Most people believe that only the Bank of England can create money. Many people also believe that high street banks can only lend money if they have enough savers’ deposits to lend from. But as I’ll explain shortly, both views are mistaken.

It’s true that once upon a time that’s how things worked. A central bank like the Bank of England had a monopoly on money creation and prior to 1931, this money was pegged to gold reserves.

Meanwhile, high street banks could only hold bank deposits in the form of savings from customers. And since savers rarely need all their money at once, banks would profit by lending out a portion (or multiple) of customer deposits at a higher interest rate than that offered to savers.

This isn’t how money works in the UK economy today. The reality is stranger than intuition would suggest. I certainly wouldn’t have believed the mechanics either had I not read a full account of the process in a 2014 bulletin published by the Bank of England itself.

It turns out, the Bank of England hasn’t got a monopoly on money creation. Commercial banks such as HSBC, Barclays, and Lloyds all create new money every time they issue a loan. They create this money as a digital entry that represents a new bank deposit for the borrower. So if I take out a loan of £1,000 from a bank, here’s what roughly happens:

1. The bank creates a new digital bank balance of +£1,000 in my account. It doesn’t need to draw from customer savings to create this balance. It just makes a digital entry.
2. The bank recognises a new ‘asset’ in its accounts because it now expects a future repayment from me that’s worth £1,000.
3. The bank also recognises a new matching obligation (or liability) of £1,000. This is because it has made me a promise—an I owe you (“IOU”)—that I can go to a cash machine and withdraw £1,000 in hard cash if I wanted. I can also send some or all of this digital IOU to others as payment for goods or services. This would transfer the IOU made by the bank to me, to an IOU the bank makes to another individual or business.
4. When I repay the loan, the new money that was created by the bank is cancelled out and destroyed. Any extra bits I repay as interest are kept by the bank as profit. Such earnings are usually held by the bank as ‘capital’—amounts which ultimately benefit the shareholders and other funders of the bank.

When I learnt about this process I expected these digital bank deposits to be a small fraction of money in the UK. But this expectation is wrong. Digital bank deposits make up the majority of money in the economy.

According to the Bank of England, around 80% of all money in circulation is created digitally by commercial banks. The remainder takes the form of currency (banknotes and coins) and central bank reserves (electronic money that commercial banks hold with the Bank of England). These make up around 3% and 18% of money in the UK economy respectively and only the Bank of England can create them.

If we focus on just the money that people and businesses use (so if we exclude central bank reserves), digital bank deposits make up 96% of money while just 4% is physical currency.

The curious among you will now have more questions about how all this works.

• Do banks create money from thin air?
• Is your personal income in the bank ‘real money’?
• What stops high street banks from creating too much money if issuing loans isn’t restricted by lending from customer deposits?
• Where does the Bank of England fit in? Does it also create money from nothing given it doesn’t hold gold reserves for every pound sterling?
• How do banks fail?

These are all good questions. I got sucked into a rabbit hole of inquiry trying to answer them and the next 3,000 words reveal what I found.

The following section will condense a lot of complexity but if you can get through it, you’ll know more about how money works than 85% of politicians in the UK and probably over 90% of the general public.

We start with some key definitions before moving onto the questions of how money works in practice.

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Key Definitions

Money

Money is just an “I owe you” (IOU) that’s easy to move around. It’s a recorded promise to deliver value in the future but critically, if everyone trusts the issuer of that promise, you can exchange that IOU directly with other people for other goods and services.

Early versions of this system can be traced back to English goldsmiths in the 1600s. You could store gold or silver with them and they would issue a “promissory note”. This piece of paper promised that you could withdraw your precious metals from a secure vault at some point in the future. Since other people also trusted goldsmiths, you could trade your promissory note with other people directly for other goods, rather than go back to the goldsmith to fetch your gold or silver for trade. Promissory notes were IOUs that were easy to move around, just like today’s money.

The best IOU object—whether it’s digital or in paper form—does three things well. First, it reliably stores value over the long term. Second, it’s accepted by everyone as medium of exchange. And finally, it’s used everywhere as a unit to measure the value of goods and services.

Modern money achieves all these functions wonderfully. It’s a trusted store of value (so I trust that the Bank of England will protect it from losing its worth); it’s accepted as a medium of exchange by everyone (and more importantly, it will always be accepted by the UK government when I pay my taxes); and finally, everything I buy or sell is valued and denominated in pound sterling, not some other unit of account.

Bank Deposits

A bank deposit is a digital form of money. It’s an electronic IOU that you hold in your bank account. It’s created by high street banks every time they issue a loan and it’s distinct from currency (which we’ll cover shortly.) As I shared earlier, bank deposits make up over 90% of all the money that people and companies hold in the UK.

‘But if this money is created when banks issue a loan, what are my savings then?’ you might ask. We’ll answer that in the questions section later. For now, just know that bank deposits are digital IOUs created by the likes of HSBC, Barclays, and other banks.

When you take out a loan, a bank just makes a digital entry that represents an IOU to you. It’s a promise of value from a bank that you can cash in (literally) when you decide to withdraw that loan as physical money.

