Do you want a Billion or a Million?

Legend tells us that the same amount of effort is required to build a Billion Dollar business as a Million Dollar business, so you may as well aim high.

I just can't believe that can be true. 

Maybe I don't believe it because I haven't built a Billion Dollar business. But, if were true, surely more people would be running Billion Dollar businesses? 

Maybe it is the same amount of effort, just a lot less likely to happen. Do investors tell the story because they prefer to aim for 1000x upside with only 100x more risk? Is that extra risk acceptable for a founder?

The downside for investors is expected. They lose some money. But, it's Early Stage business, the highest risk asset class there is, and a diversified High-Risk portfolio is usually less than 5% of the investor's net worth and the business that fails is only one of 20 in the portfolio.

It's a lot easier for the investor to take on extra risk, especially when returns scale-up profitably. However, a founder might be risking 100% of their Net Worth and "failure is simply not an option".

Would you rather take a 0.1% chance of making a Billion Dollars or 90% chance of making a Million Dollars?

I know the mathematically correct answer, but I've thinking about this in the context of what your goals might be when starting a business. I start with a question:
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​HOW MUCH MONEY DO YOU NEED?

There are many reasons why someone starts a business:

• create positive social impact
• solve a problem
• help the community, create jobs
• follow a passion, become a leader
• create a flexible lifestyle
• creative expression or leave a legacy
• learn new things, etc

All this can be achieved in many ways, but the key aspect of a business is achieving these goals within a commercial framework. Founders are, by their very nature, ambitious people and I don't expect their financial goals are minimum wage equivalent. Most would want to become "rich" along the way. What exactly does that mean?
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Here is what I thought about in order to quantify my answer:

How does ASIC define it?
To qualify as a Sophisticated Investor in Australia you need $250k annual income or $2.5M in net assets. (1)

Net Assets for Retirement
​ASFA estimates the average superannuation balance required to achieve a comfortable retirement would be $640,000 for couples. (2)

However, Nathan Zahm, investment strategist at Vanguard, recommends a balance somewhere between $800,000 and $1.6 million. (3)

These figures assume that a retiree owns their own home outright and is in reasonable health.

Net Worth in Australia
The average net worth for all Australian households in 2017–18 was $1.0 million. (4)

The top 20% are known as "high wealth households" and have average net assets of $3.2 million. (4) Which matches pretty closely the $1.6 million figure above.

Assuming a $1.2 million home, this requires $2 million in other assets.

Income In Australia
The mean weekly household income is $2,242 ($116,584 per year). While the median (50th percentile) is $1701 per week ($88,500). (4)

According to the 2017-18 Survey of Income and Housing, Australian households that earned $4275 a week were in the 90th percentile, which means they are in the top 10 per cent of income earners in the country. If your goal is to be in the top 10% of earners you need annual income of $222,300 before tax. (6)

If your ambitions are loftier, the top 0.2% of the population have annual income of $416,000 or more. (7)

Rich Lists
AFR Rich List 2019 shows you need $472 million to crack the top 200 in Australia and get onto this list. (8) The average age is 66 and encouragingly, 150 of the 200 are "self-made".

The Rich List shows the richest 0.0008% of the population.
Spending just $1350 on Powerball tickets would give you about the same 0.0008% chance of winning $150 million, with a lot less effort than running a business. (It's one ticket per week for 20 years.)

One wonders how realistic a goal (remember SMART goals?) it is to get onto this list.

So what's my answer?
I suggest founders first target $90,000 annual income with a goal to reach ~4x around $350,000.

Accumulating (before you are 65) around $7 million in assets would allow you to retire and (at 5% yield) retain an income at around that $350k. Sure, you need to do this 67 times to get onto the Rich List, but it's a good start!

Put this into perspective. You'd be 2x the average of the top 20% of Australian households. Australia being the 21st richest country in the world and an average Australian is already in the top 1% wealthiest worldwide. (5)

Translate that into Business Revenue
A $2m revenue business (6.9% of all Australian businesses generate >$2m) should be able to generate $350k in profits. You could sell this business, but it would be unlikely to provide your entire asset accumulation budget. But, run it for 10 years and invest your profits and you'll be there.

Let's say your business is your entire asset portfolio and you draw minimal income, you probably want to grow business revenue to between $6 - $10 million (2.95% of businesses reach >$5m) to get a trade sale and bank your $7m in cash. (9)
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Interestingly, businesses between $5m - $10m in revenue have the highest survival rate.

In Summary
I'm confident working with any great founder to become a top 3% business.
I don't concern myself with hunting Unicorns (0.01% of all businesses). 

To keep the downside risk small and ensure Founders always win, I like to see Early Stage startups with a 90%+ chance of reaching $2m in revenue. They should also have a 50%+ chance of reaching $10m and then if there happens to be a 0.1% chance of $100m, well that's just icing on an already delicious cake.

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References:
1. http://www5.austlii.edu.au/au/legis/cth/consol_reg/cr2001281/s6d.2.03.html
2. https://www.superannuation.asn.au/resources/retirement-standard
3. https://www.intheblack.com/articles/2019/08/01/how-much-super-do-you-need
4. https://www.abs.gov.au/household-income 
5. https://www.investopedia.com/articles/personal-finance/050615/are-you-top-one-percent-world.asp
6. https://www.news.com.au/finance/work/how-does-your-income-compare-to-others/news-story/0ce60a9a6f433a765fe77a6c440b52b1
7. https://profile.id.com.au/australia/household-income?BMID=250&WebID=260
8. https://www.afr.com/rich-list
9. https://www.asbfeo.gov.au/sites/default/files/documents/ASBFEO-small-business-counts2019.pdf