Recap

This series aims to break the “Myth of Easy Money”, which is the idea that starting a business is a guaranteed way to make more money for less time and effort compared to working a job.

It approaches the topic solely from a money, time, and resource-based perspective, so any discussions about the emotional fulfillment of being an entrepreneur are out of scope.

For this series, Work is any activity that uses your time and your personal abilities (hard skills, soft skills, network, how you look, etc.). Investment is the deployment of your resources (money, land, your computer, etc.) to make a profit.

Work and Investment are the only two ways to make money. Business is not a third independent way of making money. It is nothing more than a combination of Work and Investment.

You can read the previous parts of this series here:

Business and the Myth of Easy Money (Part 1: Defining Business)

Business and the Myth of Easy Money (Part 2: Misconceptions About Business)

Why Start a Business?

Previously, we discussed how entrepreneurship is not a guarantee of a high income.

Contrary to believers of the Myth of Easy Money, most businesses do not break the laws of economics. To increase your income, you must generally give Work or Investment in return.

This can be discouraging. Why would I go through the hardships of entrepreneurship if I can get similar returns from Working a job and Investing on the side?

For this article, I’ll balance things out by talking about the good side of business. The Myth of Easy Money may be a massive lie, but there are in fact monetary benefits that you can only get by starting a business.

The Four Benefits of Starting a Business

Business is composed of Work and Investment. We can, therefore, categorize the benefits of starting a business according to these 2 components.

The two Work advantages of starting your own business are:

1. The ability to Work a job you're unqualified for on paper: the job of CEO.
2. The ability to Work on raising capital.

The two Investment advantages of starting your own business are:

1. The ability to Invest in underdeveloped industries.
2. The ability to Invest in a business with a competitive advantage.

The Work advantages of business maximize your skill and effort expression, giving you the chance to make a greater income for doing harder work compared to most jobs available to you.

The Investment advantages of business show the few times when your Investment capital will make a greater rate of return compared to the market average. The Myth of Easy Money is false in almost all cases, but these are the two rare instances where it is true.

Let's explore each of these advantages.

Work Advantage 1: The ability to Work a job you're unqualified for on paper (i.e. CEO)

The first (and most common) Work advantage of starting a business is the ability to Work as CEO - a role that many would be unqualified for on paper.

The compensation you get from any kind of Work will tend to be proportional to the value of the skills you bring to the job and the amount of time you're willing to spend. As an equation:

Work Income = (Applied Skill Value) x (Time Applied)

“Skill” includes everything you have as a person that brings in money. It includes non-technical abilities like your network, your participation in office politics, and so on.

If you take away all of a person’s belongings and assets, whatever remains will fall under “skill”. (I originally planned to use the term “Human Resources” but that seemed confusing.)

There are times when the jobs you can get don’t maximize all your available skills.

You might have the skills to be a CEO, but maybe you can't get promoted for a variety of reasons.

Some reasons include not having formal credentials (like an MBA), the industry having no openings, and upper management jobs just not existing in your realm of expertise (For example: construction contractors are mostly run by owner-managers, so openings for CEO are rare).

Starting a business bypasses this issue.

If no company will hire you as CEO, then you can make yourself a CEO by starting your own business.

Starting a business allows you to express your dormant Work skillset. If you apply the required skills to meet the customer demands of the industry, your company can earn good profits.

This is an important point: You must apply skills and time in your Work as CEO of your business.

If you choose to make a business in an industry where your skills are lacking, then don’t expect to win against your competitors who have decades of expertise.

I’m sure you’ve eaten in at least one place where the owner-managers clearly didn’t have the skills to run a restaurant. The food is mediocre, waiters are hard to call, parking is difficult, and so on.

You don’t go back to these places, and they never make it big. Most close within a year or two.

You are not entitled to payment merely because your role is CEO. You get paid business profits because of the value you add through your Work output. So you need to have and use the skills required to make your business of choice succeed.

Case Study: Factory Owner

Here’s a familiar story among Filipino-Chinese families:

An immigrant who never finished elementary school finds himself in the Philippines, unable to speak the local language.

He gets a job at a factory, at first working the assembly line. As the years pass, he takes on different roles and learns everything he needs to know about how factories work. He even learns Tagalog and gets to know the customers of the factory.

He eventually becomes an operations manager. He wants to do more than that.

However, he is too uneducated to get a high-paying job as the CEO of a big factory. His resume as a mere elementary school graduate puts him at a severe disadvantage against professionals with master's degrees and six-sigma black belts.

