Startups are Financial Suicide
medium.com
medium.com
Its not that startups are financial suicide - the suicide is not saving and not keeping the personal burn rate low.
A clearer way of saying the same point - keep on saving like a regular employee would - you will protect yourself in case startup fails. Do not assume that the startup succeeds and have no safety net. That sets up for a disaster.
Reality is starting your own startup is a very risky proposition. Huge upside potential (serious generational wealth), but tons of downside scenarios. If financial security is important to you, then pursuing a more measured approach to reaching some basic level of financial independence is probably a good idea before going that route - I write a lot about this here: https://ramenretirement.com/
On the other hand, starting or joining a startup can be a huge accelerator to career and skills growth. You’ll get opportunities you’d have to wait years for at a larger company. That’s (arguably) the best reason to join someone else’s startup.
I don’t fully get this part, even if the startup wasn’t financialy viable, why didn’t he pay himseslf something around $10-35k per month as CEO? He won’t have his savings crushed now, and probably made money for himself. Maybe I am missing something obvious.
I take you've never planned a startup budget before ;). Try running the numbers on how much it costs to run a startup with 5 employees for 3 years given $2m. You can't afford to pay the CEO $35k/month because you will run out of money far to quickly.
This subject has been discussed over and over again by top tier VCs !
If none of this happens (and I bet some of this could be set add cost of business) yore just filling your bank account with VC money and reducing the chances of success.
Sadly this biases investors towards funding either the young and the rich.
On one end you have guys like Paul Graham and Peter Thiel that truly believe in the startup way of life.
On the other end, you have people that quit their job at Google, posted a "Why I left Google to do a startup" article on medium, and then ended up regretting the decision years later.
Most people that start companies are either people that are unemployable and can't help themselves, or employable people that could do well in more traditional career paths. If you're in the employable group, I think it's important not to start a company for the sake of doing it because it's cool. The type of startup becomes really important. As an old man, would you regret not trying to solve this particular problem that you're passionate about? It's different for serial entrepreneurs / hustlers, who are always scheming for new ways of making money no matter what.
There are definitely people who just wouldn't be happy any other way. And people who are at least seemingly in the right place at the right time to give it a shot.
https://www.crunchbase.com/organization/shoes-of-prey
I would hope this Founder has more to share in retrospective explaining the true reasons for suicide, such as:
* The margins of an online retail shoe business are poor (typically single digit).
* The costs of carrying unsold inventory will bury a company in debt.
* Being the first to deliver a product online is not a sustainable competitive advantage.
* Amazon is crushing everyone in retail.* Zappos hadn't been acquired yet by Amazon (July 2009)
* Amazon failed to compete with Endless (launched in 2007)
* Shoes seemed like a great vertical at the time : Zappos did 1B in revenue in 2008 (vs 19B for Amazon) and competitors were popping up all over the world (Zalando launched in 2008)
Too many founders, myself included at one time, start companies because the passion strikes without seriously considering if their finances/life are well-positioned to minimize long-term downside or the constraints on the startup required to ensure that failure doesn't empty your bank account. If you are careful and thoughtful about when and how you do a startup, the downside risk can often be a reduced rate of financial growth (versus a normal job) rather than financial ruin. It is quite possible to build startups without jeopardizing your financial future but it requires some diligence and discipline.
One of those widely repeated number, but not true: number is below 60%.
https://www.google.com/amp/amp.timeinc.net/fortune/2017/06/2...
I am wildly skeptical of these numbers, and could not find the actual study after a quick search on Google. It seems to ignore seed investments for starters, and many "exits" (acquihires) aren't public information, so how they quantify this is ambiguous.
If we consider a startup to begin when someone decides to quit their job and work on it full-time and a successful exit as a positive ROI to most investors in less than 10 years, I'd estimate the number as closer to 99% (most people never get any funding for their startups at all). Of course, I have no hard numbers to back that up.
The article is a bit light on details.
forbes https://www.forbes.com/sites/davidhochman/2017/05/31/shoes-o...
crunchbase https://www.crunchbase.com/organization/shoes-of-prey
Essentially you should calculate your opportunity cost. And then figure out a dollar number you are willing to lose. So lets say you save $10k per year. Also assume that you will reduce your lifestyle so as to spend only 2k/month (including medical insurance) on living expenses to start your company.
So for a year of unpaid work you will be down the hole of 24k + $10k + $6k (it will take 3 months to get a job after 1 year of being an entreprenur) + $10k in incidentals (server hosting costs to seeing the doc a few times). So thats a total of $50k. Now thats in fantasy land or Utah.
In NYC and SF you're looking at probably $120k or more per year if living in decent housing. The more you make the higher this number becomes, becuase of the opportunity costs.
So its should become very apparent to you that you need to raise money if you start a startup in SF or NYC. Else move somewhere else immediately.
It should also make apparent that you should work as much as possible in your free time before quitting.
After this you should put a number in your savings account after which you will quit entrepreneruship. So say on hitting $100k in your bank account (after starting with $200k) you'll quit.
People focus too much on just their monthly bill and I think thats the biggest mistake. The opprotunity cost is very very real. You don't get that time back.
This kind of takes the bite out of his argument.
As other have said, "don't bank on the home run" is good advice but if the worst you do is to give something you really want to do a try when you're young and it doesn't work out financially, you'll probably still be fine.
See here, where the difference between Ben and Jerry’s and Amazon (when both were small companies) is explained.
https://www.joelonsoftware.com/2000/05/12/strategy-letter-i-...
Of course these businesses can look similar from a distance, one can turn into the other, and it's possible to bet wrong on which category your business should align itself with.
Or exiting via IPO (which of course is a type of sale)
Many forms of bad behavior or generally useless approaches can be justified by "oh well some other people did it successfully, why cant we?"
I think this is common sense that when you are starting business, you have to adjust your life style to that. Suddenly, you won't be getting regular hefty paycheck from Google and have to rely on your business income. If the income is not able to sustain your current life style, you have to adjust otherwise you will burn through your cash. That is reasonable in the short term, but should ring a bell if it takes more than 1 year to be able to live from your startup salary.
On the top of that, you have to adjust the company to the "startup" budget as well. I have seen so many people go nuts with hiring, benefits and useless spending after getting large seed or series A.
Also building muscle and weightlifting is common sense and thus theres no need to talk about growing old.
And finding the right spouse is common sense and theres no need to talk about divorce.
Have you read the article? It does explain why they, after 9 years of hard work, end-up having financial issues. What was the reason for them to not to have financial viable product? Was it cause of over-hiring; over-engineering; wrong market? There are always problems in companies, so what was the unique experience they have that they can confidently put all startups into one bucket and say: "Look this bucket, this is suicide bucket!".