These digital IOUs are easier to move around than physical money. So instead of withdrawing cash and paying for goods, you can just wire a portion of your digital IOU to someone else’s bank account. In that instance, what the bank owed you becomes something the bank owes to the recipient of your payment. And since everyone trusts that these digital IOUs can be converted to cash, they are widely accepted as money. The Bank of England also provides further security: If a bank fails, up to £85,000 of your bank deposits are guaranteed by the government.  

Currency

This is basically cash. It’s a physical record of an IOU from a central bank. It comes in the form of banknotes and coins that are manufactured and backed by the Bank of England. Only central banks can create this type of money and it represents just 4% of all the money that households and businesses have.

High street banks always have some currency to meet daily customer cash withdrawals. They buy it from the Bank of England using central reserves, which I’ll define next.

However, banks don’t need large holdings of currency because it’s unlikely that all customers would ever want to withdraw their full bank deposits at the same time. In addition, most people and businesses prefer the convenience of digital bank deposits. Currency is falling out of favour as you can see from the BBC chart below.

Central bank reserves

This is digital money created by the Bank of England for use by commercial banks only. Since a Barclays can’t create money to pay a Halifax or vice versa, central bank reserves are used as the ultimate settlement medium between banks. These reserves can also be exchanged for currency so that banks can meet customer cash demand.

How is central bank money created? Here’s a quote from a Bank of England handbook that explains the process:

“Unlike banknotes there is no physical cost to producing reserves, the central bank can create reserves simply by pressing a key on a keyboard to credit a commercial bank account.”

In other words, central bank reserves are created digitally, just like the money you have in your bank account. The main difference is that only banks can use this money. We’ll look at an example of this use later on.

Central bank

Each country has a “central” bank that manages its currency. In the UK we have the Bank of England (sometimes known as “the Bank”—with a capital “B”).

One of the Bank’s primary objectives is to help keep the value of money stable and to make sure there isn’t too much or too little of it. Without this stability, few people in the UK would adopt the pound as a medium of exchange or as a store of value.

The Bank can influence the stability of money by adjusting interest rates or creating more money (some people refer to this as “printing money” but the Bank does it digitally). You can read about how interest rates impact the economy here and how creating more money can stimulate spending in the economy here.

Although the Bank of England is owned by the UK government—and it returns most of its profits (around £400m per year) to HM Treasury—it’s independent from it. What does that mean in practice? Here’s a quote from the Bank’s website:

“Independence means that we can promote the good of the people of the UK by maintaining monetary and financial stability, free from political influence.”

Commercial (or high street) banks

This is all the banks you know, such as Monzo, RBS, Lloyds, Barclays and others. They are formally designated as ‘credit institutions’ and have permission from regulators to take deposits, make loans, and create new money.

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Now that we know the different types of money and the distinction between central banks and high street banks, we can look more closely at how money works in practice. We’ll do that by addressing six key questions on the process.

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FAQ on How Money Works in the UK

Do banks really create money from thin air?

No. This is because money is always linked to an IOU—a promise to deliver value at some point in the future. A brief historical detour on money makes this point clear.

Hunter gatherers didn’t need money (or IOUs) because they provided everything for themselves. But as life got more sophisticated, barter trade emerged. People would now trade various commodities for items they couldn’t get themselves, such as salt in exchange for clothes or spices for weapons.

This method of exchange only worked up to a certain point though. For example, if I needed to trade my ripe tomatoes today but I wasn’t sure what else I needed and when I needed it, my produce would go bad or I’d have to get spices or salt that I didn’t need.

This is where money as an IOU comes in. Rather than barter trade my tomatoes for a random commodity I didn’t need, I could go to a trusted party and get an IOU in exchange for my tomatoes. The issuer of the IOU would then promise to deliver some equivalent value to me in the future. Meanwhile, I could hold onto the IOU or trade it for other goods as long as other people trusted the IOU issuer as well.

This is what modern money enables. It transforms value into an easily exchangeable object that can move across time and space.

So when a bank issues a loan and creates a bank deposit, it isn’t really creating money from thin air. Instead, it’s transforming a borrower’s future ability to repay into an object that can be used today. Repayment is crucial and it’s why banks run credit checks to make sure borrowers can pay back their loans. Banks also charge a high enough interest on loans so that profits from lending can cover losses on the few debts that go bad.

Put in simpler terms, money used to be created by linking it to gold or some other precious object. Today, it can also be linked to someone’s ability to generate value in the future. Therefore money isn’t made from nothing. It’s always linked to value somewhere.

What stops banks from creating as much money as they want?

Commercial banks can’t issue loans and make new money without limit because doing so would put them out of business. There’s a variety of ways this can happen but let’s look at three factors that protect against this.

1. Regulation (by the Prudential Regulation Authority) – Commercial banks are highly regulated and there are rules on how financially sound they need to be. More specifically, if a bank lends too much money, it exposes itself to more risk of losses from loans that go bad. Such a bank would therefore need larger buffers of its own funding (i.e. ‘capital’) that could absorb potential losses. If the bank failed to secure enough of a buffer—as is required by regulators—it could lose its permission to operate. Here’s a recent example where regulators asked Monzo to increase its ‘capital’ to guard against potential losses.
2. Market forces (from other banks, businesses, and households) – A bank can only lend money if it has borrowers to lend to. And not just that, but the pool of credit-worthy borrowers is limited. So even if a bank finds enough good borrowers, it has to compete for them against other banks. One way it can do this is to offer loans at low interest rates. Yet, if the rates are too low the bank would risk making losses that could put it out of business. Lending (and money creation) is therefore limited by the opportunities a bank can find to lend money at a profit.
3. Interest rates (set by the Bank of England) – Another factor that influences the amount of money creation is the interest rate the Bank of England pays on central reserves held by commercial banks (i.e. the “Bank Rate”). You can read more about this here but the basic principle of this factor is this: If there’s too much money and lending in the economy, the Bank of England can raise the Bank Rate. This change usually flows through to the wider economy such that banks now have to pay more interest on savings and in turn, they have to charge a higher interest rate on loans. If loans are more expensive, less people will borrow money and that ultimately limits the creation of new bank deposits. 

