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.

startup-1018511_960_720

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.

Advertisements

Strategies for winning college financial aid

I have written many posts on saving for college. You can refer to them here: Simplifying saving for collegeHow to get your money into Roth IRA even when IRS prohibits it?The Mother of All Personal Finance Hacks- Mega RothHow much to save for college?

If you have read the above articles, you know where, how and how much to save for college. However, what if you just cannot save enough for college. Maybe your income is too low or your expenses too high. Then, you might have to rely on Financial Aid and Scholarships/Grants.

financial-aid

First, terminology distinguishing different kinds of Financial Aid (FinAid):

  • Scholarships: Usually, merit-based, sometimes merit cum means.  They are given out by private institutions, colleges, and the Government. The student does not have to return this amount.
  • Grants: Means based. Given to students who qualify based on income and assets. The student does not have to return this amount. Again, given by private institutions, colleges, and the Government.
  • Loans: Usually means based, sometimes merit cum means. This could be a subsidized or an unsubsidized loan for education. The students have to return this amount, however, the terms of these loans vary.  The source of these loans is usually the Government.

Now, if you were to qualify for any of these FinAid opportunities, you will have to fill out one or both of the forms:

  • FAFSA: This is Free Application for Federal Student Aid (FAFSA).
  • CSS: This is the financial aid profile offered by College Board ( CSS).

Most colleges accept FAFSA but some colleges like Stanford want you to specifically fill out CSS. So, what’s the difference between the two?

  • CSS Profile is just used for private, non-federal aid while FAFSA is required for any Federal Aid.
  • FAFSA excludes the value of your equity in the primary residence and also the value of your small business, while CSS does not.
  • CSS asks for the financial information of the non-custodial parents.
  • CSS asks for the expected income and expenses (medical expenses, elementary school tuition for your other children and any other circumstances) of the academic year to better judge your ability to pay college tuition.

Now, let’s see what our strategies could be to win the financial aid.

Let’s say you belong to the following category:

  • You have low income.
  • You have no equity in your primary residence and no small business and no investments.
  • You show that in the academic year, you will not have any money leftover to be able to fund your child’s college.

In this case, from both CSS & FAFSA perspective, you don’t need any strategy. You will qualify for financial aid anyway.

So, we need strategies for people in the following groups:

  • High income, high assets.
  • High income, low assets.
  • Low income, high assets.

I am not going to deal with the question if it is moral or ethical for High-income folks to strategize for FinAid or not. I will leave this moral dilemma to the reader. 

Here are the main tenets to keep in mind:

  • FAFSA and CSS don’t look at your retirement accounts (IRAs, 401Ks). Again, if you have read my articles  Simplifying saving for collegeHow to get your money into Roth IRA even when IRS prohibits it? , The Mother of All Personal Finance Hacks- Mega Roth, you know that I am a big proponent of Roth IRA for college saving, precisely for this reason.
  • FAFSA and CSS both primarily look at a prior year’s tax return to assess your income. For eg., my daughter will go to college in 2026. Both FAFSA and CSS will look at my 2024 tax return. Note, they have recently changed the rule. With the earlier rule, they would have looked at my 2025 return.
  • FAFSA does not look at the equity in your primary residence nor does it look at the value of your small business.

For the purposes of a case study, let’s assume the college starting year to be 2026.

Low income, high assets strategy:

  • The main strategy here is to sell off all your investments in your taxable accounts/real-estate and pay off/down the mortgage on your primary residence with the money. For the case study, this has to be done in the year 2023 so that the capital gains don’t mess with your 2024 tax return.

High income, low assets strategy:

  • If this person does not have any assets whatsoever, including Retirement Accounts like Roth IRA, there is not much this person can do.  He will automatically get benefited by the fact that he does not have any assets in his investment accounts though.

High income, high assets strategy:

  • This person has to show reduced income as well as reduced assets.
  • Reduced assets can be shown by “selling your assets in investment accounts and paying off/down your primary residence mortgage” in 2023 strategy.
  • Since this person has a large number of assets including big sums in retirement accounts, this person can quit working (or take a break) at the end of 2023 and live off his Roth IRA. If you have read my prior post, you know the flexibility of Roth IRAs.  Of course, this works only for those people who:
    • Want to change careers so want to go back to school themselves or start something new, OR
    • Are done working and this happens to be a good sweet spot to quit, OR
    • Always wanted to take a break for a few years (or one year) and this happened to be the sweet spot.
    • It’s important that this should not be a financial strategy in isolation. This has to be holistic life decision. This is because since you are high-income, it makes more financial sense to keep your income and pay for college without financial aid than to rely on financial aid and stopping your income as a financial strategy.

I hope you enjoyed these strategies. Please share any other strategies which I can add to the list.

Good luck!