Why Not To Do A Startup

Recently re-reading pg's How To Make Wealth [1] made me wonder if this will soon become an outdated view of startups. The factors leading to the current and predicted rise in the number of startups (free software, cheap hardware, less personnel) should also lead to a large broading of the spectrum of failure <-> success.

The startup world has until recently been determined by its capital-intensive, high-risk nature - big money chasing big rewards. But the new dynamics may leave room for a lot of diversity in between, and consequently a lot more working on some kind of startup. 37 signals can be seen as exemplary of the other extreme to a go-big-or-die startup: founders and employees accept less risk, less pressure and more life for a higher chance of reward, though a lower expected reward. I think there will be a lot of middle ground: a lot of investors willing to accept less risk for lower return, and a whole lot more people will choose lower rewards for a more comfortable life, and better chance of success.

[1] [http://www.paulgraham.com/wealth.html] "The all-or-nothing aspect of startups was not something we wanted. Viaweb's hackers were all extremely risk-averse. If there had been some way just to work super hard and get paid for it, without having a lottery mixed in, we would have been delighted. We would have much preferred a 100% chance of $1 million to a 20% chance of $10 million, even though theoretically the second is worth twice as much. Unfortunately, there is not currently any space in the business world where you can get the first deal."

I'm no defender of the blind optimism that goes along with the startup universe, but there are certainly less lucrative ways to waste the best years of your life.

I think that part of the confusion of people when they get into the startup scene, is that they loose sight of what a successful exit does for you: solves the money problem. That's it. Nothing else. Nada.

A successful exit will not buy you love. It will not make you instantly happy. An exit will not provide you with meaning and purpose in life. It will not make you immortal. It will not fix all the other problems in your life. It solves one and only one problem: the money problem.

If you talk to people in the valley who were sudden millionaires in the first dot.com gold rush, I think that you'll find that sudden wealth brings its own set of problems which you touched on in your article. I actually remember reading a number of articles about the struggles of the nouveau-rich after their dot com went public.

These things are worth keeping in mind when you're thinking about that startup, or in dealing with relationships while you're in a startup. Be careful burning bridges with family and friends when you're working 100 hours a week with your startup. They might not be there when you find your exit.

Don't get me wrong, though -- they're both good writers, so the above isn't a swipe at either guy or Hacker News.

However: "trailer-dweller" seems a little mean-spirited (and inaccurate) when it's clear who you are referring to with that example.

I had a high paying job, which I hated, and quit to do a startup last year. The problem was that while I was motivated and working night and day, the other 'founders' weren't nearly as devoted to it. As I went months and months without a paycheck, living off credit cards mostly, my new wife and I got further and further into debt (I quit my job 2 weeks before our wedding, that went over REAL well with the in-laws). After about 6 months I realized I was working all hours of the day for no money on a project that had a single digit chance of working out. At that point even if we did get the funding we were looking for I was still going to be paying off my credit card debt for years just to get back to the place I was before I started. So what could I do?

I got a real job, high paying enough that money isn't a problem anymore. We are still paying on the credit cards but we should have them taken care of in about 6 more months. The failure didn't stop me from working on startups though, I've seen what I'm capable of when I work for myself and after that I can't stand to spend my days working for someone else. In fact I'm already deep into a new startup, something that I'll hopefully be able to share with all of you in the next month or so.

Hopefully this time will turn out better than the last.

Now that we’ve identified the worst case scenario, let's try to improve on it.

I hate this comparison - building a successful startup may have some element of luck, but like with everything in life, the amount of luck your success is based on is inversely proportional to the amount of understanding you have of your environment.

If you don't know the currents, getting to the other side does seems to take a lot of luck.

The 37signals folks could write a scathing counter-example to your post. Sure, they might be a rare exceptions, but I never understood why people feel there is fate in statistics... it's possible! It doesn't matter what "the most common startup life" is like, because again, the way your life works out isn't decided by pigeonholing you into fated roles, but by your own choosing.

I have to say, though, and this is totally unrelated to the article itself, that this is one of those pieces where I've thought--hey, I'd like to get in touch with this guy--and yet there's no way to do it directly. I may be the only one who still prefers to communicate specifically with one person directly from time to time, rather than via public comments, blog posts, walls, and the like, but I do. And there's no e-mail address or general contact information I could find on the site, no WHOIS information, no information in the Y Combinator profile on this board, etc. There's probably information somewhere on Facebook, but I can't access Facebook, and even if I could, I'm probably not in the right network to see it.

Oh, well! Still a good article.

Good post. Having both done a startup that didn't go big and now one that looks like it will turn into something big I thing your points are very well made.

As you say, history is written by the winners and about the outliers and totally glosses over the truth for the average majority (and the destructive lows of the minority).

As all of us know who've done it though, doing a business is something that's just in your blood. Most of us who do it didn't do it because we chose to, only because we had to.

I once asked Marc Hedlund a little about the failure of the startup he did before Wesabe. He said it was bad but on balance he didn't feel he came out too badly since he didn't lose his wife or go bankrupt. Enough said.

The highs are insanely high but it's worth writing about the lows too because there's a whole lot of cult around the startup scene that lures people into decisions that can be destructive.

OK, so maybe betting on a startup to succeed is a dumb plan, some hedging might be in order (occasional consulting gigs to ensure a minimum income - any other ideas?).

Btw., I wonder what is the average savings rate for employees? I am 35 now, and I recently realised that I am probably way behind on my savings compared to my peers... I think maybe to save about 10000€ per year is realistic?

Still, in my first year of work after getting my degree, according to some statistics I was already in the top 10% of earners of my country. Nevertheless I felt that without inheriting some money from parents (which I won't), I would never have been able to even afford to buy a flat. That is kind of sick, I think. Maybe life as an employee is not so easy, after all. A friend of mine is also an I worker in the top 10% range, and he said he couldn't support his family without help from his parents.