Are the savings and wages in my bank account real money?

Yes. They are real money to the extent that whatever deposit you have in your bank account, other people and businesses can accept it as payment.

You might now wonder: “My employer pays a salary into my bank account without taking out a loan. They have accumulated their own deposits by selling products or services. So if my salary isn’t linked to a loan, where do the bank deposits from my employer come from?”

I couldn’t find a definitive answer to this in my research but here’s what I believe is happening. If it were possible to go back in time and fully trace the family tree of where a bank deposit in your account came from, you’d probably find that a loan sparked its creation.

Consider the following facts. At the time of writing this blog, the private sector (excluding banks) in the UK held around £3 trillion of money. Guess how much debt the private sector has? Put another way, how much money do people and businesses owe to banks? When I wrote this it was around £3 trillion also. The chart below shows what these figures looked like historically.

Remember, money is an IOU and the majority of bank deposits in the UK are naturally linked to debt. That debt is then transformed into digital deposits that spread throughout the economy. This includes the money sitting in your account today.

How do payments between banks work?

Since each bank creates money when it issues loans, there has to be a way to use the sums created at one bank as payment to another bank account. This happens in two ways.

First, banks can offset payments against each other. For example if I send £100 from my Monzo account to a Barclays customer, there will also be payments flowing in the other direction that can offset what’s owed.

In our example, let’s assume a different Barclays customer has sent £150 from their account to another Monzo user. We now have a situation where the IOU Monzo had with me (it owed me my £100 of savings) has been transferred to an IOU it has with Barclays.

Conversely, the IOU Barclays had to its customer of £150 has now been transferred to an IOU Barclays has to Monzo. Still with me? Here’s a visual representation of this.

Given these exchanges, the two banks can just net off the two amounts to arrive at a net obligation. In this case, Barclays has a net IOU of £50 to Monzo (and in turn, Monzo has that IOU to the customer who was sent the £150).

Notice that Barclays can’t just create new money to settle the obligation it has to Monzo. It has to use another resource. This is where the second settlement method between banks comes in.

All commercial banks have an account with the Bank of England that holds their respective central bank reserves. Remember we defined central bank reserves as money that the Bank of England creates specifically for other banks to pay each other. We’ll come to how this money is created shortly, but for now, just know that all commercial banks have a portion of their ‘worth and savings’ (in other words assets) in the form of central bank reserves. They can draw from this balance to settle obligations with other banks when the offsetting method isn’t sufficient.

In our example, all Barclays would now have to do is ask the Bank of England to send £50 worth of central reserves from its account to Monzo in order to settle its obligation.

I wanted to write more about this process because there’s more to it. But given the 4,000 word limit I set myself we’ll have to stop here. For those who are super curious though, here are some quick facts about bank settlement systems in the UK and the relevant links where you can learn more.

• High value transactions (on average £1m+ or for things like buying a house) don’t happen with the offsetting system I described earlier. Instead, they go directly through a Bank of England accounting system called ‘real-time gross settlement’. These payments are dealt with one-by-one but through a ‘clearing house automated payment system’ called CHAPS, which draws from central bank reserves.
• In 2019 CHAPS payments were just 0.5% of the volume of payments in the UK (around 192,000 transactions a day) but they represented 92% of all the sterling value (£83 trillion for the year or £330bn every working day.)
• You might have heard of payment technologies like Faster Payments or Bacs. These systems are not operated by the Bank of England and deal with smaller value transactions. They allow banks to offset amounts with each other first, and then the final net obligation is sent to the Bank of England for settlement with central bank reserves through its real-time gross settlement system.

How do commercial banks get central bank reserves?

High street banks accumulate central bank reserves in three ways.

First, they can receive payment from other banks in the form of reserves—we covered this in the previous section.

Second, and more commonly, banks can borrow reserves from the Bank of England for a six-month period. This lending doesn’t come for free though. Commercial banks must offer the Bank of England a high-quality asset that it will hold until the loan is fully repaid. This ‘collateral’ is typically a high quality financial asset such as a gilt (i.e. a government bond – this is an IOU of future payments from a government to the bond holder). The diagram below from the Bank of England visualises this process.

Finally, commercial banks can get more central bank reserves by selling high quality financial assets to the Bank of England. Again, these are usually government bonds or other low-risk assets.

How do banks fail?

There are two main ways a bank can fail.

First, if we all decide to go to a bank and withdraw all our deposits as cash today, the bank would face a ‘liquidity crisis’ and go under. This is because no bank actually keeps everything it owns in the form of central bank reserves or currency. The majority of bank assets are in a less liquid form (e.g. its loan book and other investments) but so long as people have confidence that the bank’s finances are sound, this liquidity crisis—or ‘a run on the bank’, as it’s better known—is unlikely to happen.