He has the skills and the experience to do the job, but he lacks the education to get hired for a high-paying role.

The solution? He makes his own factory.

It's the hardest thing he ever does. He has to sleep on the factory floor and help produce the orders himself for many years, frequently eating nothing but soy sauce and rice. It is a living hell that consumes his life for a decade or so.

But because he uses all the skills required of the industry - sales, marketing, HR, operations, maintenance, quality control, finance, etc. - he's able to build an adequate team and lead his company in the right direction and profit.

By deploying every atom of Work capacity he has - both in terms of time/effort and in terms of skill - he’s able to meet the industry’s requirements for a viable business.

As a result, over time, he's able to create a much larger income compared to his original factory job.

By starting his own business, he was able to give himself the job of CEO. And because he had the skills to make his Work as CEO productive, he was well compensated through the profits of the business.

Business is a great way to deploy your dormant Work skills.

If you have skills but lack proper qualifications to use them in high-paying roles, starting a business can be a great way to create your own high-paying CEO role.

It's not free money. As CEO of your own company, expect to Work harder than you ever have your entire life.

However, if you have the skills for it, applying all of your Work abilities in a business context can be profitable.

Work Advantage 2: The ability to Work on raising capital

This advantage is a subset of Working a job you aren't qualified for on paper. However, it's an important enough skill to deserve its own category.

If you have industry skills and connections but lack capital, then starting a business gives you the opportunity to Work on raising money from others.

This is an important advantage of starting a business because all else equal, a business making more money will be able to afford to pay its CEO a higher salary, and income is a function of the amount of assets a business has.

Here’s some data from 2023 highlighting this dynamic in the Philippine banking sector:

Case Study: Silicon Valley

Most huge Silicon Valley startups make use of this Work advantage.

A founder brings skills and vision to the organization, partnering with venture capitalists to get the funding to succeed.

Because they apply their Work skills to enterprises with hundreds of millions of dollars of assets, their total compensation is huge.

Most of you reading this probably don’t have plans to build a massive startup though, so let’s apply this advantage to a more mundane industry.

Case Study: Real Estate

Let's say you're skilled in handling real estate projects and you want to develop a townhouse.

However, you lack capital. So you ask your friends and family to invest in exchange for a profit split you all find fair (For example: Perhaps 10% of the company’s equity could go to you for doing everything). Then you set up a shared corporation, and get to Work.

As a result, you're able to apply your real estate skills to a large amount of capital, making money for your shareholders and yourself.

Your income from the project becomes a function of the capital raised and your ability to squeeze profits out of said capital. The more money you raise and the better CEO Work you do, the higher your income.

This model can apply to any business where you have skills but capital is required.

It can be anything: factories, restaurants, laundromats, etc.

If you can use other peoples' money effectively, this Work advantage applies to you.

By raising capital from others, you can scale your business to increase your compensation as a CEO.

Those are the 2 Work advantages of starting a business:

• The ability to Work a job you're unqualified for on paper
• The ability to Work on raising capital

Business lets you maximize the deployment of your skills and effort when your employment options limit you to only applying a fraction of what you're capable of.

The Myth of Easy Money claims that business has a higher earnings-to-effort ratio compared to employment. While this is untrue in almost all cases, you can still make a lot of money by cranking the "effort" part of the "earnings to effort ratio" to levels you've never thought you could experience.

As an analogy: Farming 1 hectare of soil will only ever give you 1 hectare of crop.

The idea that you can make 2 hectares of crop with 1 hectare of soil (i.e. The Myth of Easy Money) is wrong in almost all cases.

But if you’re hardworking and persistent enough to do it, you can always choose to manage 10 hectares of soil to get 10 hectares of crop.

It’ll take a lot of effort, but that’s the only way to get 10 hectares of crop if you’re dealing with soil.

Businesses tend to follow a “law of equivalent exchange”.

To get a certain amount of output, you will need to put a certain amount of input through Work and Investment.

To make money, you must be willing to pay the price. And making a business allows you to pay the Work side of that price all day long.

This is essentially the Work advantage of starting your own business: You get to Work as much as you want to.

