In 1999, my internet start-up was valued at nearly $100M. I thought I had it made. Like many of my contemporaries at the time, I rented a nice apartment near the beach and spent more money going out. I momentarily day-dreamed that I’d be ringing the NASDAQ opening bell.
It didn’t end up that way and when that world came crashing down in 2001, I ended up with less than $10K to my name. I learned the hard way that paper wealth doesn’t pay bills. I was forced to re-think how to think about finances, risk and exits.
Personal burn rate
For the scrappy entrepreneur, budgeting and saving is complicated. Many entrepreneurs are living paycheck to paycheck, or in debt. Early stage founders can make $60K or less.
The key is to live conservatively and maintain a low personal burn rate. Married entrepreneurs often deliberately diversify income streams whereby one pursues the entrepreneurial route while a spouse takes a lower-risk, steady-paying job. As a career entrepreneur, I’ve never owned a home, avoided lavish spending and invest conservatively. While others may think I’m cheap, I’m acutely aware that a big win is by no means guaranteed. Though I’ve had a previous exit, I’m very protective of my savings.
The equity/cash trade-off
My father, an attorney, would say “every hour I’m not working, I’m not earning.” Unlike high cash-paying jobs like those on Wall Street or in consulting, the entrepreneur must be at ease that it is a conscious ownership/cash trade-off. One’s equity interest in their start-up often is their savings.
Start-ups are, inherently, hit driven businesses. The entrepreneur has significant earnings volatility, yet greater upside. The shares one aggregates over his/her career may be worth nothing or millions of dollars, but this often takes years to find out. I advise young entrepreneurs to take a longer term, multi-venture perspective and to diversify the types of opportunities they pursue. In a sense, you’re your own career venture capitalist.
Risk tolerance and exits
Most entrepreneurs set out to build the billion-dollar business. Somewhere along the way they realize that it isn’t in the cards. Sometimes there’s an opportunity to sell the business and make good, potentially life changing, money. I’ve long believed in staging risk and preserving exit options along the way. Too many entrepreneurs, tempted by the ability to raise lots of venture capital, ended up with smaller returns than if they had sold earlier (perhaps my mistake at Handshake.com). I encourage founders to talk openly with their teams, investors and families about risk/return throughout the journey. Always believe you’re out to change the world, and build the next great big company. Just don’t spend like it.