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Chapter 1
What Is the Difference
Between an Employee
and an Entrepreneur?
Starting with the Right Mind-set
When I was growing up, my poor dad often said, "Go to school, get good
grades, so you can find a good job with good benefits." He was encouraging
me to become an employee.
My rich dad often said, "Learn to build your own business and hire good
people." He was encouraging me to become an entrepreneur.
One day I asked my rich dad what the difference was between an employee
and an entrepreneur. His reply was, "Employees look for a job after the business
is built. An entrepreneur's work begins before there is a business."
99% Failure Rate
Statistics show that 90% of all new businesses fail within the first five years.
Statistics also show that 90% of the 10% that survive the first five years, fail
before their tenth anniversary. In other words, approximately 99% of all
startup businesses fail within ten years. Why? While the reasons are many,
the following are some of the more critical ones.
1. Our schools train students to be employees who look for jobs rather
than train entrepreneurs who create jobs and businesses.
2. The skills to be a good employee are not the same skills required to
be a good entrepreneur.
3. Many entrepreneurs fail to build a business. Instead they work hard
building a job that they own. They become self-employed rather than
business owners.
4. Many entrepreneurs work longer hours and are paid less per hour
than their employees. Hence, many quit out of exhaustion.
5. Many new entrepreneurs start without enough real life experience
and without enough capital.
6. Many entrepreneurs have a great product or service but don't have
the business skills to build a successful business around that product
or service.
Laying the Foundation for Success
My rich dad said, "Starting a business is like jumping out of an airplane without
a parachute. In midair the entrepreneur begins building a parachute and
hopes it opens before hitting the ground." He also said, "If the entrepreneur
hits the ground before building a parachute, it is very tough climbing back
into the plane and trying again."
For those of you familiar with the rich dad books, you know that I have
jumped out of the plane many times and failed to build the parachute. The
good news is that I hit the ground and bounced. This book will share with
you some of my jumps, falls, and bounces. Many of my failures and successes
were small ones, so the bounce was not that painful-that is, until I started
my nylon and Velcro wallet business. I will go into further detail throughout
the book because I made many mistakes, and learned from them along the
way. The success of that business was sky high and so was the fall. It took me
over a year to recover from that powerful bounce. The good news is that it
was the best business experience of my life. I learned much about business
and about myself through the process of rebuilding.
The Crack in the Dam
One of the reasons I fell so hard in the nylon surfer wallet business was that
I did not pay attention to the little things. There is some truth to the age-old
statement, "The bigger they are, the harder they fall." My little surfer wallet
business grew so fast that the business was a lot bigger than the capabilities
of the three entrepreneurs who created the business. Instead of creating a
business, we had created Dr. Frankenstein's monster and did not realize it. In
other words, our sudden success was accelerating our failures. The real problem
was we did not know we were failing. We thought we were successful. We
thought we were rich. We thought we were geniuses. To the extent that we
bothered to consult expert advisors (like patent attorneys), we did not listen
to them.
As three successful entrepreneurs in our late twenties and early thirties,
we took our minds off the business and partied into the night. We actually
thought we had built a business. We actually thought we were entrepreneurs.
We actually believed our own story of success. We started bragging. Champagne
started to flow. It was not long before we each had fast sports cars and
were dating even faster women. Success and money had blinded us. We could
not see the cracks forming in the wall of the dam.
Finally, the dam broke. The house of cards started tumbling down around
us. Our parachute did not open.
Too Much Success
The point in sharing my entrepreneurial stupidity is that many people think
that it is the lack of success that kills a business. And in many cases that is
true. The failure of my surfer wallet business was a valuable experience because
I found out early in my career as an entrepreneur that too much success
can also kill a business. The point I am making is that a poorly conceived
business can fail whether it is initially successful or not.
Hard Work Covers Up Poor Design
A poorly conceived business startup may be able to survive as long as the entrepreneur
works hard and holds the business together with sheer determination.
In other words, hard work can cover up a poorly designed business
and keep it from failing. The world is filled with millions of small business entrepreneurs
who are able to keep their leaky business afloat with hard work,
sheer willpower, duct tape, and baling wire. The problem is, if they stop
working, the business breaks apart and sinks.
All over the world, entrepreneurs kiss their families good-bye and head
off to their own businesses, their pieces of the rock. Many of them go to
work, thinking that working harder and longer will solve their business problems-
problems such as not enough sales, unhappy employees, incompetent
advisors, not enough free cash flow to grow the business, suppliers'
raising their prices, insurance premiums' going up, landlords' raising the
rent, changing government regulations, government inspectors, increasing
taxes, back taxes, unhappy customers, nonpaying customers, and not
enough time in the day, to name a few of the daily challenges. Many entrepreneurs
do not realize that many of the problems their businesses face
today began yesterday, long before there was a business.
One of the primary reasons for the high failure rate of small businesses is
sheer exhaustion. It's tough to make money and to keep going when so
much of your time is tied up in activities that do not make you any money or
that cost you money without offsetting income. If you are thinking about
starting your own business, before you quit your job, you might want to talk
to an entrepreneur about how much time he or she spends on non-incomeproducing
activities to run his or her business. Also ask how he or she handles
this challenge.
As a friend of mine once said, "I'm so busy taking care of my business I
don't have time to make any money."
Do Long Hours and Hard Work Guarantee Success?
