How to Decide If You Should Become an Entrepreneur

In response to October's quiz about entrepreneurial “types”, a reader named Pace posed some intriguing questions:

  • What are the characteristics of successful entrepreneurs?
  • Are they demographically different from unsuccessful entrepreneurs?
  • Or is it all due to individual differences?

At the heart of Pace's inquiry, I think, is something many people long to know: How can I decide whether I should become an entrepreneur?

Here's the first part of my two-step response, and one I sincerely believe: If you're seriously thinking of starting your own business, then you have what it takes to start your own business. We've seen that “personality” and other personal attributes are poor predictors of entrepreneurial inclination, let alone success.

But at the same time, we need to move beyond simplistic “you can do it!” exhortations and faith in sheer willpower.

So here's the second part of my answer, in the form of three questions that will help you drill down to the hard realities of whether you should start a business.

What industry are you targeting?
The choice of sector in which you start your company could be the single most important factor in your success. Most entrepreneurs — and remember, we define “entrepreneur” as anyone who starts a business, including one-person, home-based sole proprietorships — start their ventures in mature, low-growth, highly competitive sectors. And that's why so many entrepreneurs (again, we're talking about the entire population of self-employed people) fail, or earn less than they would as employees.

Those who launched software companies between 1982 and 2002, for example, were 608 times more likely to have their startups join the Inc. 500 than those who launched restaurants, according to Scott Shane, a professor of entrepreneurial studies at Case Western University.

Deliberately choosing a higher-growth sector, such as healthcare or education, is a smart first move (see J.D.'s discussion of recession-proof jobs, which touches on high-potential industries ).

What is your work experience?
Most entrepreneurs, naturally enough, start businesses in sectors where they already work. So here's the first takeaway: if you currently work in a mature, low-growth, highly competitive sector, becoming an entrepreneur in that sector will predispose you toward failure. If you work in the restaurant industry, for example, you should not become an entrepreneur — unless you are extremely talented and savvy about both your niche and the industry as a whole.

What should you do if you're in the above situation but still committed to starting your own business? Consider switching industries first. But start by getting a job in the new sector, rather than launching a new venture in unfamiliar territory.

Will you focus on businesses or consumers?
Many new entrepreneurs want to target consumers. That's natural because all of us, as consumers ourselves, have a basic understanding of, and affinity for, many consumer products and services. But most successful new companies focus on selling to other businesses rather than to consumers (they are business-to-business, or “B-to-B”, rather than business-to-consumer, or “B-to-C”, ventures).

Why? Businesses tend to make rational purchase decisions, so if you can demonstrate that your service or product provides cost savings or a quick return on investment, you'll make sales. Consumers, on the other hand, can be, well, downright irrational in their purchasing habits, at least compared to businesses. Marketing to consumers can be far more difficult, and you must often depend on retailers or distributors to reach them. Unless you or someone on your team have a strong track record of successful consumer marketing, you're more likely to enjoy success targeting businesses.

So there you have 'em: three questions to help you decide whether you should become an entrepreneur. Keep in mind that these are simply guidelines, and that some entrepreneurs successfully ignore them. But why not let the facts improve your odds?

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Dustin Brown
Dustin Brown
11 years ago

I’ve definitely considered starting my own company. I believe in my case I would need to start small, as a solo freelancer working from home, and as my client base (and therefor my workload) increased, I could think about hiring people to help. Things like equipment, office space, etc would also increase as necessary in a way dictated by a conservative projection of the companies growth. Still though, it’s really REALLY scary, the thought of giving up a steady paycheck for a situation where everything is riding solely on YOU and YOUR ability to sell whatever ever it is you’re… Read more »

nickel
nickel
11 years ago

Do people really “decide” to become entrepreneurs? My sense (and experience) is that some people have a knack for dreaming up and executing cool ideas, and when one of those ideas sticks, they are a de facto entrepreneur. To me, deciding to be come an entrepreneur is a bit like deciding to become more athletic. While there are some steps that you can take to increase the likelihood of success, you either have “it” or you don’t.

