8 Ways Fear of Poverty Makes Entrepreneurs Stupid

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Even short brushes with hunger, homelessness, or poverty are enough to create lasting aversion. My friends call this “poverty brain” — interacting with the world from a perspective of scarcity, a fear of not having enough. Poverty brain makes you (and me) do stupid things, like eat half-spoiled food because you’re afraid to waste, even when you have plenty to eat. It makes you stupid in business, too.

This is Part 1/ 6 in the Swimming with Sharks series. This series shows simple principles for interacting with investors. Venture Capitalists are risk-averse gamblers looking for shiny horses to bet on. Knowing what your prospective investors need puts you in a fantastic position to negotiate.

Before you seek investment, it’s important to double-check your perspective on money. Experience with poverty is a two-edged sword. Frugality and empathy for others are powerful business tools. However, being stuck in a poverty brain perspective is enough to burn the house down.

(PS. Poverty brain applies to BOTH money AND time. You can feel poor from either “I don’t have enough money” or “I don’t have enough time.” Watch out for both.)

“You’re broke, eh?”
“I been shaking two nickels together for a month, trying to get them to mate.”
― Raymond Chandler, The Big Sleep

EIGHT WAYS POVERTY REARS ITS UGLY HEAD

1. You don’t maintain your tools
2. You don’t protect your time.
3. You think your customers are as poor as you are.
4. You ignore probabilities and over-compensate for risk.
5. You blow off investing.
6. You’re penny-wise and pound foolish.
7. When you are desperate, you’re more likely to give into temptation.
8. You don’t enjoy what you’ve worked so hard for.

HOW TO TURN THESE INTO STRENGTHS:

1. Focus on offense, not defense.
2. Build a team.
3. When you negotiate, have an abundance mentality.
4. Love risk and celebrate losses.
5. Mitigate risk by planning ahead.
6. Understand that money is for spending.
7. Start with a Tripod of Stability.
8. Schedule play!

It is too difficult to think nobly when one thinks only of earning a living.”
― Jean-Jacques Rousseau, Confessions

Head’s up, this is a long post. Scroll to the points that resonate. Feel free to skip the rest.

1) You don’t maintain your tools.

Poverty brain is a “tipping point” mentality. You procrastinate everything you can, hoping for a big break that will allow you to relax. We glorify sacrifice, but in this form, it’s pure stupidity.

You don’t exercise. You don’t change the oil on your car until it loses performance. You don’t sharpen your kitchen knives. You cut corners with sleep wherever you can. You don’t see the dentist until you have a problem.

Personal example: For almost 20 years, I’ve been over-wearing my contacts. I wore 1-month contacts for 2–3 months, often waiting until the edge tore or they started to get uncomfortable before swapping them out. Why? Because it saved money.

Well, my last semester of college, sudden, rapid deterioration of my eyesight interrupted my life. Just one hour of staring at a screen triggered migraines. Daily migraine auras caused words to jump around to the point that I couldn’t read. I couldn’t finish my homework. I started typing with my eyes closed to limit exposure to light so I could maximize my work time.

When I asked an optometrist for advice, he chastised me for over-wearing my contacts and explained that I was destroying my cornea. Treatment required antibiotics and steroidal eye drops.

So… aside from emergency-only maintenance making you personally miserable, consider the impact of under-maintaining tools in your business. How will you treat your equipment? How will you treat your employees? Is that the business you want to run?

SOLUTION: Focus on offense, not defense. Establish preventative rituals, instead of emergency-only firefighting. Pick something you’re neglecting and make a daily mediation out of treating it right.

2) You don’t protect your time.

“Entrepreneurship is bringing something new into the world when you don’t control the resources to make it happen.”
― Professor Mesquita at Arizona State University, paraphrasing Peter Levine.

I love this definition of entrepreneurship. Your job is not to work like a dog and do it all alone. Your job is to build a community. Your job is to pull together talented people, inspire them to do something for your common good, and tear down any barriers that get in their way.

3) You think your customers are as poor as you are.

In a fascinating research study, a venture capitalist found that a CEO having empathy for others was NEGATIVELY correlated with a good business outcome.

