Overcoming the Global Challenge for Entrepreneurs
One of the true great gifts of North American society is entrepreneurialism; every man, woman, and child has the right and privilege to start their own company. Whether it’s your main mode of income, something big you’re building on or off-line, or just a side-hustle the opportunity to establish wealth is always there for many if not most of us. If you manage the winnings from your entrepreneurial efforts properly, you can set yourself and your family up nicely both now and even forever.
NOW FOR THE BAD PART.
The average small business sells for 1-2 times EBITDA (roughly a year’s profits) or can’t be sold. A gym, convenient store, family restaurant, or landscaping business profiting $200K/year could get about $2-500,000 at exit.
The number in the service industry is .8-1.5 times EBITDA. Chiropractor, massage, small salon, personal training is going to get between 80% of the profits and up to 80-85% of the gross. It is lower because of the likelihood of clientele leaving when their beloved service-provider sells.
To be clear, you’re selling off your livelihood for what you make in 1 year. The check seems nice, but what do you do in year 2 – forever?
HERE’S WHERE IT GETS EVEN MORE DIFFICULT
Many of these businesses can really struggle or never be sold. Many small businesses are difficult to profit in under “normal” circumstances. As we all know now, they can be devastated due to Covid or other disasters. Small businesses are often tough to sell anywhere near the asking price or for any price at all as they can be unattractive, the buyer could get into their own similar business at a lower price, and now because of concerns over government regulations and restrictions.
THE RESULT: You can spend years or your entire life honorably working super hard with little to no exit or beneficial acquisition event.
Here is an example listing from a well-known practice brokerage:
Well established 66-year generational chiropractic practice collecting $402,811.00.
Profits: Not Disclosed
Asking price: $325,000
Seller financing Available On Request
The exit after 66 years is $325,000! That’s a whole lot of love, blood, sweat, and tears for a little less than $5,000 in equity/year. And it’s “asking” price. It can also be financed and therefore if the new provider struggles or fails, you will not get the rest of the money. An outcome I’ve seen become a reality many, many times.
CAN YOU GET WEALTHY IN REAL ESTATE?
Real estate can be an extremely sound investment, although the vast preponderance of people do not have the training, capital, or credit to get there. Given the right timing, the right deal, and the right type: single family, multi-family, commercial, mortgages, etc; you can make some real money. Yet, doing real estate on the side of your normal business very rarely makes anyone wealthy.
According to Forbes, with mortgage payments to contend with and a tough competition, you may only be able to profit $200 to $400 per month on a property. That’s $4,800 a year, a far cry from earning a living. You’d need to own over 10 properties profiting $400 per month in order to reach that target.” Done as purely a side-hustle by many, it is far more common that someone loses rather than makes money in real estate.
You’ll often hear of someone saying they sold their property for double. However, if they held the house for 5 years and you take out: 5 x taxes, insurance, maintenance, and replacement costs there is modest profit left for the risk, stress, and work.
The very top land developers and those fully vested in real estate community report 10-12% as the most experts will experience in overall returns. More common, successful ventures are 6-8%. Once again, these are solid returns in an investment portfolio when done well, but unlikely to generate real wealth or replace someone’s income.
THE WEALTHIEST PEOPLE IN THE WORLD INVEST IN TECHNOLOGY!!!
Common examples of returns on tech:
- If you had invested just $10,000 in Amazon, Dell, Apple, or Microsoft, when they went IPO, you’d be a million dollars richer just from that investment according to the IPO Playbook.
- Apple had a 4,581.7% rise in stock value between 2002 and 2012.
- Andreessen Horowitz invested $250k in Instagram. Two years later it was bought for $1B by Facebook, returning a 312x return, or $78M on that initial $250k.
- 4 of the top 5 wealthiest people in the world are tech giants Bezos, Musk, Gates, and Zuckerberg
There are virtually endless other examples of less mega-famous founders & companies:
- WhatsApp turned an initial $250,000 investment into a second of 7 million investment from a venture capital firm (Sequoia) resulting in 22 billion acquisition by FB
- Dropbox initial funding was $15,000 and first major raise was 1.2 million now worth 16.8 billion
- Mercari operates a booming online, app-based flea market. The original raise had a 53- times return of 3.7 billion.
- After an initial developing cost of $5,600, Flipkart raised 1 million dollars in 2009. Ten years later, in 2018, Walmart acquired Flipkart for a whopping $16B,
- Angel investors raised 1 million dollars for Groupon now worth 13 billion
- When Snap Inc. (Snapchat) went public in 2017 at a $25B valuation, it was the second-highest valuation at exit of any social media and messaging company since 1999. This started with a seed round of $480,000.
- Zynga started as a small game app for FB and led to an IPO of 7 billion 3 years later. Now worth 9 billion dollars.
BELOW ARE THE COMMON EXITS FOR SMALL TECH INVESTMENTS
- 2% equity in a 10-million-dollar tech exit is a $200,000 return.
- 2% equity in a 100-million-dollar tech exit is a 1-million-dollar return
- .5% equity in a billion-dollar tech exit is 5-million-dollar return.
YOU GET PAID PRIOR TO THE EXIT
As an early stage investor, you own an actual percentage of the company. Therefore, you also will collect dividends as a rule of the process with the goal of getting your investment returned prior to an exit.
EXPECTATIONS INVESTING IN TECH
Unicorns with returns of 50 – 1000 times return are rare. According to Jason Calcanis who manages the largest Angel Syndicate, they happen approximately 1:17 start-ups.
Tech companies becoming profitable, growing businesses with 200-400% (2-4X) returns are very common.
WHAT ABOUT THE STOCK MARKET?
The real money is made in early stage tech investments. By the time stock in these companies is available on Wall Street, you are now buying at high prices and hoping for what amounts to interest on that money for returns. Like real estate, owning stock in quality companies is a very good thing. It just lacks the impact and upside of tech.
Thanks to the JOBS Act, investing in startups and getting to experience the potentially gigantic upsides no longer reserved just for the uber-wealthy. Now all accredited investors may participate. As an example, New York Times Bestselling author Tim Ferris, who has sold millions of copies of best-selling books such as the 4-Hour Work Week and Tools of Titans states, “so far my startup bets are 10x+ more successful than my publishing career.”
I’ve spent many years now in study, partnered with the right tech people, and spent time with our engineering and programming teams across the globe to make tech development and investing a skill-set. My family and I have also multiplied our money through tech. Happy to share my experiences with you.
Have fun saving the world
Dr. Ben