Really good programmers also need to consider other opportunity costs. Linus and the world are better off because he has pretty much stuck with Linux through thick and thin, and never got heavily involved in running a startup. Tcl started going downhill when Ousterhout did Scriptics (although he did make lots of money). Some people are better off focusing 100% on tech, in other words.

Of course a startup does not want to swap stock share-for-share with just any other startup, and there are startups whose prospects are so dim that even if they offer 5 or 10 shares for every share of yours, you would not want to swap stock with them. And learning enough about another startup to judge their expected earnings is a lot of work. But sometimes the work has already been done for you, by YC for example.

There exists what economists call a "moral hazard" here: namely, once a startup has swapped stock with more than one or two other startups, its optimal strategy is for its founders not to put themselves out (that is, to coast, to relax) and rely on the possibility that one of the other startups will make a lot of money. But this is the same concern any individual founder has when he takes on any co-founder, and the solution is the same: you have (or someone you can trust has) to watch the other startups with whom you have swapped stock closely enough to verify that they are working as hard as you are. (YC's requirement that the startups it invests in must all move to the same city makes it easier for YC startups to watch each other in this way.) Along with that you will want to give yourself a time frame (1 year seems about right) during which time you can back out of the stock swap deal if you believe the startup you are swapping stock with is not putting themselves out (or has misrepresented themselves in negotiations with you).

I can think of several way to refine this strategy to deal fairly for example with the situation in which one startup gives up after 18 months while another works hard for four years, but I will stop here for now.

The problem of being lonely at the top is pretty much eliminated if you found your startup with some buddies who are also smart, creative, and motivated. If your startup is successful, you'll have some good friends who are in the same position as you and who have just gone through the entire startup experience with you.

I found myself at the age of 30 many years into a company I started at 23, and it consumed my entire 20's. Every aspect of my life suffered.

Are people aware of the strange things stress can do to one's body? Look up 'IBS' in google. Try not eating for a year. That's just the stuff I can post.

I missed weddings and funerals. I did things I'm so extremely proud of, and things I'm ashamed of.

Here is the real rub: Once you hire employees, you have an obligation to give them a consistent paycheck. It just happens. This increases 10x when the employees aren't kids in their early twenties working for stock options making peanuts who get 10 job offers a week.

When you have employees who have families that depend on your company, depend on your health plan, your dental plan, your 401k matching funds, the pressure to maintain even when times are tough is huge.

The game can change quickly. Having employees will make it harder to throw up your arms when things get tough and say 'perhaps I don't have a winner here'. You will dig in, and continue the battle, and you are committed until it can survive on it's own. And sometimes that takes a couple years.

Or five.

Or ten.

So a word of caution. Keeping a company alive is tough. Closing down a company is tougher. A fairy tale ending is a pipe dream. Last time I checked, there are a very small number of Mark Cuban's, and this sure ain't 1998. And guess what Jerry Yang is doing: working his ass off to save the soul of his baby. His hugely successful baby.

He doesn't have to be there.

He made his billions. But things aren't right, and he can't sleep at night.

Success is hitting payroll every month. Never ever miss payroll. Any goodness above that is gravy. Anything worse than that is hell.

Would I change it all, and to have just gotten a job out of college, reporting to someone every day of my life? Hell no!! I love it. I could think of no better way to live my life. :)

The idea that you have to 'go big or go home' in tech is getting more outdated I'd say. If I have to choose between being a corporate toad or a work-enslaved zombie, I choose neither. We live in a free-market economy, which gives us the flexiblity to make what we want with it. Isn't that what entrepreneurism is all about?

Even more extreme -- what if the whole economic cycle reverses, the currency devalues and inflation eats up your savings? Hard to imagine, but economic systems have this capacity for extreme events. I know the whole generation of honest engineers in Soviet Union who have not built a capital to retire on (obviously) and who were left desolate in their 50s-60s without pensions or jobs when their state companies/research labs collapsed.

Startup offers an option to strike it rich. If you hit the sweet spot of some business 'fitness function' - then you're set for life. If not, the most obvious strategy is to try as many startups as possible in your lifetime. This is like having a venture fund spread in time. One of your holdings should make it, the rest of them you expect to fail. It's nice if the winner comes when you're in your 20s :) But not necessary.

However, focusing on a single make-or-brake business idea and betting your farm (life) on it is a stupid idea. It is sad that many engineers are actually one-idea phenomena simply because of their specialization. Venture capitalists are in the best position, as they sit on the portfolio of options (startups).

If you can answer the question "What you would like to do with your life?", the macro decisions, then decisions such as doing a startup or not, where to buy a house, etc. seem pale in comparison.

A lot of them try to do too much or try to compete when they should be ideally figuring out the business.

Good mentorship goes a long way of making the startup work the right way.Getting good mentors who have done startups is really the harder part.

Startups are good for society and hopefully good for the individuals who do them - but they need to be done the right way. Matts article serves as a cautionary tale to every startup entrepreneur. If he describes your startup really well, you are probably doing it the wrong way.

It's important to try to do great things, and it's noble to encourage others to do the same. ("Yay YC," you know?)

Seth Godin has an old post on this that I think serves as a good reminder, and still rings very true to me. A key quote:

"The thing is, we still live in a world that's filled with opportunity. In fact, we have more than an opportunity -- we have an obligation. An obligation to spend our time doing great things. To find ideas that matter and to share them."

--http://sethgodin.typepad.com/seths_blog/2007/12/only-two-yea...

Me, I don't need plentyoffish money to be successful. Just give me some hope and some extra cash and I'll call it a small win.