The second way a bank can fail is if it ends up in a situation where the value of everything it owns (its assets) falls below the value of everything it owes (its liabilities.) This can happen if a bank issues loans recklessly to lots of borrowers who fail to pay back what they owe. In that instance, the following would happen:

1. The bank would have more liabilities than assets.
2. It would be considered ‘insolvent’.
3. Investors who originally funded the bank (by buying its shares or lending it money) could force it to shut down and sell everything it owns so that they could recover their capital.

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That’s all for now on how money works in the UK. I left out a lot of detail to keep the blog readable but I look forward to discussing this with readers and friends.

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Bonus question 1: Why isn’t currency linked to gold anymore?

The ‘the gold standard’ was abandoned because it was too rigid. Fiat currency—so currency that isn’t pegged to an underlying asset—gave governments more flexibility in managing their money supply and ultimately, their economies.

In fact some economists argue that the gold standard made the great depression in the 1930s worse. Meanwhile the UK fared better because it was able to control its money supply without being tied to how much gold was available.

All told, pegging currency to gold risks more economic volatility and many governments prefer to have more control of their money supply than what’s possible with a commodity-linked currency.

Bonus question 2: If currency isn’t linked to gold, how can it be worth anything?

It all comes down to trust. And currency and central bank reserves are currently the most trusted IOUs you can get. They are a promise of value from the central bank and ultimately the government.

Moreover if I have £10 today, I trust that the Bank of England will always honour that value in whatever type of money they create in the future. I also know that the government will do what it can to help maintain its value over time and that it will always accept currency as payment for tax.

This—along with wide public acceptance of its worth—is what makes fiat currency valuable, even if it isn’t linked to gold or some other commodity.

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Ps. Other interesting things I discovered during my research.

• How does one interview for the job of Governor of the Bank England? Here are the answers Mark Carney had to give to a selection panel when he applied for and the job.
• What’s the most common banknote in the UK? The £20 note accounts for almost half of all banknotes in circulation in the UK economy both by volume and value.
• Will the Bank of England ever make central reserves available to the public and non-bank private sector? Possibly. Here’s a discussion paper from the Bank that considers the opportunities and challenges of a widely used central bank digital currency.

If you’re a startup founder, artist, investor, or anyone working on something hard, you’ve got to watch the HBO/Netflix documentary about Jimmy Iovine and Dr Dre. It’s not just about the music business either. The 4-part series is an extended biopic about two incredibly talented individuals who we think we know from their craft. Yet, by the end of the series you realise you did not know them at all.

If you watch the series you’ll come away inspired and appreciative of Jimmy Iovine and Dr Dre’s perseverance, creativity, and not least of all, humanness. Both of these guys worked super hard to get to where they are but they were also lucky. They messed up a bunch of times but they also sought redemption. And despite the extraordinary success of these individuals, the documentary shows that no one is immune from the rumbles and tumbles of life.

For all that, I enjoyed this documentary so much that I watched it twice. Along the way, I noted down quotes I found pertinent for my current field of work (venture capital and technology entrepreneurship) and have been meaning to post this blog for many weeks. Below I highlight some of these quotes with commentary but this is certainly no replacement for watching the series, which I highly recommend.

Investors: it’s not about you.

There’s a section in the series where a young Iovine, new to the studio and his role as a supporting record engineer, is complaining about how hard he had to work for the artist Bruce Springsteen, while at the time having nothing to show for it. At one point, and after endless and fruitless studio seasons, Iovine is ready to quit. But the co-producer Jon Landau interjects:

“Jimmy, you’re missing the big picture. What are we here for? We are here to help Bruce make the best record he can. That’s the job.

We’re not here to make you happy, we’re not here to make me happy. We’re here to contribute to the project and it’s Bruce’s project.

If you go back in and say to Bruce, ‘I’m here to support you. This is not about me, its about the album,’ you will have a friend for the rest of your life and you will have learned a big lesson.”

The relationship between a record producer and an artist is like that of an investor and entrepreneur. One helps the other in the process of creating something new. But its never about the investor or whoever is supporting the maker. Good investors—and as it happens, good music producers—know this. Here’s Dre:

“Every producer knows that you’re only as good as the artist that you’re working with, because that artist could either make or break you. No matter how great your track is, the artist that you’re working with or the writer that you’re working with has the ability to make it magic or fuck it up.”

Simply put, good investors support the entrepreneur and aim to do everything they can to help founders build the best businesses possible. It’s never about the investor. It’s always about the business.

Extraordinary success is impossible without luck.

Dre and Iovine had a few of lucky breaks that snowballed into unimaginable success. Such is life. The Matthew Effect—“for unto one that hath shall be given, and he shall have abundance”—is always at play.

Indeed, a small turn of events can completely change the course of your life. For example with Iovine, it was being called into the studio on a Easter Sunday to answer phones. Unbeknownst to him he was being called in because an assistant engineer couldn’t make it. Iovine skipped the festivities at home to go to the studio and to his surprise, the recording session was for none other than John Lennon of the Beatles.

Dre had similarly fortuitous breaks (watch the documentary and see if you can spot them) and what’s clear is that though hard work is necessary for success, it’s never sufficient. You always need the occasional blessing from Lady Fortune.

