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Financial Literacy

Financial Literacy

Home Financial Literacy Investing 101 Today's Entrepreneurs

Today's Entrepreneurs

Just for kicks, we thought we’d illustrate some entrepreneurial businesses in hopes of enlightening you to either start one or learn how to back up an 8 wheeler for the men in brown.

Restaurant Owner

Restaurants are generally renowned as the worst business in town. That quaint, lovely Italian food place which seats 80 has an expected life span of less than 3 years. Over 50% of restaurants created fail in the first year. It is a lousy business. You have recurring fixed costs you must commit to like rent, the leasing of the ovens, refrigeration units, silverware, cookware and extended insurances. Those are costs you burden whether you have customers or not. And the restaurant business is really two businesses: food and liquor. Think about what is involved for that Italian restaurant to deliver to you a plate of spaghetti and meatballs for $7.95. They have to cook the needles, paying a chef $12/hour to do so. He has a cleaning guy they pay $9/hour. In a given hour, that chef can only make so many meals, maybe 20. The direct cost of the labor for that spaghetti was maybe $2. The cost of the meatballs and the spaghetti itself was probably another $2 if you add in the parmesan cheese and other filler. So, you have $4 of profit to cover rent, insurance, heat, and the very likely scenario that you have ordered wrong in your supply chain and have to throw out a meaningful percentage of the food that you’ve paid for with your hard cold cash.

For most restaurants, the food portion of the business simply pays the overhead as they break even. The profit driver is liquor. A $7/glass of wine has almost no maintenance associated with it. The glass gets washed. The wine gets poured. If you don’t sell out that night, the wine will be just fine the next day, year and decade. So, on the $7 glass of wine, the cost is likely $1 or so and if you’re lucky your customers order a lot of wine.

Touring pro

Believe it or not, a golf touring pro is an entrepreneur. They make no salary. They pay for their own travel. They pay their caddie a commission on winnings but the caddie himself usually has to pay for his own travel and travel the way those guys travel on the PGA tour is not cheap. Tiger is an enormously successful entrepreneur. Each week for a long time he won tournaments and closed lucrative sponsorship deals with AT&T, Accenture, EA Sports, Nike, and others.

The top 100 entrepreneurs on the PGA tour earn a couple million dollars a year. Unfortunately for them, most entrepreneurs only survive in that brutal climate for a few years. For many, they don’t make enough money winning tournaments so that they don’t need to work. Consider Player X. He graduated ASU, made it on the pro tour and earned the following for 6 years: $500,000, $800,000, $1.6 MM, $2 MM, $1 MM, 0) That player earned almost $6 MM on golf tournaments and sponsorships. That sounds like a lot of money but in fact it isn’t. After taxes, that $6 MM is about $3 MM. Additionally, he would have paid in caddie fees between 5 and 10% of his winnings and would have had travel and other expenses in excess of $1MM. So his $6 MM, after everything, netted him $2 MM.

What did he do with that $2 MM? He bought a Porsche. Then, he bought another. He bought a home for $4MM, believing that the earnings would continue forever. When real estate values dropped, the $1 MM down payment he put on the home was nearly wiped out. After failing to make the pro tour and unable to pay his bills, he finds himself at 30 years old, unemployable in any other job than teaching golf. His total net worth is just enough to buy him a modest home in a modest neighborhood modestly.

Kids, don’t let this happen to you. The PGA golf tour is an amazing glamorous place for many. It is the aspiration of thousands of supremely talented golfers; but the reality that a few very blessed talents are actually able to create for themselves a high quality life experience by playing on it. So, if it is not obvious that you will likely give Tiger, Phil, Rory, etc. a run for their money by the time you are a senior in college, go sell bonds or real estate and use your great golf skills to make you real money. The twentieth best real estate broker makes 20X the money as the 100th best golfer.

Google founder

When things go really, really, really right, it is called Google. The two founders were not just brilliant but ungodly lucky and well-timed. They raised their initial seed/angel financing in a special form called a convertible note which converted into a “Series A” round at an astronomically high price. The way it works is that a group of angels collectively raises $3 MM. They give it to the founders. The note simply says that the $3MM converts into share ownership of the company at whatever the next round (likely funded by a professional venture capitalist) dictates. In the case of Google, the founders suffered very little dilution because they raised money in 1998 and 1999 at the peak of the insanity of the internet bubble. Subsequent rounds of financing were also raised at very high valuations. That is, at a valuation of $300 MM pre money, a company raising $100 MM, dilutes itself 25%. But, if a company can raise money at a $1 billion valuation, that same $100 million dollars only dilutes the founder/investors 10%. This was the story of Google and it is the reason that Larry and Sergey ended up being the wealthiest guys in Silicon Valley for a while.

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