A friend of mine quit his high-paying job with a large bank in Honolulu and
opened a tiny lunch shop in the industrial part of town. He had always wanted
to be his own boss and do his own thing. As a loan officer for the bank, he saw
that the richest customers of the bank were entrepreneurs, and he wanted a
piece of the action, so he quit his job and went for his dreams.
Every morning, he and his mom would get up at four o'clock to begin
preparing for the lunch crowd. The two of them worked very hard, scrimping,
cutting corners, in order to serve great-tasting lunches with generous
portions at low prices.
For years I would stop by, have lunch, and find out how they were doing.
They seemed very happy, enjoying their customers and their work. "Someday
we'll expand," said my friend. "Someday we'll hire people to do the hard work
for us." The problem was that someday never came. His mom passed away,
the business closed, and my friend took a job as a manager of a fast-food franchise
restaurant. He returned to being an employee. The last time I saw him
he said, "The pay isn't great but at least the hours are better." In his case, his
parachute did not open. He hit the ground before he built a business.
Now I can hear some of you saying, "At least he went for it." Or, "It was
just bad luck. If his mom had lived, they might have expanded and gone on
to make a lot of money." Or, "How can you criticize such good hardworking
people?" And I agree with these sentiments. My intent is not to criticize
them. Although not related to them, I loved the two of them dearly. I knew
they were happy yet it pained me to see them work so hard and not get
ahead, day after day. I only relate this story to make the same point. The business
began to fail before there was a business. It was poorly conceived before
he quit his job.
Is Being an Entrepreneur for You?
If this story about working long hours or failing if unsuccessful and possibly
failing if successful or jumping out of a plane without a parachute and bouncing
frightens you, then being an entrepreneur may not be for you.
But if the stories intrigue you or challenge you, then read on. After finishing
this book, at least you will have a better idea of what entrepreneurs need
to know to succeed. You will also have a better understanding of how to create,
design, and build a business that grows with or without you, and possibly
makes you rich beyond your wildest dreams. After all, if you are going to jump
out of a plane without a parachute, you may as well win big if you are going to
win at all.
The Job of an Entrepreneur
The most important job of the entrepreneur begins before there is a business
or employees. The job of an entrepreneur is to design a business that can
grow, employ many people, add value to its customers, be a responsible corporate
citizen, bring prosperity to all those that work on the business, be
charitable, and eventually no longer need the entrepreneur. Before there is a
business, a successful entrepreneur is designing this type of business in his or
her mind's eye. According my rich dad, this is the job of a true entrepreneur.
Failing Leads to Success
After one of my demoralizing business failures, I went to rich dad and asked,
"So what did I do wrong? I thought I designed it well."
"Obviously you didn't," rich dad said with a smirk.
"How many times do I have to do this? I'm the biggest failure I know."
Rich dad said, "Losers quit when they fail. Winners fail until they succeed."
Shuffling the papers at his desk for a moment, he then looked up at me and
said, "The world is filled with want-to-be entrepreneurs. They sit behind desks,
have important sounding titles like vice-president, branch manager, or supervisor,
and some even take home a decent paycheck. These want-to-be entrepreneurs
dream of someday starting their own business empire and maybe
someday some of them will. Yet I believe most will never make the leap. Most
will have some excuse, some rationalization, such as, 'When the kids are grown.'
Or, 'I'll go back to school first.' Or, 'When I have enough money saved.'"
"But they never jump from the plane," I said, finishing his thoughts.
Rich dad nodded.
What Kind of Entrepreneur Do You Want to Be?
Rich dad went on to explain that the world was filled with different types of
entrepreneurs. There are entrepreneurs who are big and small, rich and poor,
honest and crooked, for-profit and not-for-profit, saint and sinner, small town
and international, and successes and failures. He said, "The word entrepreneur
is a big word and it means different things to different people."
The CASHFLOW Quadrant
As I mentioned in the introduction, the CASHFLOW Quadrant explains that
there are four different types of people that make up the world of business
and they are often technically, emotionally, and mentally different people.
E stands for employee.
S stands for self-employed or small business owner.
B stands for big business owner (over five hundred employees).
I stands for investor.
For example, an employee will always say the same words, whether he or
she is the president or janitor of the company. An employee can always be
heard saying, "I'm looking for a safe secure job with benefits." The operative
words are safe and secure. In other words, the emotion of fear often keeps
them boxed in that quadrant. If they want to change quadrants, not only are
there skills and technical things to learn, in many cases there are also emotional
challenges to overcome.
A person in the S quadrant may be heard saying, "If you want it done
right, do it yourself." In many cases this person's challenge is learning to
trust other people to do a better job than he or she can. This lack of trust often
keeps them small, since it's hard to grow a business without eventually
trusting other people. If S quadrant people do grow, they often grow as a
partnership, which in many cases is a group of Ss binding together to do the
same job.
B quadrant people are always looking for good people and good business
systems. They do not necessarily want to do the work. They want to
build a business to do the work. A true B Quadrant entrepreneur can grow
his or her business all over the world. An S quadrant entrepreneur is often
restricted to a small area, an area he or she can personally control. Of course,
there are always exceptions.
An I quadrant person, the investor, is looking for a smart S or B to take
care of his or her money and grow it.
In training his son and me, rich dad was training us to first build a successful
S quadrant business that had the capability of expanding into a successful
B quadrant business. That is what this book is about.
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