Why the startup won’t make you filthy rich?

At the outset, this sounds like a negative post. However, it is not. This post centers around the reasons to start that startup you have been pining to start (this is probably the only sentence I have seen with the incessant use of the word “start”).

“Start” is a very positive word and we all love starting something new.  I have started a company in the past and have started a small business with my wife. What I want to talk about here are the reasons why one should start a company or even join an early stage startup.

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You should start a “traditional startup” (I define it as any startup which takes funding from outside and has an exit goal of either IPO or acquisition) or join an early stage startup if you have the following traits/goals:

  • Have developed Interest and passion in the area.
  • To accelerate your career by learning a lot in a shorter amount of time.
  • Love creating jobs and creating a difference in people’s lives.
  • Entrepreneurship feels meaningful to you.
  • Making a reasonable living but not necessarily aiming to become filthy rich.

I think people understand the first four points well. For eg., if you work for a decent startup for a few years and then move to a bigger company later, you are more likely to score a better position for yourself.  Interest and passion are no-brainers because once you have developed interest and passion in a certain area, the process is more exciting than the goal itself. (To clarify, I don’t believe that people have innate interests and passions. What they have innately are predispositions which are honed into interests and passions over time). For eg., an entrepreneur should think: will I be ok building this product/service even if I don’t end up making tons of money but don’t devastate myself financially either? If the answer is yes for sure, then that’s a go. However, if the answer is: no, the only reason I am doing this is to make tons of money, then it’s surely a red flag.

My fifth bullet is the bone of contention. You keep hearing about acquisitions like Instagram and WhatsApp and IPOs like Facebook and you wonder why the author is leading you away from billions of dollars. The answer to that question is the statistics. If you are of the mentality of “Go big or go home”, then you might attempt a traditional startup (eyeing for an acquisition/IPO as an exit strategy) for money reasons. Otherwise, if you are interested only in making decent money, you can focus on small businesses, high-income jobs, and asset building, instead of the traditional startup path, as an alternative.

Here are some stats to support my claim (the best place for double checking these stats is Rand Fishkin’s book- Lost And Founder. You can read/buy the book here: Book: Lost And Founder):

  • only 25% of tech startups survive past year 5 of operation.
  • Roughly 40% of the high potential US startups fail completely (completely means investor lose all the money).
  • Only 5% of US startups deliver the expected return on investment for VCs(yes, Instagram, you know you did it).
  • The target is to beat S&P 500 very handsomely over the period of 10 years as far as VC funding is concerned. If we take 12% as average return for S&P 500, the target is to return more than $300 million on a $100 million investment in 10 years.
    • Only 5% of startups succeed at this target.
    • A further 10% startups will return between $200 million and $300 million. (The VC was better off invested in an index fund.)
    • The next 35% return between $100 million and $200 million. (The VC was better off keeping his money in a high yield CD/bond/savings account in this case.)
    • The remaining 50% return less than the initial investment. (A checking account with 0% interest rate would have done better in this case)
  • The founders and employees in a startup make lesser income and get worse benefits compared to their big company counterparts on average. The rationale for this is that they get equity (common stock for founders and employee options for employees; the VCs keep the preferred stocks for themselves).
  • The equity is illiquid, hence worthless if the company does not go through an exit event, like IPO or acquisition.

Entrepreneurship is supremely important for innovation, creating jobs and keeping the economy vibrant. However, for an individual, being an entrepreneur with a traditional startup with VC money might not be the “get rich quick” scheme they were hoping for, even though it could be their best life decision. So, go start that startup of yours, but for the right reasons.

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