Poverty-brain teaches us that the world has winners and losers. But that’s a narrow-minded false dichotomy. This is especially important when negotiating with customers.

Negotiation is a critical skill all business owners need, and the best deals always come when both parties expect to win together.

Here’s an example: In a recent mock negotiation, I represented a coffee company selling 10,000 pounds of coffee to a fancy hotel. On the surface, we were debating price.

Overall, however, bigger things were at stake: My coffee company desperately needed brand awareness. Statler Hotels had a partnership with Cornell. They wanted to impress their elite customers, who were often the parents of Cornell students.

We negotiated the price of coffee for an hour. We didn’t split the difference.

In exchange for a price reduction, the hotel chain offered to leverage their connection with Cornell directly. “Make a video of your coffee farms,” they said. “We’ll get it in Cornell classrooms.” This creates valuable educational material (so Cornell benefits) and brand awareness. Suddenly, reducing price was worth it. But I saw opportunity to do something generous, too. “Hey, my coffee company has data sets,” I realized. “Let’s give real industry data to your students to play with.”

At this point, this wasn’t just a transaction. We were talking about a long-term partnership, seeking to maximize value for each other in every possible way. We were excited to help each other succeed. This is the power of negotiating with an abundance mentality.

SOLUTION: When you negotiate with customers, have an abundance mentality. Instead of presuming pity by default, start all customer negotiations with admiration!

4) You ignore probabilities and over-compensate for risk.

When you’re poor, you start ignoring probabilities. In situations of uncertainty, small risks are either disregarded or hugely overrated. If you’re poor in time you’re more likely to disregard the risk. If you’re poor in money, you’ll wildly overcompensate to avoid risk.

A great example paraphrased from Nobel Prize Winning Economist Daniel Kahneman:

Your rich aunt just died, leaving you with 8 million dollars. Your bratty cousin contests your inheritance in court, saying she has prior claim. Your case is going well. After lawyers present both sides, the jury has gone to deliberate. Your lawyer assures you that your chances of winning are 95% — but of course, you can never be sure.

While you’re biting your nails, a risk hedging insurance company comes to you and offers to buy your case for 7 million dollars. If you win, they get 8 million dollars. If you lose, they get nothing and you still get 7 million. Do you take the offer?

Most people would take the deal. The estimated value of your case is 7,600,000. If you sell for 7 million, your loss (probability-wise) is 600,000 or 7.5%. Even when people know this, they still take the offer. Economist Cass Sunstein called this “Probability Neglect”.

The reason is obvious: People who are poor assume this is the only chance they’ll ever have. What an insurance company can laugh off, someone buried in poverty would regret for the rest of their life. If you flip a coin 100 times, it’s worth taking the bet, because you’ll come out on top. If you only flip the coin once, though, the game changes.

The overall impact of Probability Neglect is that you’re less lucky. You don’t take good chances when odds are in your favor because you’re afraid of losing. This strategy keeps families off the streets, but it’s death for a business. Considering 90% of businesses operate at <10% profit margin, surrendering that 7.5% makes a huge difference.

SOLUTION: Embrace Risk, and Celebrate Losses.

Trust that as a business owner, you’ll have plenty of chances. Don’t play craps with your rent money. Whenever you play, acknowledge that everything you put on the table, you might lose. But KEEP PLAYING. Only play games where probabilities are in your favor. Play games where you can influence the outcome. Play in rings where you have an edge. Play smart…. But PLAY. Don’t sit on the sidelines and congratulate yourself for not losing.

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again… Who at the best knows the triumph of high achievement, and if he fails… fails while daring greatly. …His place shall never be with those cold and timid souls who neither know victory nor defeat.”
― Theodore Roosevelt

Back in college, I applied to a study abroad in India. I couldn’t afford the study abroad on my own, but I had a great chance of winning the essay-based Gilman scholarship.

Normally I’m not cocky, but the Gilman has a 70% award rate. I’m a professional writer with first-place awards under my belt. On top of that, Most of the Gilman scholarship requests are to tourist-heavy places like Paris, and the Gilman Foundation typically gives priority to students going to countries like India. Advisors assured me my chances of winning were over 90%.