That said, hard work positions you well to benefit from opportune moments. Patti Smith, a punk rock singer/songwriter who also worked with Springsteen, illustrates this point with her recollection of why she chose Iovine to produce her album. Bear in mind Iovine wasn’t a well known producer back then. In fact, he’d just been fired from a previous gig. But Smith saw something in Iovine that won her over. Here’s what she had to say about him:

“I didn’t care whether he was liked by Foghat [the English rock band that fired Iovine as their producer]. He made an impression on me immediately. If Bruce [Springsteen] wasn’t there working, he [Iovine] would stay for hours and study other people’s mixes, other albums. He’d find some old tape to see if he could improve that. He worked all the time.”

During this period Iovine had actually made a promise to himself about his music production career:

“I said to myself, no fun, no life, no nothing. You’re gonna give up everything and put 100% into this!”

As venture investors we’re always looking for people who are as determined as Iovine and Dre. But a lesson here is that we should also look for entrepreneurs who have a propensity to be lucky.

This is not to say that you can accurately measure someone’s propensity for good fortune. But I have found that people who are luckier in life tend to have large diverse networks, insatiable curiosity, and an experimental approach to life that is driven by small tests and doubling down when a winning opportunity presents itself (I cover some of this in chapter 13 of my book, which also has a brief luck-driven origins story on Felix Dennis—a canny entrepreneur who amassed a £400m+ fortune.)

There’s no doubt that hard work is necessary in competitive fields, particularly in entrepreneurship and investing. But to win big you absolutely need luck on your side. Dre sums it up nicely in the documentary:

“As far as me and Jimmy goes, we just some lucky motherfuckers man.”

If you don’t humble yourself, a flop will.

In the startup world we often chime that for a founder, a startup is like their baby. Which is why I found this comment from the music manager Alonzo Williams amusing:

“Records are like children. You never met a mother with a ugly baby, okay? I never had a flop. They just wasn’t as popular as the other ones.”

This made me chuckle but it also reminded me of how the art of creation can blind you, particularly if you’ve had a streak of successes in the past. Sooner or later market forces can hand it to you, so it’s important to stay humble. As Dre put it:

“There’s nothing more humbling than putting out a fucking flop.”

Do something you can be first in.

Most people don’t know this but Dre was once a breakdancer. He is also an ex-boyband member. Both of these pursuits frustrated him though because he wasn’t great at either. Here’s a conversation his mum remembers:

“I used to tell him you can’t have no job pop-locking. You need to find you a job. And he was always coming in second. And I remember him saying that he needed to do something he could be first in.”

This all changed when Dre discovered the art of DJing. As soon his ears latched onto what you could do with vinyl, he was smitten and immediately knew what his calling would be: to become a DJ and ultimately a hip-hop music producer, something he could be first in. Beats By Dre and all his other ventures came much later.

Innovative creators and high performing investors often launch their careers by curving out a niche that they can be first in. Eminem did it by owning freestyle rap battles. Google did it by focussing on search. Warren Buffet did it by mastering value investing. This strategy isn’t the only way to do things but it works with sufficient regularity to make it worthwhile.

Don’t let success breed complacency.

The founder and CEO of Intel, Andy Gove, once quipped that success breeds complacency and complacency breeds failure.“Only the paranoid survive,” was his motto. You don’t have to take this message literally but if you are a maker or investor that wishes to excel, these parting words will bode you well:

“You gotta work hard to get it, twice as hard to maintain it.” – Dr Dre

“Treat everything like it’s your first opportunity.” – Kendrick Lamar

This is a sample chapter taken from my career skills book Graduate Entrepreneurship. You can purchase a copy on Amazon or Book Depository. Please refer to the book for references and sources of key statistics and data.

Myth 1: You need a great idea

Everyone has a business idea in them but they never think it’s good enough. This is because people often judge early ideas against already established businesses. However, no venture ever starts fully formed. Every successful idea starts small and over time can mature into greatness. Did you know, for example, that Sir Richard Branson’s Virgin Group started as a small mail-ordering business? The company would take orders through the post and mail music records to customers. In those early days it is doubtful Branson knew how big his venture would become.

The reality of entrepreneurship is that an idea does not have to be perfect from the get go; nor does it have to be extraordinary. For instance, in a survey that involved 100 highly revered start-ups only 12 percent of the founders attributed their success to an extraordinary or unusual idea. The other 88 percent attributed most of their success to the extraordinary execution of an ordinary idea.

In light of the above, the pressure we place on ourselves to come up with a revolutionary idea is unjustified. Few successful businesses ever start that way and many great entrepreneurs simply execute an existing idea better than everyone else has done. In other words, you don’t need a great idea to start a business. You just need a reasonable concept to build upon.

Myth 2: Entrepreneurs are born not made

The founder of Nike, Phil Knight, did not realise he wanted to be an entrepreneur until he got into business school for his master’s. It was during a class when a lecturer asked students to invent a new business that Phil realised that’s exactly what he wanted to do as a profession. Was Phil Knight born an entrepreneur? No. He didn’t pursue the craft until his later years. Moreover, this is just one example among many where someone becomes an entrepreneur but it wasn’t always something they had a natural inclination towards. And yet the myth that entrepreneurs are born lives on.

