This was a post taken from Forbes.com from Michael Ellisberg, the writer of one of my favorite books The Education of Millionaires. While I’m a huge advocate of ‘passive income’ he does a great job of adding a bit of realism to the expectations a person (including myself) should have.
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I’ve been encountering a lot of people lately — particularly young people rightly enthralled with the seemingly limitless potential of the Internet — who have focused their professional lives on developing “passive income.”
You know the fantasy: write some ebook (or better yet, hire freelancers in Mumbai to research and write it for you at $.20/word!) on some niche topic, set up AdWords and Facebook campaigns targeted to the right keywords (you can hire those Mumbai guys to do your keyword research too), put up a cheap landing page (with copy written by… guess who!), press “Go!” on the PPC campaign, and voilà. . . just wait for the money to roll in while you sleep!
Now, with all those dog owners across the globe buying your new ebook on how to help their pit bulls lose weight with Açai cleanses (the keyword research your man in Mumbai did determined that dog training and antioxidant weight loss were hot niches)–you can just check in every once in a while to make sure your outsourced VA is facilitating the transfers from your ClickBank account over to your checking account, and while you’re not working, you can hang out in whatever fine restaurant his Internet research has determined is happening this month on your particular island of Fiji.
I’m caricaturing a bit here of course–but not too much. This is more or less the life plan that many of the “passive income” people I’ve encountered lately have spouted to me.
But there are a couple problems with holding “passive income” as your main goal in business and life:
1. You Can’t Stay Ahead of Competition Passively
If your research really does determine that there is some amazing market niche that until now has miraculously gone unnoticed and unserved—dog owners who wish to help their dogs lose weight naturally, for example—sooner or later, word is going to get out that there’s money to be made there, and someone is going to create a better ebook or info course or product that serves that market’s needs better than yours does, and who markets it better to them than you do. You can’t manage this competition while sipping margaritas all day from your paradise restaurant on Fiji. You’ll soon see your market share go down the drain—just like all those Açai cleanses. . .
2. You Can’t Maintain a Loyal Tribe of Customers Passively
As soon as your customers realize that you don’t care about them (which you don’t, if you’re trying to get away from them as fast as possible), they will eventually go elsewhere, to someone else who actually does care about them and their needs. ‘Nuff said.
3. You Can’t Lead Great Teams Passively
If you’re going to be building a large, scalable business, sooner or later you’re going to need employees and/or freelancers (even if they’re spread out over the world virtually). You’re not going to attract great talent for the long run by indicating to them that you have no interest in being involved in the business whatsoever.
All the great talent will run the other way from a leader like that (i.e., a non-leader.) You’ll end up attracting people who are just looking to make a quick buck with as little work as possible. A mirror reflection of the person hiring them, in this circumstance.
Some people obsessed with “passive income” say, in response, “No problem, I’ll just hire a leader to do all that managing, motivating, and creating stuff!”
What you’re essentially saying, then, is that you’re adding zero value to the equation. You’re not coming up with the ideas, you’re not implementing/executing the ideas, and your not leading anyone to implement or execute them.
Perhaps you’re adding capital, but the start up costs on these kind of ventures tend to be close to zero, so really you’re adding nothing.
Again, no leader worth her salt will be attracted to such an opportunity. And anyone you do hire to lead the value creation, if they have two brain cells, will see that she’s the one adding all the value. Sooner or later she will simply find a way to cut you out of the value chain, either by requiring more and more compensation, or by going off and competing against you (and actively at that.) Why does she need you? You’re not adding any value anyway!
Anybody who can truly create the value on their own, without your active involvement or leadership, probably costs more than you can afford if you’re trying to create some passive income vehicle to fund your Fiji lifestyle.
4. You Can’t Create Meaning, Passion, or Purpose in Your Life Passively
I’ve had several conversations recently with people in their twenties who have built up some semblance of moderate passive income (for now, before the competition gets the better of them, or their team implodes in disarray for lack of care, or their revenue collapses for lack of customer development or innovation.)
These people are (for now) living the dream–they get to travel to Fiji or some other exotic location on a shoestring and hang out on the beach, funded by their little niche ebook or whatever.
Yet none of these people I’ve talked to who have this temporarily successful lifestyle seem very happy. They actually seem kind of restless and lost. I’ve had conversations with several of them to help them determine “what the purpose of their life is” now that they have some amount of money coming in from some little passive venture they don’t even care about that much. It all feels empty to them.
This is the basic mistake they’ve made: they’ve fallen prey to the belief that money and meaning are two totally separate things. They’ve chosen to make their money from something that feels completely meaningless to them (some business they care so little about, they just can’t wait to get away from it and minimize their involvement as much as possible), which they hope will buy them the freedom to do something they actually care about.
This is deeply sad to me. Sad, because these people have given up so easily (or never even entertained in the first place) the idea that something meaningful to them could also be their livelihood.
Think of the people who know who are most fired up about what they’re doing in life. Make a mental picture of one or two such people you know.
