Choosing between wealth and control

You're an entrepreneur. You identify a problem, come up with a solution, and then launch a business to deliver that solution to the marketplace. And as the company grows, you continue to exercise control over every aspect of it, because after all, it is your idea and your solution, so there is no one better to ensure the vision of the company than you, it’s creator.

Until you’re not.

Many startup founders desire to maintain control as the primary means to achieving their goals with their business. One of those goals, of course, is solving that problem on which the company is built. However, many of the other goals are much more personal. Things like personal pride and wealth, for example, come to mind. Thanks to men like Jobs, Gates, and Zuckerberg, almost every first-time entrepreneur has aspirations of building something big by controlling everything and then gaining fame and a fortune when the company goes public.

It rarely happens.

Pride and personal recognition have fanned the flames of more crashing businesses, than the successful companies those same goals have fueled. Control is the problem for founders who, like Yertle in Dr. Seuss’s Yertle the Turtle, desire “to be king of all they can see” (Geisel, 1958). A king might see the wealth in the distance, but eventually, somebody sneezes, the king loses control, and everything comes tumbling down.

Being a king and building wealth are not mutually inclusive. Some research suggests that if you focus on maintaining control of your business you may become king, but it is unlikely you will ever create significant wealth. And if you focus on building wealth, it is inevitable that you will give up control (Wasserman, 2012). It is rare for an entrepreneur to maintain control and achieve wealth.

Here’s why: Like it or not, your business will inevitably outpace your skills, abilities, and expertise. If you believe controlling all aspects of the company will ensure your success, it is unlikely you’ll recognize when your company has outgrown you. You might be the king, but you’re likely to have little else. Plus,...

The Entrepreneur and the Sunk Cost Fallacy

If you’re an entrepreneur and you’re not familiar with the term “sunk costs” you may have a problem.

A “sunk cost” is any past cost for something that you’ll not be able to recover. Typically, sunk costs are not included when making forward-looking decisions because those costs will remain the same regardless of what you may choose to do. In manufacturing, for example, a sunk cost might be the cost of equipment because it is a cost that has been incurred which will remain constant regardless of whether that equipment produces any product.

Think of it this way: It’s money you needed to spend that you’ll never get back.

The problem for most of us is that our forward-looking decisions become too tied to those sunk costs. We often become emotionally invested and the more investment we make, the harder it becomes to divest ourselves from those costs. In these situations, it is difficult to consider the pros and cons objectively. Instead, we try to recoup sunk costs, which makes us do irrational things.

Researchers Hal Arkes and Catherine Blumer argue that when we continue a behavior or work because of our previous investments of time, money, or effort, we fall victim to what has become known as the sunk cost fallacy (Arkes & Blumer, 1985). We place such a high value—either monetarily or emotionally—on those investments that we irrationally behave when faced with a decision that devalues those prior investments. Moreover, we look for ways to justify our choice rather than accepting the sunk costs as what they are—money we can never recoup.

Let’s look at it a more personal way.

Say you bought a quart of your favorite yogurt at the grocery store. It’s been in the fridge for a few weeks unopened, and putting away the dinner leftovers you spot it and realize that yesterday’s date is the “use by” date on the package. Concerned that it will spoil, you open and eat as much of the yogurt as you can—maybe even all of it—even though you’ve already had dinner because you’d rather do that than “waste your money” on food that will...

Interview: Jim Mitchem on Entrepreneurship

Jim Mitchem, an author, and partner with branding firm Out of the Ether, and I explore starting a service business, the willingness to take risks, branding, continuous self-improvement, and many other things in this interview for my Everyday Entrepreneurs podcast.

 

You can listen below on Soundcloud or subscribe to the podcast on iTunesGoogle PlayStitcher, or wherever you get your podcasts.

 

You can learn more about Jim and read his personal essays and poetry at Obsessed With Conformity. You can also find him on Twitter @jmitchem