The truth is there’s no evidence that some people are natural-born entrepreneurs while others are not. Research indicates that entrepreneurs come from both entrepreneurial and non-entrepreneurial families. In one survey, which involved more than 500 company founders, more than half of the people surveyed (52 percent) were the first in their families to launch a business. If entrepreneurship is genetic you would not expect this percentage to be so high. And so the conclusion is clear: you aren’t born an entrepreneur; you become one.

Myth 3: Age matter

Web entrepreneur and YouTube personality Zoe ‘Zoella’ Sugg was in her early twenties when she started to earn a reported £20,000 a month from her social media ventures. Fraser Doherty set up his jam-making business when he was just 14 and, by the time he was 18, he was supplying jam to the supermarket chain Waitrose. There’s no shortage of media coverage on young entrepreneurs because the younger they are, the more sensational the story. But these reports warp our view on the relationship between age and entrepreneurship. The reality is far more diverse.

Doris Fisher co-founded Gap when she was 37 years old. Ruth Handler launched the Barbie dolls business aged 42. Giorgio Armani didn’t start his company until he was 41. And a 55-year-old pharmacist invented Coca-Cola. Most entrepreneurs actually start a business in their late thirties to mid-forties. In fact, the average age for a first-time founder is 45. The media, however, finds younger entrepreneurs more newsworthy so you’ll always hear more about the twenty-something millionaire and less about the mature businessperson.

Does this mean that you should wait until you are 35–45 years old to start a business? Not necessarily. Starting a business when you are young has advantages. You have fewer responsibilities and can be more flexible. On the other hand, when you’re older you may have a mortgage and family to think about and that restricts the sort of risks you can take. The upside, of course, is that you will have more experience, a better network of contacts, and perhaps even more cash to invest. Each age group has its pros and cons but a major advantage to starting now is the flexibility and energy that comes with youth.

Myth 4: Entrepreneurs love risk

Another common misconception is that entrepreneurs love risk and that you have to be a big risk-taker to become an entrepreneur. However, when it comes to risk preferences business owners aren’t that much different from the general public. If you asked an entrepreneur to leave their car unlocked while shopping they would view the risk of theft to be just as high as anyone else’s assessment. There’s a possible key difference, however: entrepreneurs are generally more confident and optimistic. When reviewing a business opportunity they have a strong belief in their ability to profit from a venture. In contrast, other people are likely to see threats where entrepreneurs see opportunity. On that account, entrepreneurs are not risk-taking enthusiasts. They simply believe that if they work effectively they can turn risk into reward.

Myth 5: Nine out of ten businesses fail

One of the most common myths in entrepreneurship is that nine out of ten businesses fail. Fortunately, the statistic is an exaggeration. It’s too simplistic and ignores a component that, if removed, leads us to forget an even more bizarre reality: over a long enough timeline all businesses come to an end. A vivid example of this phenomenon is that of the world’s oldest business, the Japanese company Kongō Gumi. After running for an impressive 1,400 years the company ended in 2006 – an impressive run, no doubt, since the average life span of a company is 40–50 years.

The ultimate end of all businesses, which by the way should not worry you, given the timespans involved, highlights an important point: when we talk about business failure rates we also have to consider a time component. A more telling statistic should tell us how many businesses fail over a specified period of time. Fortunately, this data is available and it is more encouraging than the usual nine-out-of-ten- businesses-fail mantra (see Figure 1.1).

According to a study by researchers from the University of Sussex and Barclays Bank, only one in six businesses (16.98 percent) fail in the first year. Over time this proportion increases, but even after six years, 30 percent of the original companies are still running. So next time someone tells you that nine out of ten businesses fail, ask them, ‘after how many years?’

With that said, it’s worth acknowledging that statistics are informative but not always instructive. Taken alone, the above numbers tell you nothing about the kind of things you can do to enhance your chances of success (more on this in Part 3 of the book). The numbers reflect a select group of businesses that might be completely different from your venture. As such, don’t assume that your fate has already been sealed. Your chances are better than you think!

Myth 6: Starting a business is straightforward

Few people believe that starting a business is easy but many underestimate the effort it takes. Entrepreneurs generally work longer hours and at the early stage of a venture don’t get paid much. According to research from the UK, entrepreneurs work an average of 52 hours a week. That’s 63 percent longer than traditional employees. In America the renowned investor David Rose says he has never met an entrepreneur who works fewer than 60 hours a week. He believes that starting a business is an ‘all-in sport’. You can’t do things half-heartedly. Once the engine gets going you have to commit fully (more on this in Chapter 15).

In addition to the long hours there’s usually little to no salary in the early stages of a venture. The founders of Innocent Drinks, for example, didn’t have any income for 12 months. It took them four years before they could earn a salary of £40,000, which was the same amount they had left at their corporate jobs.

Paradoxically, entrepreneurs are happier than most people are. In a global survey of over 197,000 individuals, authors of the 2013 Global Entrepreneurship Monitor Report found that entrepreneurs score higher on ratings of happiness and life satisfaction when compared to non-entrepreneurs. So while it’s harder to start a business it’s also often more satisfying than regular employment. You enjoy more creative freedom and the hours fly by when you’re working on something you really care about.

