Why is no one dreaming of opening their own business?
I’m in the process of making a career transition into real estate and currently I’m in an Ivy League grad school. I am absolutely staggered that hardly anyone has any aspiration to set up their own business. Entrepreneurship doesn’t even seem to be on anyone’s agenda. Everyone is chasing associate roles at big name shops. Am I just around the wrong group of people and getting the wrong impression? Or is this the case? And if it is, why? Surely with a good education and given enough time most people could set up and grow a successful real estate shop themselves?
People like to get experience before going out on their own. That’s it… it’s very straightforward
Much easier to raise capital if you spent 10 years at XYZ prestigious fund VS your only RE experience two years of taking RE classes at Tuck
Starting your own business is hard. Not many ever get in a position where they could go out and raise capital, they don’t have the connections to source great deals and you have to remember that when a person does get to a point in their career where they could realistically start their own firm, they’re tied down with golden handcuffs. Or they got a decent amount of carry or a family and just can’t afford to risk it. Or maybe they become too comfortable with a salary and just lose that ambition they might’ve had when younger.
I always day dream about having my own firm one day. At 22, it’s a long ways off but people underestimate what they can achieve in 10 years.
I think it’s the other way around - the influx of institutional capital/companies in the space as well as the increasing efficiency of markets due to data availability have caused the industry to really mature. It’s way harder to find opportunities now than it was 20+ years ago and bc of this way harder to start new companies IMO.
No it isn't. It's just that you look at what others have accomplished and think you can't do the same thing, which is true; once someone proves out a business plan, others pile into the space and opportunities dry up. There are just as many opportunities to make fortunes now, it's just in slightly different products/business models.
As with everything in life, risk and reward are correlated. It's easier to start a value-add fund these days because it's a proven investment thesis; it's harder to make a killing because everyone else has the same thought. Say what you will about Adam Neumann, but he became a billionaire by pioneering something new - all the other coworking companies haven't done as well because they weren't first movers. Extend that to, well, everything.
I thought this way too when I was younger but many people simply are not wired for it and that's OK. Not everyone wants to be thinking about their work 24/7 and worried about their net worth fluctuating around wildly.
Of course this depends on how you tackle entrepreneurship but if you are a true entrepreneur and not a small business owner, then you will be routinely putting 95%+ (if not far more) of your net worth at risk. Making tons of money and losing it quickly is part of the fun but probably not very fun for most people. For me personally, it's hard to get excited about something or even want to work on it unless I have my own capital at risk.
I found most people at university to be risk averse too. the people I know that have started successful businesses started from nothing, no degree, and quite frankly had no other option to make money. I have a theory that it's not so much brains as it is taking massive risks, which 'uneducated' people are more willing to do.
People in generally, and especially the ones in top schools with good records are very risk averse. Even while joining to some firms, people seek open oppurtunities. Entrepreneurship involves great amount of risk. Starting from 1990s with the rise of tech, entrepreneurship is more or less glorified and the failure rate which is high is not shown. We mainly see successful start-ups which became big companies but there were hundreds of start-ups which are no longer operating.
Entrepreneurship requires finding good team, having knowledge or at least ability to operate in certain industries, connections, and capital. Not every person graduating from college has enough capital to start a business (+they need to repay college debt).
In initial years of operation, hours are brutal, little to not profits, and constant stress.
I think start-up building is for:
People in category 1 are normally people like where in WSO. People in category 2 are priviliged people. People in category 3 are usually people with good STEM background. (as most start-ups are somehow tech-related knowing how to code in a valuable asset)
Came across an interesting opportunity lately. Could potentially be related to real estate if you bought the buildings…
apparently, at least where I live, there is a massive shortage of dog groomers. It’s nearly impossible to get an appointment and business aren’t taking calls or accepting new clients. Partly because nobody wants to grow up and be a dog groomer, partly because covid resulted in every lonely single person going out and buying a dog for company. If you wanted to do something where there is a strong demand…buy a dog grooming operation. Kind of random.
I had that entrepreneurial mindset in gradschool as well - get a job at Associate level at some XYZ brand name firm, work for 3-5 years, then spin off and do deals with friends with the hope of raising money together etc... That's very naive thinking and life doesn't just happen like that. It's all a fee business, and you wouldn't raise enough money to pay yourself full time by collecting couple dozen millions from family and friends.
I've done the math before, you'd need at least $100MM in AUM to make it a meaningful business. AMF and promotes net to about ~2%/year, which is about normal for coreplus/value-add stuff, so $2MM in fee income a year for 3 principals and 3-5 support staff (accounting, analysts, etc). Even then it's still slim operating margin for the business, considering you have to pay office rents, payroll overheads, operating costs, travels etc.... Any less than that AUM threshold, you won't be busy enough...And it ain't easy to raise $100MM to begin with.
