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How to Decide If You Should Become an Entrepreneur

indecisive_businessman.gifIn response to last year’s quiz about entrepreneurial “types,” reader Pace posed an intriguing question: What are the characteristics of successful entrepreneurs? Are they demographically different from unsuccessful entrepreneurs? Or is it all due to individual differences?

Good question. At the heart of Pace’s inquiry, I think, is something many long to know: How can I decide whether I should go into business for myself?

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, with full knowledge of the risks and rewards involved, then you have what it takes to start your own business.  A good test is to read the Monevator’s excellent Seven Reasons Why You Shouldn’t Start Your Own Business.if_you_seriously_think_of_business1.gif

In previous posts, we saw 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 part two, 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) either 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 recent discussion suggesting 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 to 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.

– Focus on business-to-business –
Many new entrepreneurs want to target consumers. That’s natural, because, as consumers ourselves, we all 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).

donotgiveup.gifWhy? Because businesses tend to make rational purchase decisions. If you can demonstrate that using your service or product will produce clear 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 has 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 every day some entrepreneurs successfully ignore these principles. But why not let the facts improve your odds?

* * * *

This essay first appeared as a guest post at Get Rich Slowly in a slightly different form.

You may also enjoy these entrepreneurship-related posts:

Entrepreneurship: A Primer

Three Things I Wish I’d Known Before Starting My Own Business

Pursuing Fortune and Fulfillment with Blogger Extraordinaire J.D. Roth

Three Questions Seekers Must Ask Themselves

How to Go Solo Without a ‘Big Idea’

The Soul of an Entrepreneur, the DNA of a Business

Making Money: The Right and Wrong Questions to Ask

How to Create Wealth, How to Keep Wealth

For Entrepreneurs Starting with Nothing, Here’s the Ultimate Strategy

Make This Year’s Decisions Stick with This Simple Secret

In Praise of Salaried Employment

Soaring Success, Devastating Failure: A Samurai’s Story

Entrepreneurship: Why It’s Not about You

The Surprising Truth About Why People Become Entrepreneurs

Quiz: Are You the Entrepreneurial ‘Type’?

5 Comments to How to Decide If You Should Become an Entrepreneur

On Feb 5, 2009, Adam Steer - Better Is Better commented:

Good food for thought. I dropped out of the “rate race” a few years back and am just now starting to really gain a head of steam with my business. It takes patience, vision and optimism. And you need to be thankful for all the little successes along the way.

Always enjoy this blog (and that of the author!).

Cheers,
Adam

On Feb 5, 2009, by Tim commented:

Congratulations, Adam, for making the big move and making it work. From what I’ve seen of your work you’re destined for big success.

And thanks for dropping by with the kind words!

On Feb 6, 2009, Dave commented:

Tim,

Great post with lots of good pointers.

In answer to your question on which entrepreneurial qualities are essential for success, I ran a series on that very topic on my blog late last year. I’m getting ready to run the 2009 version of the survey and would invite you, and your readers, to participate (or at least follow the proceedings).

I would also humbly add a recent post of mine to the “you might also enjoy” list: “Oh, so THAT’S an entrepreneur!

On Feb 6, 2009, Dave commented:

Okay – just noticed that the links I embedded in my comment are working due to the trailing period. If you can edit, I’d appreciate it. Otherwise, if anyone wants to follow one of the links, just copy and paste without the final period.

Sorry about that.

On Feb 6, 2009, by Tim commented:

Dave, I fixed the links. Many thanks for your contributions!

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