Studenomics
Studenomics
11 years ago

One really important thing to consider before pursuing any entrepreneurial ventures is your adversity quotient. You have to ask yourself, do you have the ability to bounce back from a failure? How do you react when things don’t go as planned? A persons adversity quotient determines how well they would react when they hit setback. True entrepreneurs turn adversity into opportunity. All successful entrepreneurs have failed at least once before. The only difference is that they were able to bounce back from this failure and reach success.

Nick
Nick
11 years ago

For some great advice and articles on freelancing check out Freelanceswitch.com. They’ve got a book called Rockstar Freelancer which I highly recommend to those looking to start up their own venture.

Eric J. Nisall
Eric J. Nisall
11 years ago

I’m with nickel on this one. People generally do not “decide” to become entrepreneurs. It is my belief that it is a natural progression in their lives in which they decide to take their own business experience and take it to the next level in order to implement changes and ideas that they are not able to make as an employee. The other reason people decide to go into business for themselves is to pursue something which they have a passion for which will enable them to do something which they love as a career rather than simply being in… Read more »

Pace
Pace
11 years ago

Hi Tim, Thanks for answering my question! I appreciate it. This is very good advice and some very useful things to think about for people who are considering starting their own business. The sort of thing I was scared of was what I read about in the E-Myth. This is the myth of the pie baker who loves to bake pies, and feels that she would love it even more if she didn’t have to deal with her annoying boss who restricts her in so many ways, doesn’t listen to her idea, and doesn’t pay her what she’s worth. Then… Read more »

Shana
Shana
11 years ago

I really have to disagree with “if you are seriously thinking of starting your own business, then you have what it takes…” I know more people who have thought (even seriously) about starting a business than people who have actually done so. Thinking and doing are two entirely different things. In addition, what the article doesn’t cover is being able to do everything for your business aside from the skill. I run my own business, and I have to deal with budgeting, marketing, finding clients, maintaining client relationships, negotiating, bookkeeping. For people who intend to have a staff, there are… Read more »

ajc
ajc
11 years ago

Having gone from $30k in debt to $7 Mill. in the bank, I can tell you from personal experience that entrepreneurship is:

a) Possibly the most lucrative activity that you can undertake, and

b) the hardest road to financial success that you can choose.

So, I recommend that you FIRST ask: do I NEED to become an entrepreneur to achieve my financial goals … and THAT depends on you required annual compound growth rate:

http://7million7years.com/2008/09/30/its-the-gradient-of-the-curve/

mp97303
mp97303
11 years ago

“Do people really “decide” to become entrepreneurs?” Yes they do, the moment the see a need in the marketplace and decide to act on it, they are in fact entrepreneur’s. That is exactly what I did in ’93 while preparing to become a Realtor. I overheard some agents talking about not having anyone to install signs anymore and how “bummed” they were at the thought of doing it themselves. All the other agents agreed. Long story short, two weeks later my business was open. Now mind you, I had NO previous experience in business and had no members of my… Read more »

Happiness Is Better
Happiness Is Better
11 years ago

I agree with a lot of the comments. I think some people do have a knack for coming up with cool ideas, as Nickel stated, but you can not underestimate the spirit of “it can be done”. I think MP97303’s story is a great example of that. @ MP97303 – I disagree with #5. I would say that before the age of the internet, it took money to make money, but I don’t think that holds true now. You can start a website for basically nothing and grow it into a cash cow. Perhaps J.D. or Nickel could provide a… Read more »

Adrienne
Adrienne
11 years ago

The term “entrepreneur” is so wide ranging we might as well be talking about “college student”. There is a huge range of choices out there. My husband and I both are entrepreneurs on completely different jobs (restaurant owner and consultant) and each would find the other’s job impossible.

I really don’t think that entrepreneurs are “born” – it’s a choice just as a career is a choice.

