’t bet it all on one attempt. Build a system that allows you to take multiple attempts and one of them will work.