The Problem With Small Business

The Slow Death of American Entrepreneurship

No kidding. More people are realizing entrepreneurship is a big money pit due to the high failure rate, as well as a multitude of other factors such as competition, high borrowing costs and endless regulation.

Why does small biz suck and large cap rule?

1. Uncompetitive borrowing rates for small biz versus large caps.
2. Bailouts and rescue programs for large caps and too big to fail. For example, General Electric Co. borrowed $16 billion through a Federal Reserve Board rescue program in the fall of 2008.
3. Weak dollar fed policy and proliferate government spending for programs like homeland security, war, and infrastructure that benefit large companies such as LLL communications, Halliburton, Raytheon & Caterpillar.
4. Globalization, free trade agreements great for S&P 500 companies
5. Price advantage. Discounters like Wall-mart (WMT), Family Dollar (FDO) and Costco provide a much better value for cash-strapped consumers than expensive mom & pop stores. Its common sense…why pay more for less?

The way you get rich is to buy and hold the S&P 500, buy Bay Area real estate, build a website that goes viral, become an early employee or early investor of a company that becomes very valuable.

Picking the winning companies is easy if you know what to look for. In this blog, we predicted Facebook, AirBNB, Snapchat, Pnterest would become more valuable, which indeed they did. It’s as simple as looking for a company with a lot of growth, a wide moat, and in a hot sector. The mistake a lot of VC firms make is investing in something that is new and edgy, like a watch or a lame phone app that has no users, instead of the already valuable stuff that has gained traction such as Snapchat. At least in the later case you have a near 100% chance of doubling your money on buyout or IPO instead of a 99% chance of failure and maybe a .001% chance of having the next Facebook. The expected value of the later is higher, too.

Entrepreneurship has a higher ROI if you chose a business that has low start-up costs and expenses, is in a hot sector such as web 2.0, and viral potential such as apps and websites, versus businesses with a lot of overhead like restaurants and retail.