Andrea >> Become a Consultant
Andrea >> Become a Consultant
11 years ago

Excellent points. Deciding whether you should become an entrepreneur can be a complicated question. I’ve had so many questions over at my site that I wrote two guides that may help. One is Discover Your Inner Entrepreneur (for Moms) at http://www.consultantjournal.com/mompreneur and the other is Discover Your Inner Consultant at http://www.consultantjournal.com/discover-your-inner-consultant. Since publishing these guides, I’ve had a lot of positive feedback. One of my first customers has recently asked about licensing the content for use in screening people who want to buy franchises from her, as she finds many people have never taken the time to think about what… Read more »

Pace
Pace
11 years ago

@mp97303: Thank you for those seven tips. I’ll take them to heart.

mp97303
mp97303
11 years ago

@Happiness is better:

I blew the meaning of #5. What I meant was that when/if you spend money, make it on items that matter, and superfluous “stuff” like fancy buildings and $800 office chairs don’t matter.

Thanks for the comments

PizzaForADream.com
PizzaForADream.com
11 years ago

Great thoughts! I don’t think most consider the industry they are entering and it’s maturity. They come up with what they believe is a good idea and dive in.

mp97303
mp97303
11 years ago

Many of you may remember the book “The Millionaire Next Door.” I believe their study found that the average millionaire’s business was in a mature, sometimes dirty, always unspectacular industry.

“Those who launched software companies between 1982 and 2002, for example, were 608 times more likely to have their startups join the Inc. 500 than those who launched restaurants, …” My question is: where are they now? I would suspect NOT in the software industry.

Tim
Tim
11 years ago

Everybody, many thanks for reading my post and feeding back. And thank you, J.D., for the opportunity to be here. As usual, I’m late to the discussion as it’s against my religion to view computers on weekends and I’m very strict in my faith 🙂 Good point about thinking versus acting. For me, thinking means serious contemplation and consideration, not just musing. Everyone has fantasized about starting a business, and some consider it, but only a few give it deep, careful thought. Most are better off remaining employees. I agree with Adrian that entrepreneurship is a choice, though it’s certainly… Read more »

M
M
11 years ago

Hubby and I have been brainstorming for a business we’d like to start out as a side business in about a year.

All of these comments will be used and considered.

Thank you, everyone for all the great comments!

~M

Craig
Craig
11 years ago

It takes a different type of mentality to become an entrepreneur. You have to have a comfortable level of risk and want to be your own boss and work hard. Not easy.

thomas
thomas
11 years ago

Being your own boss is the absolutely best way to financial prosperity. Live the American dream!

Terra Andersen
Terra Andersen
11 years ago

Being especially aware of what industry you are targeting is important now, more than ever. I consulted someone a few days ago who is in the process of creating a start-up in an industry I have seen spiral downward since last summer. It’s tough to tell someone that they may need to hold off on their dream. Research is key!

Monevator
Monevator
11 years ago

Not to decry the post, which seems genuine enough, but I do think trying to decide if you’re an entrepreneur is completely futile. The trouble of survivorship bias looms large. I know brilliantly clever people who’ve utterly failed when they’ve set up businesses; they’d walk any ‘tests’ with their eyes closed. And I know others who’ve been lucky. If I was forced at gunpoint I’d say the key criteria are spotting an idea, loving the idea of fulfilling it, and having a cavalier disregard for the risks. Just as long as you don’t think ticking those three boxes will make… Read more »

Amber Weinberg
Amber Weinberg
11 years ago

Great article! Often times, people jump into starting a business before doing much research or even figuring out if they’d actually make a good business owner.

Peg Corwin
Peg Corwin
11 years ago

As a SCORE counselor, I work with lots of entrepreneurs. I strongly agree that entrepreneurs often overlook the importance of choosing a promising industry. I have in draft a blog post that compares by industry women business owners in Crain Chicago’s “Fast 50” versus overall stats by industry on the businesses women start. Big difference in industry focus between the women who succeed and the masses of women in low margin industries like personal services, childcare, and retail.

Alslayer
Alslayer
11 years ago

Ahh to dream of someday starting my own business. I have tried a few times and always failed. I even failed to keep my low cost condo.

My plan now is to clean up my debt this year and see if I can start again next year.