If you're willing to take on the Work of CEO:

• Handling suppliers who send subpar product
• Hiring and firing employees (including the first hires you’ve grown attached to!)
• Handling audits from the tax man
• Grinding to make sales just to keep the lights on, meet rent, and meet payroll
• Taking zero vacations because the business relies on you
• Managing cash flows
• Having a thousand tasks in mind 24/7
• Tracking competition
• Collecting receivables from customers unwilling to pay
• Handling unreasonable customer requests and complaints
• Taking the time to upskill and study industry trends
• Handling any facilities problems like fires, floods, and earthquakes

…and so on (it’s an endless list)…

AND if you have the Work skills to make a team that chooses all the right decisions for these issues, then your business might actually make a profit.

Because of the opportunity to Work infinitely, business lets you apply dormant skills that a job wouldn’t have made use of. This lets you make a great income if your skills and efforts let you make profitable sales running your own business.

Moving on to the Investment-related advantages:

Investment Advantage 1: Investing in underdeveloped industries

Most businesses in mature industries will have average levels of profitability at best.

This is because highly profitable industries attract competition (“That looks like a good business! I should get into that!”), and competition lowers profits through market share dilution.

In most cases, when the profits of each player get low enough due to the sheer number of competitors, the industry stops being desirable. This leaves all industry participants with average levels of profitability.

Underdeveloped industries can be temporarily highly profitable.

If you’re the first to offer a product or service that clicks with a market, there can be a temporary window of massive profitability while your industry’s supply (i.e. the number of competitors) has not yet caught up with the market’s demand.

This is the first Investment-related advantage of starting your own business: You can make a lot of money in underdeveloped industries before other competitors come in and take your market share.

Usually, this type of Investment can only be had by starting your own business.

Why? Because an underdeveloped market means that there are barely any businesses in the industry. You usually can't Invest in such businesses because they don't exist. And that lack of businesses is itself what makes the industry profitable to enter, because that means you have little to no competition.

Case Study: Hot Pot in Metro Manila

Hot pot is a massive trend in Metro Manila right now. However, there was a time when they were rare.

The first hot pot place I tried in Banawe always had long lines. Wait times of 1 hour were common. Clearly, they were making insane amounts of money.

Competitors probably saw this and made their own restaurants. Now, hot pot places are everywhere.

I never drive to that restaurant in Banawe anymore. I just go to a nearby mall instead, where there are 2 hot pot restaurants 100 meters apart. To illustrate how congested the hot pot market has become, check out this Google Maps screenshot for the search term “hot pot”:

The lines in hot pot restaurants aren't as long as they used to be. I frequently see empty seats when I dine in these restaurants. Profitability per hot pot restaurant is lower because market share is diluted by competition.

Still, while the first restaurants aren't making as much money now, they definitely made their initial Investment many times over during the golden days when there were only less than 10 hot pot restaurants in all of Metro Manila.

Early movers were rewarded massively for a short time because they took the plunge and went first. By being the only supply in an underdeveloped market, they soaked up all available demand.

Case Study: Filipino Business in the 70’s

You'll also see this Investment-related advantage when you hear old people talk about how business used to be in the Philippines. Markups of 500% were not uncommon back in the 70's, even for commodity goods like paper and cement.

Back then, the only requirement to make absurd amounts of money in business was to exist. I once heard a story about someone back in the day buying typewriters for 1,000 pesos each then selling them for 15,000 pesos a piece. It's insane to expect to make such margins off commoditized products today.

The supply-demand dynamic for the entire Philippines was so imbalanced in the 70's that most business people in almost all product categories had profit margins like this.

It was such a widespread phenomenon that I suspect this temporary window of profitability was the source of the Myth of Easy Money locally that haunts us today in 2024.

Recently, I heard of a man who used to do business back in the 70's.

Earlier in 2024, he opened a tire store. He didn't do any marketing, didn't have specialized service people, didn't have a business phone number, and wasn't even listed on Google maps. All he had was a store by the roadside, and a sign that said "Tires for sale".

He was incredibly confused as to why people weren't flooding his store with purchases.

He'd gotten so used to the idea that a business is entitled to customers by merely existing. Little did he know that between 1970 and 2024, the Philippine business scene evolved and became competitive. Other tire stores now have Facebook accounts, specialized mechanics, modern installation equipment, and so on.

This man believed in the Myth of Easy Money - that businesses always profit just by existing. In reality, his experience in the 70's was just the temporary effect of an underdeveloped market.

Still, those old businessmen all got rich!

Even if money isn't easy to make anymore (the majority of these supply-demand imbalances have already closed), a good number of businessmen during the 70's made enough money at the time to be set for life.

So that's the first way to make outsized Investment returns from business: Start a business in an underserved market and sell as much as you can before competitors enter and the supply-demand imbalance disappears.

