As I write this following July 4th, I can’t help but begin by being a bit patriotic. We are amazingly fortunate to live in a country with an inherent entrepreneurial culture and even healthy respect for valiant, but failed ventures. I’ll never forget when my grandfather came to visit my first start-up, Handshake.com. He questioned, “investors gave you guys millions on an idea?” He proceeded to tell me that he just didn’t get it (his instincts were right), but how great America was (he ended most conversations that way). I don’t take it for granted that we have an industry dedicated to investing billions to passionate entrepreneurs with little more than a big idea and a committed, capable team. Wow.
I must confess, however, that I now see things a bit differently having spent a few months part-timing on the investment side. Here are a few observations:
Better ways to make dough
It seems to me that the “higher level” you are in business, the more you get paid (on a risk-adjusted basis). Large hedge fund and private equity investors, and even top tier consultants often make many multiples of what a start-up founder or executive garners in terms of cash compensation. Arguably over a 20-30 year period, working one’s way up in a large company may be more lucrative (considering 401(k) contributions, etc). Given that the probability of success in a start-up venture is in the neighborhood of 10%, even with a high potential return, the math suggests that if your priority is making money, start-ups aren’t a particularly good idea.
The march of time
The other difference between investing (or working for a big company) and operating a start-up is the time pressure. Sure, there’s urgency around winning a hot deal or a big M&A transaction. However, unlike an operating business the investor or big company manager can typically punt or pass (always easier to say “come back to me later”). The time scales of investing are often many years long (fund life is around 10 years). In the start-up world, every week that passes means one less week of capital, and that wake-you-up-in-the-middle-of-the-night question of “are we moving fast enough?”
So, are we entrepreneurs nuts?
Sort of yes, sort of no. I think there is far more satisfaction in operating a business, selecting the people you want to work with and building something of value for customers. I think people underestimate the challenge of growing a business from $0 to millions in sales, but getting there is exhilarating. The challenge for the entrepreneur is to stack the deck (by hiring great people, etc) given the risk.
Many entrepreneurs, like me, tend to be short-term focused. However, I believe the entrepreneur should view his/her career as a portfolio of bets (coincidentally much like an investor). Think holistically and strategically about when and which risky bets to take. If you can diversify your base of experiences, you’ll lower your risk and be a better entrepreneur (and have better stories to tell your grandkids).