Is Entrepreneurship a good Idea for you?

In Financial language it is said that while we are evaluating a project we should try to evaluate it in terms of its Net Present Value. A thumb rule is that for an investment project if NPV >0, we should go for the project. Is we try to describe NVP in simple terms: It is the amount by which one gets richer today by investing in a project. Other definition could be: It is the present value of all the cash flows from the project.

Let us assume that we have invested 100 Rs. in a business and we get 50 Rs. from business after first year and 50 Rs. After second year. Let us assume that rate of return that we desire from the project is 10%, then the Present value of project is ( -100 + 50/1.1 + 50/1.21), which is negative, so we should not invest in this project. Had the second year cash flow been 70 Rs. instead of 50 rs. then the total present value of all the cash flows would have been positive. So by investing in the project I would have been richer today itself.

Well, Even if you are not able to understand everything completely, in other terms we can say that NPV of a project shows how we see our future returns from a project today. Lets apply this concept to Entrepreneurship. Many of us want to become Entrepreneurs but always face the dilemma if we should quit our jobs for an entrepreneurial venture?

Let us say one person is earning 12 lacs rupees in a year. This person gets an annual salary increment of 10% let us say every year. This person is investing an amount X in to an Entrepreneurial venture. The consideration period for business in let us say 10 years. This means that in 10 years time the business opportunity would be exhausted. Let us say that desired rate of return for person is 15% on the money that he is investing. Let us assume that person gets a 30% return on initial investment every year for 10 years. so your net present cash flow of future cash flow of any year would be ( [[[-1200000*(1.1)^n]+(0.30x)]/(1.15)^n]

If we calculate submission of values for all 10 years we would find that the x should be atleast 61 lacs to get a positive Net present value.

For somebody who does not want to get in to this calculation, he can understand that if a person leaves his 1200000 rs. per annum job to invest in a business that gives him 30% return on Initial investment every year (which is a significant quantity), he would only be richer by his entrepreneurial venture if his initial investment was more than 61 lacs. Other situation could be that the returns from business are very high and increasing.

My conclusion of this analysis is that it makes sense to leave your job for entrepreneurship only if you have an enormous initial corpus to invest or you have a really brilliant idea which gives you enormous returns. In all other situations, I would say Entrepreneurship can be kept just as a hobby. ( I mean not just as a hobby but something that should be pursued alongside your regular job)

So have a look at the analysis and think before you quit your job for your own entrepreneurial venture.