Ed Driscoll

'Most Small Business Owners are Dumb as Hell'

Hey, don’t look at me; I’m merely quoting the headline by Aaron Clarey, the Blogosphere’s self-described “Captain Capitalism,” and while that’s a pretty brutal assessment (perhaps it stings a bit because in another life, I was a small business owner as well), he’s onto something in one sense:

Most small business owners are naive and start things they think will be “fun.”  There was no limit to the number of sports bars, trinket shops, horse hobby farms, music studios, and restaurants I had to deal with working as a credit analyst.  NONE of them were profitable.  NONE of them were feasible.  It was just some moron who foolishly cashed in their 401k to “pursue a dream” and start a company they thought would be fun.  Of course “fun” things are usually oversupplied to the market and the profit margins just aren’t there.

Another reason for the spectacular failure of small businesses is their owners truly and honestly believe accounting is optional.  That’s the “hard stuff” and they literally have no idea how much they’re making or losing.  All one has to do is watch Restaurant Impossible where the host invariably asks the bloated sows about their “P&L” and they don’t even know what that is.  Again, these are lazy, dumb people who started the business for “fun.”  Not profit.  And since accounting isn’t “fun” they don’t do it.

Finally, a disproportionate number of “small businesses” are really just contractors who claim they’re running a business.  You know, the guy with the truck who bought a magnet to put on it “Joe’s Master Paving” but couldn’t tell you what “LLC” stands for or where the secretary of state is to register such a thing.  They are basically playing make-believe-businessman.  They get cards, they get signs, they get everything that is glamorous and ritzy, but not the basic things like setting up a company or getting insurance.

The central thesis of business consultant Michael Gerber’s best-selling 1986 book The E-Myth was the notion of the “entrepreneurial seizure.” As Gerber wrote:

Inside your mind it sounded something like this: “What am I doing this for? Why am I working for this guy? Hell, I know as much about this business as he does. If it weren’t for me, he wouldn’t have a business. Any dummy can run a business. I’m working for one.”

And the moment you paid attention to what you were saying and really took it to heart, your fate was sealed.

The excitement of cutting the cord became your constant companion.

The thought of independence followed you everywhere.

The idea of being your own boss, doing your own thing, singing your own song, became obsessively irresistible.

Once you were stricken with an Entrepreneurial Seizure, there was no relief.

You couldn’t get rid of it.

You had to start your own business.

The Fatal Assumption

In the throes of your Entrepreneurial Seizure, you fell victim to the most disastrous assumption anyone can make about going into business.

It is an assumption made by all technicians who go into business for themselves, one that charts the course of a business–from Grand Opening to Liquidation–the moment it is made.

That Fatal Assumption is: if you understand the technical work of a business, you understand a business that does that technical work.

And the reason it’s fatal is that it just isn’t true.

In fact, it’s the root cause of most small business failures!

The technical work of a business and a business that does that technical work are two totally different things!

But the technician who starts a business fails to see this.

To the technician suffering from an Entrepreneurial Seizure, a business is not a business but a place to go to work.

So the carpenter, or the electrician, or the plumber becomes a contractor.

The barber opens up a barber shop.

The technical writer starts a technical writing business.

The hairdresser starts a beauty salon.

The engineer goes into the semiconductor business.

The musician opens up a music store.

All of them believing that by understanding the technical work of the business they are immediately and eminently qualified to run a business that does that kind of work. And it’s simply not true!

Gerber’s book, which is focused on the notion of running a business built around systems — written down in a manual for every employee to read, and followed religiously so that every customer gets the same experience, and every repeat customer gets the same experience, is one way to make a business feels like a business. As Gerber wrote in The E-Myth, it was also the key to one of America’s most successful businesses, which is the subject of Kyle Smith’s column today in the New York Post:

What is “the cheapest, most nutritious and bountiful food that has ever existed in human history” Hint: It has 390 calories. It contains 23g, or half a daily serving, of protein, plus 7% of daily fiber, 20% of daily calcium and so on.

Also, you can get it in 14,000 locations in the US and it usually costs $1. Presenting one of the unsung wonders of modern life, the McDonald’s McDouble cheeseburger.

The argument above was made by a commenter on the Freakonomics blog run by economics writer Stephen Dubner and professor Steven Leavitt, who co-wrote the million-selling books on the hidden side of everything.

Dubner mischievously built an episode of his highly amusing weekly podcast around the debate. Many huffy back-to-the-earth types wrote in to suggest the alternative meal of boiled lentils. Great idea. Now go open a restaurant called McBoiled Lentils and see how many customers line up.

But we all know fast food makes us fat, right? Not necessarily. People who eat out tend to eat less at home that day in partial compensation; the net gain, according to a 2008 study out of Berkeley and Northwestern, is only about 24 calories a day.

The outraged replies to the notion of McDouble supremacy — if it’s not the cheapest, most nutritious and most bountiful food in human history, it has to be pretty close — comes from the usual coalition of class snobs, locavore foodies and militant anti-corporate types. I say usual because these people are forever proclaiming their support for the poor and for higher minimum wages that would supposedly benefit McDonald’s workers. But they’re completely heartless when it comes to the other side of the equation: cost.

Driving up McDonald’s wage costs would drive up the price of burgers for millions of poor people. “So what?” say activists. Maybe that’ll drive people to farmers markets.

For the average poor person, it isn’t a great option to take a trip to the farmers market to puzzle over esoteric lefty-foodie codes. (Is sustainable better than organic? What if I have to choose between fair trade and cruelty-free?) Produce may seem cheap to environmentally aware blond moms who spend $300 on their highlights every month, but if your object is to fill your belly, it is hugely expensive per calorie.

As James Glassman noted in 2005 at Tech Central Station, Morgan Spurlock put himself on the map by devouring over 5,000 calories a day in McDonald’s for a month — the equivalent of nine Big Macs a day — and not exercising, a daily caloric intake that would supersize anyone, whether they ate at McDonald’s or the Four Seasons. (Spurlock evidently wanted to become the next Michael Moore in more ways than one.) But hey, attacking a giant corporation ultimately led to Spurlock being put on salary with another giant corporation (Time-Warner-CNN-HBO in his case), so perhaps both karmically and comically, it all worked out.