Tech startups: The worst get rich quick scheme ever

Ever seen this quote? (Most recently seen circulating through various social networks):

“Entrepreneurship is living a few years of your life like most people won’t, so that you can spend the rest of your life living like most people can’t.”

This is the most misleading statement about entrepreneurship ever. You know what would make this quote accurate? Replace ‘Entrepreneurship’ with ‘Investment Banking.

Starstruck wantrepeneurs: Understand the real-world challenges that you’re going to face as a startup founder. It’s not just 100+ hour work weeks coding in a dingy garage while subsisting on ramen-only diets. You’ll also experience a constant fear of failure, stressed conversations with your significant other, and an ever-shrinking social life, all while living life as a cash-flow negative individual.

But you’ve already heard this spiel. In famous founder war stories, this despair is followed up by “then we rapidly scaled our startup to 100 million users, raised an eight figure VC investment, grew even more, IPOed, and I retired at 28 with 2 yachts, 3 girlfriends, 4 houses, and 10 cars.”

All that pain and suffering sounds like a tiny price to pay compared to the expected payoff. Except that is not what is actually happens. Here’s the most common way that story ends: “We got to a couple thousand users pretty quickly, but then our numbers plateaued. We started running out of money, and desperately cold-called VCs, but no one answered. One day, our money ran out, and I emailed my co-founders to tell them that it’s over.”

The celebritization of startup founders has gone way too far in the wrong direction.

Moving to Silicon Valley and launching a tech startup is a lot like moving to Hollywood and signing up for a few screen tests: you are at the bottom floor of a massive wealth pyramid where a tiny few at the top make nearly 100% of the money. But at least the starstruck movie extra understands the extreme odds they’re up against on their path to success.

There’s this nasty rumor going around Silicon Valley that it’s easy to launch startups and raise money. The next time you hear that every stupid app idea is getting VC funding, and that we’re moving ever closer to a tech bubble, give them these statistics: Of the 5-6 million companies launched each year, only 1000 companies/year receive early stage financings, and increasingly these investments are targeting enterprise startups with repeatable business models.

The few startups getting ridiculous, unearned valuations nowadays are attached to ‘celebrity’ founders. You’re no Sean Parker (or Bill Nguyen). Don’t expect to raise money like them. You’re going to need a real product with proven traction in a promising market to even get to a Series A. And even those ‘validated’ startups are facing up to 20:1 odds at a > $100M exit.

If you’re an entrepreneurial newbie and want to maximize your chances of becoming a millionaire in the near future, you have a series of alternatives to launching a tech startup that will provide you a much higher chance of success:

  1. Start a small business: These are often pejoratively referred to as ‘lifestyle’ or ‘lemonade stand’ businesses, but there are a number of small business advantages over jumping right into a startup.
    • They’re much more likely to make money. I’ve found that there is a much higher correlation between talent + effort and financial success in small businesses than startups. It’s still risky, but small businesses are a lot more predictable.
    • You will learn valuable lessons about hiring, sales, operations, and cash flow, putting you miles ahead of most ‘hustlers’ in Silicon Valley if you ever decide to join a startup.
    • Successful small business owners build great networks, partners, employees, and value, all which can be leveraged to enhance your future startup prospects.
  2. Get an education and a real job: I’m three years out of college. Do you know which of my former classmates are the closest to becoming millionaires? Not my fellow startup entrepreneurs; most of them are barely making rent. By far, the richest 25-year-olds are those math and science kids working for investment banks, engineering firms, and pharmaceutical companies. Next in line to make million(s)? My friends in law and medical school.
  3. Learn how to save money: This is the least sexy, but most practical option. Read The Millionaire Next Door. Realize that huge chunks of people who get to ‘millionaire’ status are hard-working, diligent people working regular jobs. You just need to learn how to control your spending and invest your savings.

Boring, I know.

  • http://www.bradrach.com/ Brad Rach

    “The celebritization of startup founders has gone way too far in the wrong direction.” That is so very, very true Neil.

  • http://dragonpoe.com Adam Smith

    ehmmm… It’s yes and no. Depends on the idea and if there is a business plan at all.