Myth 7: You need lots of money

You don’t always need a lot of money to start. The amount of cash you will need depends on the type of business you hope to start. For instance, there are many examples of people who started an online business for less than £100 but went on to make six-figure incomes. On the other hand, a small coffee shop that seats about 20 people might cost you between £15,000 and £20,000 to set up.

The general pattern is that service companies have lower costs while product-based businesses (restaurants, manufacturers, retailers) tend to have higher costs. Regardless, in Chapter 15 we will look at some of the ways you can start with a minimal amount of resources.

As a side note it’s worth pointing out that there is a danger to having too much money at the start of a venture. You may be tempted to spend money on every problem. For example, if you aren’t generating enough sales you might be inclined to spend more money on marketing even if the product is not satisfying customers. In contrast, being short on resources instils a stricter discipline. You are forced to consider the underlying issues as to why something isn’t working, instead of using the brute force of cash to attack every problem.

The truth about entrepreneurship

You may have never considered entrepreneurship until now. You may still be at university, or you may be a graduate. Regardless of your current position it’s never too late to start a business. The odds of success – especially if you are educated – are better than most people think; you don’t need a million dollar idea; your age hardly matters; and it’s possible to attain the business skills necessary to become an effective entrepreneur.

This is a sample chapter taken from my career skills book Graduate Entrepreneurship. You can purchase a copy on Amazon or Book Depository. Please refer to the book for references and sources of key statistics and data.

This post originally appeared at the MBA Blog of Said Business School.

In Trinity Term one of my favourite MBA electives was the Nature of the Corporation. In this course we asked, “what’s the purpose of a corporation?”, “do companies need to have a clear purpose?”, “how many corporations adhere to a healthy reason for their being?”, “is this reason good for shareholders alone or does it have a wider positive impact?”, and “which of these two approaches is more sustainable?” Though such questions risk coming across as grandiose, self-important, and overly philosophical, thinking about them can be instructive.

Purposeful Companies

On the course, we came to learn that corporations which lack a clear and systemic purpose tend to drift towards ill-conceived aims such as the singular pursuit of maximising profit for shareholders. But this tendency is problematic. This is because purpose informs values, strategy, and day-to-day decision-making. And so, if the sole purpose of a business is to maximise profits for its owners what’s to stop it from engaging in dubious practices that produce gains for a few at the expense of many? One example of this is Volkswagen. The car manufacturer cheated emissions tests so it could save millions of dollars but in doing so, it knowingly violated the Clean Air Act by putting cars on the road that emitted up to 40 times more pollution than was allowed. (The company was subsequently fined billions of dollars.)

In contrast, companies that adhere to the systemic purpose of acting to the benefit of not just shareholders, but also other stakeholders (customers, employees, suppliers, the community and environment within which the business operates), tend to perform better in the long run. Research shows that these companies are more innovative and resilient; they have more motivated employees; they have a lower cost of capital, and are less exposed to regulatory scandals. All in all, companies that pursue a clear, multi-dimensional, and healthy purpose outperform those do not.

Purposeful Lives

While thinking about corporate purpose I was also reflecting on a personal question: “what’s my purpose in life?” For a long time, I have struggled to articulate a coherent response to the question and this is not uncommon. Many of us find purpose vague, impractical, and too preachy to honestly consider. Moreover, on the MBA programme we are so busy with classes, assignments, socials, and career anxiety to think about a seemingly unproductive question. But think about it we must. Because as the American scholar Clayton Christensen once wrote, “the type of person you want to become—what the purpose of your life is—is too important to leave to chance.”

Why is purpose in our personal lives so important? Research shows that people who are clear about their purpose—people who are able to craft and make sense of their being—are more satisfied with life. They enjoy their work more. They have higher self-esteem. And, they are less prone to depression and anxiety symptoms. Most of us already know this intuitively. Think about your own life and the decisions you’ve had to make the in past. Were things more or less clear when you knew your values and what you stood for? Alternatively, were you more or less engaged with life (i.e. living vs. existing) when you had a vivid sense of direction?

Purposeful MBAs

As our MBA programme concludes we are faced with the question, “what next?” In answering this question we can choose to go wherever the wind blows or we can be more proactive and seek answers informed by a greater question, “what’s your purpose?” Albert Wenger, a prominent venture capitalist who gave a talk at Saïd Business School earlier this year, writes that “this is the single most useful question to ask anyone who is taking time out to think about what to do next.” I agree. Without purpose we risk drifting toward singular aims—money and status for example—that may provide gains in the short term but great losses in the long term. Fortunately, it’s possible for all of us craft a purposeful life if we spend some time thinking about it.

As freshly minted MBAs, how can we achieve this? The New York Times columnist David Brooks put it elegantly in his book ‘The Road to Character’ when he wrote, “…you don’t ask, ‘what do I want from life?’ You ask a different set of questions: What does life want from me? What are my circumstances calling me to do?” This is how you find purpose. This is how you craft meaning. You find a way contribute to the world and in doing so it contributes to your well-being.

In recognition that we all have different interests and experiences, Brooks adds: “…all of us are given gifts, aptitudes, capacities, talents, and traits that we did not strictly earn. And all of us are put in circumstances that call out for action, whether they involve poverty, suffering, the needs of a family, or the opportunity to communicate some message.” In other words, to craft a purposeful life, you start with who are and what you’ve been through, and then you leverage those elements to make some personally meaningful contribution to the world.