The clincher was that I had to commit to study abroad before I would hear back from the Gilman Foundation. If I committed, then bailed, I would owe my college $1,000 and get nothing in return. Probability-wise, everything was in my favor. So I bit the bullet and committed.

When Gilman rejected me, I was genuinely shocked. They said they had far more applications than usual, but… still.

The $1,000 fee was 10% of everything I earned that year. At the time, I was bitter and angry. I felt like the study abroad costs were absurd, a rich man’s game. I was angry at Gilman for leading me on, angry at the university for elitist programs that were wildly cost-prohibitive, and I was angry at myself for getting suckered. The experience seared in my mind a violent aversion to “probabilities”.

This is the danger of poverty brain — we let one bad experience poison our whole attitude toward risk. In retrospect, I think I made a good choice. The probabilities were good. When I lost, it was a bitter blow, but I survived.

5) You blow off investing.

For the 66% of you who have retirement savings, you rock! For the 34% of entrepreneurs who have saved nothing, realize that you aren’t just short-changing yourself. You’re short-changing your children.

According to the U.S. Census Bureau, about 14 percent of all people over age 65 have two to three chronic conditions that erode their ability to live independently. Maybe you don’t expect to ever retire, but what if you get dementia? About 25% of the elderly live in assisted-living facilities. These numbers are exacerbated if you don’t exercise — which you’re probably also neglecting. If you don’t take care of yourself, that burden will fall on your children.

SOLUTION: Mitigate risk by planning ahead

Watch cycles and plan the moment to attack. I could have avoided the study abroad fee if I had applied to the Gilman scholarship 4 months earlier. They had two award cycles, and I could have gotten the rejection before needing to commit. It just wasn’t on my radar. I waited until my senior year, and rushed the process under the pressure of “this is the only chance I’ll ever have”.

For retirement, here’s an easy number. You should be saving 25% of your income. Make it happen.

6) You’re penny wise and pound foolish.

I can’t tell you how many DIY projects I’ve botched because I’m too cheap to hire a professional who will get it right the first time.
― Kristin Wong, Lifehacker

I used to choke at the price of organic stuff, pre-prepared meals, and high-end flavors. One boyfriend had to teach me, “We’re not skimping on food. Food is what money is for.”

It’s the same in business. Opportunity is what money is for. Businesses need to be fed opportunities just like bodies need calories. Feed it the good stuff.

7) When you are desperate, you’re more likely to give into temptation.

When people talk about the infamous marshmallow study, I always wonder how the results would skew if you controlled for hunger — a major factor in poverty. Feed some kids breakfast, instruct others to come fasting.

22 years ago, a particularly heinous experiment proved that self-control is a limited resource and can be fatigued — rapidly! Subjects who had been exposed to strong temptation and disappointment had half the willpower afterward when asked to perform a second mentally arduous task.

SOLUTION: Start with a Tripod of Stability

Nailing the big things means that you can play around and take risks in other areas. I call this my “tripod of stability.” By taking care of big things — my home, my car, my relationships, I can increase my growth by taking risks in other areas like pushing my limits when working out, experimenting in my business or traveling to new places.
― Ramit Sethi

This is the tragedy of poverty. You’re amazing, and you work hard. What do you want at the end of this treadmill trap?

Chances are, it’s two things: First, a sense of wellness, right? The end of fear, the retirement fund. Health, insurance, a house you own, a reliable car. Second, time for who and what you love. Time to play. Freedom to travel.

You deserve all those things TODAY. You have people who love you RIGHT NOW. I’m not saying go buy a yacht. But absolutely go to the waterpark with your son. Get back in the habit of enjoying your life.

HOMEWORK:

Write down the big things that make you feel alive. The stuff that makes life feel like a privilege instead of a chore. The stuff that makes you glad you’re here.

These are mine:

1. Fast-paced physical exertion.
2. Creating something that has never existed before.
3. Snuggling and experiencing beauty with people I love.

In summary, I invite you to put poverty behind you. That was your past. You have a new future. Poverty isn’t in your pocket, it’s in your heart and head. Everything you’ve been fighting for is already here.