Why Start a Startup?
These days, everybody loves the idea of starting a startup. It could be because they realize how much Mark Zuckerberg is worth. It could be that they admire the passion and innovation that many businessmen have, and continue to have. It could be that they simply watch too much Shark Tank. Regardless of the reason, one thing is for certain: the idea of a “startup” and working for one has never been more popular than it is today.
The harsh truth is that not enough people truly understand their “why” for being a business owner. There is little to no doubt that everybody involved in Silicon Valley, for example, is attempting to achieve some level of financial security. However, there are many other variables at play, and other, more deep-seeded reasons for their innovation. They may be striving to solve a unique problem that is extremely personal to them. They may have an unparalleled passion for a certain technological sector that they believe is currently undervalued or underrated. However, these particular reasons don’t necessarily mean that a startup needs to be created. Often times, a particular person can achieve exactly what they want to achieve at another company or organization, in an already established position. They might claim that they started a company for a particular reason, only to find that their true passion lies elsewhere – and they might do this at the expense of millions of dollars of investor capital.
Of course, that is not to say that there aren’t cases where all the stars align, and the real solution IS to start a startup. However, it is important to note that the climate is certainly changing. Silicon Valley is, of course, still a hotbed for innovation, and constantly creating companies that solve modern problems for human beings around the world, but the financial culture around the Bay Area has changed slightly. The valuation multiples for startups have declined because investors, whether we are talking about hedge funds or venture capitalists, realize that they ultimately do hold a lot of leverage. There are plenty of incredible ideas out there, but it’s also important to temper excitement by realizing that investors not only have higher expectations, but startups now have higher operating expenses. For example, it is well-known that San Francisco is now the most expensive real estate market in the United States. When you consider that investor expectations have never been higher, and couple that with the context of ever-growing costs; it’s easy to see that investors truly do have an advantage in negotiation.
The truth is that many people who start startups have great ideas – there is no doubt about that. However, there are so many variables when it comes to getting consistent funding. The idea has to be unique, great, and going after a large enough market to be commercially viable. If the market is large enough, that also usually means that you are going to have ruthless competitors, some of whom may already be successful. This now means that you have to attract the right talent pool to compete with established players in the marketplace, and lure in both consumers and employees with a unique selling point in order to do so.
It’s also important to note that many people honestly want to found a startup for egotistical reasons. They might see that there is a large market for a certain application or service, and believe immediately that it could be sold for a certain amount, and want to keep a certain amount of equity for themselves. While this all sounds lovely, it’s important to consider that of even the best ideas, only one percent of all seed funded companies actually even get to a unicorn status – or in other words, become a company with a one-billion dollar valuation. It is extremely likely that the other 99% were incredible ideas, simply not executed immaculately enough to justify that kind of rare valuation. Of course, the billion dollar valuation, by no means, means that you as a founder immediately get a billion in your bank account. Your equity will have to be doled out in order to incentivize employees and investors, and you may actually walk away with much less than you think. In fact, you’d be very lucky to walk away with 10% of that, at a hundred million dollars. And of course, even getting this far is extremely unlikely!
It may sound less ideal, but there are actual incredible advantages when you consider going another route. There is much to be said for stability. Instead of spending ten years on a startup that could, in all honesty, completely fail and leave you with a resume of a failed startup founder, you could join a company that is getting off of the ground. You could use your skills to negotiate an amazing package for yourself, especially considering that experienced tech workers are ALWAYS in demand. Consider the fact that both Google and Facebook had extremely core members when they were valued at much less. It doesn’t matter whether a staff member joined when the company was employing a hundred people or a thousand people – the opportunity was clearly there for them to prove their value, and contribute enough to the company to be financially set for the rest of their lives. Brett Taylor, who became a founder of Quip, worked at Google very early on, but still, after it already had a thousand employees. He clearly has the passion and innovation of an entrepreneur, but still saw a great opportunity for scalability. In fact, he spearheaded the creation of Google Maps, used by hundreds of millions of people worldwide, and was able to benefit in every sense because of it. He was able to absorb knowledge that he learned there that he now can apply to his own company, and be compensated well for his time, energy, and contributions.
It’s extremely exciting to be a businessman, but it isn’t easy. Too often, people see the lifestyle without imagining the long hours and constant attempts to solve problems and break through barriers of entry that other companies may have already solved, only to try to compete with these same companies, all while finding the right funding, all while not having your equity diluted into nothing. There are many people that believe that they want to start a startup, but will regret it down the road when they realize that they could’ve used their skills elsewhere. It’s extremely important to think as objectively as possible about whether your reasons are valid, and whether other options are on the table.