My guess is, these people:
A) Live, breathe, eat, and sleep this activity that is their passion. It’s what they most care about. There’s no way they’d give up this active, creative endeavor for a life of reclining on a beach chair. They cannot wait to wake up another day and spend another full day, from dawn to dusk, engaging in this project, building and creating things within this realm, giving this gift to the world. And, my guess is these people…
B) Find their involvement with this activity provides them the resources they need to live comfortably. They may not be mega-rich from it. They may not be millionaires from it. But they are living comfortably doing it, and they get to spend all day every day giving the gift to the world they’re most passionate about.
That is a good life. That is a meaningful life. In turn, what is most certainly not meaningful is some temporary party on a beach funded by some lame ebook you don’t even care about which will soon be competed into oblivion anyway.
Of course, you can make honst money in Internet info-products, or affiliate marketing, or other such areas where people tend to get drawn to “passive income” fantasies. But, to make real money over the sustainable long-haul, you must treat these like any other business. In other words, you must provide real value to real customers with a real need.
And the only way you can do that is actively. If you keep viewing it as a “headache” that your customers want to interact with you or that you have to out-compete and out-innovate your competitors in providing more value to your customers, you’re in the wrong business.
I know a guy you should invest with instead, if what you’re after is easy money. His name is Bernie. He’s hanging out, very passively, in a bar — I mean, behind them.
(Of course, you can also always get passive income by buying-and-holding US Treasuries, which are paying out around 4.2%. The BLS just reported inflation at 3.6%. No one’s going to get rich with that level of passive income net of inflation. And according to Shadow Government Statistics, the real rate of inflation you and I are actually experiencing—including at the grocery store checkout line, at the gas pump, and at the doctor’s office—not the massaged statistics the government puts out, is actually much higher, perhaps up to 11%. So government bonds could actually be not passive income—however meager—but passive losses.)
Why You Should Aim For “Leverage” In A Business You Care About, Not “Passive Income” In a Business You Don’t Care About
I asked my friend and business mentor Bryan Franklin, a successful Silicon Valley executive coach, what he thought about “passive income.” I knew he has some strongly negative opinions on the concept, and he did not disappoint.
He went straight for the jugular, pointing out the fundamental flaw common to all intentions to create “passive income”: the focus with such efforts is totally on the wrong thing, he pointed out.
“Every time I’ve seen someone create a business, with the ultimate intention of getting away from that business and its customers as quickly as possible, instead of moving towards that business and its customers, it fails.
“What makes business work is creating value. If you’re going into the business with the intention of not creating value, but of having it magically provide money for you, then you often make really bad choices. The business that you’re investing in or creating doesn’t tend to be creating value for its customers or for anyone. So it doesn’t tend to spit off the cash you’re hoping it will. So many times I’ve seen people pursue passive income, and end up having active losses instead. They just spend a lot of time and money trying to push responsibilities off on other people and having it not work.”
Just to play devil’s advocate, I raised with Bryan the issue that very wealthy business owners often do tend to have something approaching passive income, through their highly-scaled businesses, which they could step away from or sell.
Bryan said, “People who have become very wealthy through business have gotten very good at leveraging their time in their pursuit of creating value. They’ve done that by first creating value, and then automating the process of creating value, so they can scale and provide even more value to more and more people. But it starts with the fact that they already understand how to create value. They understand it so well, that they’re able to create that value and then automate and scale the process of creating more of it.
“The majority of people I see who are interested in passive income and pursuing it, haven’t learned how to create value in the first place. They’re just trying to do gimmicks and tricks and formulas. They’re trying to do the automation part, but they’ve missed the point that the automation only spits off cash if it’s based first on automating something that actually creates value. If you automate something that is worthless—or worse than worthless, a scam — it’s not going to work in the long run.”
Bryan’s answer clarified in my mind an important distinction I’ve seen play out many times.
I’ve spent the last year interviewing millionaire and billionaire entrepreneurs for my forthcoming book The Education of Millionaires. All of them could, theoretically, step away from the businesses they’ve created. Yet, they’re so passionate about their businesses and the value they’re creating in the world, they mostly choose not to.
Does that mean they’re in the lowly-trenches doing rote work in their business? Of course not. It means that, as Bryan suggests, they’veleveraged their time in their quest to create more and more value. They choose to focus their efforts—often 12 hour days—on scaling to provide value to larger and larger audiences.
They’ve delegated, automated, streamlined, systematized, etc. Not with the intention of sitting on some beach somewhere for the rest of their lives and watching the checks roll in, but with the intention of freeing up their time to create even more value that they’re inspired to create, either by leading that business to the next level of greatness and service to greater audiences, or by starting a newbusiness.
Bryan added: “If you make your choices based on, not ‘how can I get money for free?’ but on, ‘What challenge can I put in front of my face that’s going to have me step up to be the kind of person I’d rather be?’ you’re going to start to forget about wanting passive income, and you’re going to start to focus on what purpose you truly want to create the world.”
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