I've adjusted my entrepreneurial mindset from starting from the ground up like that, to joining an entrepreneurial firm. You can still get in early as a principal, and build the company with someone else. I'm not Adam Neumann and won't be charismatic enough to convince people to give me billion of dollars so there's very low chance of me starting from the ground up.
Another option is to keep working for said XYZ brand name firms, for 5-10 years, do deals on the side with friends, and THEN quit once you have enough in the portfolio to justify quitting XYZ brand name firm to pursue the entrepreneurial route full time.
So to answer your questions, it's not that people don't have balls. Most just don't have what it takes to "start a fund" and end up working for someone else. Think about, you're a gradschool kid with little transaction experience, how will you convince people to give you $100MM to "start your fund"? What will you do differently than hundreds of other firms out there chasing the same deals....
Right, but no one is raising that little money with that much overhead to begin with. If you have three principals, why have analysts at all? What's the value add for the principals that you need them? Be sole principle and hire analysts to do the work.
What you're describing is setting up the infrastructure for a half a billion dollar fund with 20% of the resources. Frankly, anyone trying to be entrepreneurial is going to need to wear a lot of hats or of course the numbers won't work. Yeah, you'll have to do your own accounting and be your own HR for a while. If you think that you'll need half a dozen support staff the moment you go out on your own, I'd argue you don't have a realistic idea of what starting a company looks like.
Which, frankly, is a big blind spot in the collective eyes of WSO. People see the "smaller" guys who raise $250-500mm per fund and think "of course I can invest the same way those guys do," without understanding that before those fund were hiring monkeys like us, they were struggling along and operating a bit of a fly-by-night operation themselves. Most of the folks on this forum seem to want to skip straight from analyst to running a $1b+ fund.
And for what it's worth, this is why people go into development. You could do a $20mm development deal and live comfortably off that for the entire life-cycle of the deal. It's really tough to raise a fund and operate it and do all the compliance and all that on a shoestring - but it's much easier to do that o the development side, where you need to find one deal that works and hustle to get it done. This is why comp is lower than in REPE (generally), or in IB - not a lot of people go from being an MD to starting their own boutique bank, but it's relatively common in the development world.
We work in finance because we're too much of b****es to start our own business. I'm willing to admit it.
Based on looking at general population trends and speaking with people who have started search funds, I think a great option for many will be to purchase a LMM family-owned business from someone who wants to retire and lacks a succession plan. In those instances, financial expertise, high-level operational experience, and an ability to sell/negotiate developed through many IB/PE/Consulting roles could lead to the dream of performance-linked equity. Patience and delayed gratification with some risk 2 the moon.
Met quite a few founders/entrepreneurs through our VC unit and also just colleagues who left the business to start their own shop.
1) Founders/entrepreneurs are often people who think outside the box and had unusual career trajectories. Sudden changes in fields, a new interest in a startup idea (with research to back it up), often people who don't fit a mold and want to break the rules. Even create entirely new ecosystems. Folks who are creative, have a huge passion for risk, and the network that is like them. They are problem solvers and much more agile and nimble compared to others.
2) If you look at the structured way of learning, studying, recruiting and working in traditional areas like banking you'll notice it doesn't always breed creativity, or most of the personal skills required to run your own business. You will learn about accounting, raising funds, the networking aspect and even the legal ones. But my own MD once said that he admires the founders who are in their 20s, came from nothing and made it big through just one idea and good execution.
3) Even though some of us are running a BU or a team, we are never alone. There are huge resources (that are also very expensive) at our hands every single day. HR, compliance, credit risk, etc cost money and none of this is available to a founder. He has to either pay external services or need to wear so many hats that it will be hard to believe a single person or a small group would have that many skills.
4) Lastly, there are many companies, ideas and founders out there. Hard work, a good network, and good employees are a good place to be when you start. However, a huge component is also sheer luck. We funded many companies in the last years and, because of Covid, many of them went under. To us, that was a write-off. To these founders and families this was the single biggest catastrophe they will ever experience - and none of these brilliant people deserved to fail like this.
I am a real estate entrepreneur. I don't do fancy syndication or development deals that you all usually mention--95% of the time just 1-4 unit buy and holds, flips, and small commercial projects using country club money. If it exceeds $10mm...it is out of my buy box.
That being said--we usually have a 30% equity cushion in our projects, so it is nothing to turn your nose up at. We have no LPs and only raise private debt for acquisition financing, with bank debt being the take-out lender after stabilization.
I would agree with most of the comments here. Risk adversion, talent arbitrage, societal expectations, and fear of failure top the list in my mind. Plenty of people, certainly in this forum, have the knowledge necessary to success as a business owner. But can they overcome the initial uphill climb that entrepreneurship creates? I don't know.
I was lucky enough to start my company when I was 26...so I climbed that hill alone, living in an apartment, with no family or friends to drag me down. Looking back on it--the best thing I ever did. But I am not sure that I could say today, as a 31 year old married guy, I would be able to do it again. Life changes, and so do we...and that's okay.