None of this needs to be dreary by the way. Your purpose (or purposes, should you have more than one) could be crafted simply—to be a good friend, parent, spouse, or member of your community. It could also be crafted ambitiously—to fight climate change, empower the disadvantaged, or end poverty. Whatever the purpose, if it leads to a life that resembles an ideal once described by the psychologist Alfred Adler—“to be interested in my fellow man, to be part of the whole, [and] to contribute my share to the welfare of mankind”—then such a life will be one that’s truly worth living.

P.S. Many thanks to my classmates Armand, Candice, and Dana, who read an early draft of this essay.

In 1942 Howard Hughes set out to build the world’s largest aircraft, the Hughes H-4 Hercules. With a wingspan close to 100 meters and a weight of 180,000 kilograms, it was questionable whether the gigantic bird would ever take off.

What’s just as uncanny is that most of  the aircraft’s structure had to be constructed using wood, since a world war had restricted the supply of steel. A few years later, when Hughes had to testify before the US government (the aircraft was partially funded by the tax payer), he remarked:

“The Hercules was a monumental undertaking. It is the largest aircraft ever built. It is over five stories tall with a wingspan longer than a football field. That’s more than a city block. Now, I put the sweat of my life into this thing. I have my reputation all rolled up in it and I have stated several times that if it’s a failure, I’ll probably leave this country and never come back. And I mean it.”

Hughes operated at the margin: When he wasn’t wooing beautiful actresses or breaking air speed records, he was busy developing the world’s first communication satellite and designing a moon lander that contributed to the success of the Apollo mission.¹ The billionaire loved reaching for the edges. However, these attempts also came at a cost.

For example, legend has it that when qualified pilots refused to perform a dangerous aircraft stunt for a movie Hughes was directing, the stubborn billionaire decided to pilot the manoeuvre himself. He pulled off the feat but also crashed violently shortly after. Hughes almost died in the accident. And though some say he kept bits of the wreckage to remind him just how close to death he had come, the event did not diminish his appetite for risk.² Indeed Hughes went on to have more brushes with death, and in less threatening scenarios, brushes with bankruptcy (he lost $90 million – no less than $400 million in today’s money – in a failed helicopter venture.)³

Operating at the Margin

Whenever I come across stories like those of Howard Hughes, Marilyn Monroe, Steve Jobs, Martin Luther King or Malcolm X, I’m reminded of a quote by the poet T. S. Eliot:

“Only those who will risk going too far can possibly find out how far one can go.”

That’s what operating at the margin is about. It involves reaching for the edges, pushing the limits, and breaking new ground. Marketer Seth Godin calls it edgecrafting, or to it put more plainly, finding an edge. Here’s an entrepreneurship example offered by Godin:⁴

“You must go all the way to the edge . . . accepting compromise doesn’t make sense. Running a restaurant where the free prize is your slightly attractive waitstaff won’t work—they’ve got to be supermodels or weightlifters or identical twins. You only create a free prize when you go all the way to the edge and create something remarkable.

[Remarkable things are] the cheapest, easiest, best designed, funniest, most expensive, most productive, most respected, cleanest, loudest [and so forth.]”

That’s what operating at the margin in business can look like. More generally, operating at the margin is when you move past a cushy status quo to pursue something extra—ordinary. Of course, you might fail spectacularly – in fact you will probably fail more than you succeed – but unsuccessful grand efforts often leave a trail of stepping stones that enable other forms of achievement in the future. The giant airplane that Howard Hughes built, for instance, ended up flying just once, and for a mere 50 seconds.⁵ But without his ambitious contribution to aircraft history, efforts in the sector could arguably have been more timid in the years that followed.

A Hypothesis on How to Have Impact

These observations bring me to paraphrase Theodore Levitt: the world is driven by what happens at the margin.⁶ Put more precisely:

“. . . what’s important is not the average . . .  but the marginal . . .; what happens not in the usual case but at the interface of newly erupting conditions.”

Indeed, it is the ‘stubborn courage’ of a few, as Nassim Taleb puts it, that “disproportionately moves the needle” when it comes to change and progress.⁷

So here’s some practical advice. If you want to have impact in the world, operate at the margin. Pursue a ridiculously ambitious project or two in your lifetime. Stand for something you deeply care about. Have the courage to go against the grain. You will polarise people (some will love what you’re doing and others will hate it) but what you won’t have is indifference. You will have impact.⁸

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Thanks to Natalie, Gifted, Dino, and Renee for reading an early draft of this essay.

Notes

[1] http://www.inc.com/articles/2004/12/jamessteele.html

[2] https://selvedgeyard.com/2009/03/10/howard-hughes-odd-behavior/

[3] http://www.nytimes.com/1977/11/13/archives/hughes-documents-disclose-big-losses-in-last-decade-two-court.html

[4] http://sethgodin.typepad.com/seths_blog/2013/09/edgecraft-instead-of-brainstorming.html

[5] https://acesflyinghigh.wordpress.com/2012/03/21/the-hughes-h-4-hercules-aka-the-spruce-goose/

[6] https://hbr.org/1983/05/the-globalization-of-markets

[7] http://www.fooledbyrandomness.com/minority.pdf

[8] Operating at the margin can be used for both good and bad.