Investment Advantage 2: Creating a business with a competitive advantage

In most schools, the term “competitive advantage” often gets misinterpreted to mean “anything the business is good at”. Students claim that things like "caring for customers", "being fast", and "having smart employees" are competitive advantages

None of these are competitive advantages.

A competitive advantage is any factor that limits competition.

Under normal circumstances, if you have a business that's making a lot of money, competitors will come in and try to make money as well. This dilutes your market share and reduces your profitability.

A competitive advantage is any ”advantage” that stops competitors from entering your industry and being “competitive”.

The classic competitive advantage is the government-backed monopoly.

Your local water utility probably doesn't have any competitors because the government doesn't allow it. This allows the utility to pass huge markups and make insane amounts of money without having to care about competitors providing better services or cheaper prices to take market share.

They have so much power that the government has to regulate them to make sure consumers aren’t being ripped off.

There are also competitive advantages that have nothing to do with the government.

For example, if your corporation uses ERP software, it's incredibly hard for the organization to migrate to a different software even if the alternative is superior.

This is because of the “switching cost” competitive advantage. You’ll have to re-format all your data and re-train all your employees if you want to use a different software. Your switching costs are high, making it difficult for competitors to sell to you.

Competitive advantages are the only way to sustainably get more profits for less effort.

The importance of competitive advantages cannot be overstated.

Business is a multi-player competitive environment. This means you cannot survive just being excellent at what you do. You must also be better than everyone competing against you. Why would a customer buy the second-best available product when they can buy the top 1?

In regular industries, businesses will keep trying to one-up each other for market share. If you're the top 1 option today, you can bet that there is a business out there trying to take your spot. The leaderboard is in constant flux, like a never-ending game of King of the Hill.

Malls are renovated every few years to attract foot traffic. Factories keep buying the latest machines to be faster and of higher quality than the next guy. New nightclubs become the place to be in, putting old nightclubs out of business. Faster, cheaper; better - it never ends.

For companies with competitive advantages, however, this isn't the case. Such businesses have structural advantages that prevent competition from entering the market, keeping profits high.

Case Study: Windows OS

An example of a competitive advantage is the Network Effect. This is when the value of a network is increased by the number of its users, reducing the competitiveness of new entrants who have no customers.

The Windows OS is a great example of this.

Most people use Windows PCs. Because of this, more developers choose to make Windows-native apps instead of developing for other operating systems.

Then because Windows has more apps and games compared to Mac and Linux, more people choose Windows. It's a cycle: more users, more developers, more users.

It's very difficult to launch a new computer OS because Windows already has a thriving ecosystem of apps and games, which makes Windows the first choice for many computer buyers. This is why Windows owns over 70% of the desktop operating system market as of June 2024.

Their Network Effect competitive advantage gave them most of the market share in the industry, allowing Microsoft to regularly hit returns on equity 20% or greater for multiple decades. A normal business would be happy just to hit 10%.

Starting a business with a competitive advantage is incredibly rare.

It's so rare that the majority of them become household names: Coke, Amazon, Visa, Jollibee, Meralco, San Miguel Beer, and the list goes on.

However, if you have the skill and vision to pull off a business that secures a competitive advantage, you stand to make insane amounts of money relative to your Investment.

Conclusion: Reasons to Start a Business

The Myth of Easy Money says that you can always get easy money from making a business. We showed in previous articles that this isn't the case.

Business tends to follow the laws of economics, and a certain amount of input in the form of Work and Investment will tend to return an equivalent reward.

However, even if most businesses don't just magically print money, business does have some unique advantages that are very difficult to replicate in employment:

1. The ability to Work a job you're unqualified for on paper: the job of CEO
2. The ability to Work on raising capital
3. The ability to Invest in underdeveloped industries
4. The ability to Invest in making a business with a competitive advantage

If you're willing to do hard Work but find that you can only use a fraction of your skills in a job, starting a business can be one way to deploy your dormant skillsets. This gives you the opportunity to create more value and therefore make a higher income -- if your skills and efforts translate to profitable sales to customers.

If you find very rare opportunities to Invest in low-competition industries - whether through temporarily underdeveloped industries or through longer-lasting competitive advantages - you can make outsized returns by starting businesses in these industries.

Even if the Myth of Easy Money is generally untrue, entrepreneurship can still be very rewarding if you put in the Work or make abnormally good Investment decisions.

Just make sure to set your expectations properly, and don't go into business expecting it to be easy, free money.