Startups are risky | #1

Friends,

In this first piece of BS-Startup-Advice, I want to write about the truism “Startups are risky”.

Risk is defined as the possibility of something bad happening. What does bad mean in the context of entrepreneurship? Two ways of looking at this

1. Bad from a company perspective: The firm is not succeeding in reaching the targeted outcome.

2. Bad from a career perspective: You hurt your career.

The company risk (1) could not be more different from the career risk (2) – the problem: both concepts are sometimes conflated in a cognitively lazy way.

The former risk is high. Building a company is hard and most startups fail. To put it in perspective: 100% of VC-backed firms successfully convince investors that their startup can return the fund, yet, only 1.1% of these firms succeed with this endeavour.

The career risk is much lower than a lot of people think.

Why is that the case?

You enjoy a limited downside with an unlimited upside across three relevant dimensions: financial, time and reputation. If you’re talented and ambitious it’s riskier to not start a company vs. to start one.

Financial

There have never been more options for raising a first funding round from angel investors and accessing grants. At the same time, costs for building a first software product (yes, not all startups build software) have never been lower. As a consequence, your entrepreneurial success does not depend on your savings or a financing round done by “family, friends & fools”. The downside is all about your financial opportunity costs.¹ You’ll earn significantly less as an early-stage founder in comparison to some high-paying jobs.

Starting a company, however, entails a disproportionate financial upside. Owning a significant piece of a tech company gives you powerful leverage through technology (very low marginal costs of replication) – you don’t get rich by renting out your time. It’s an uncapped financial upside. If things go well, there is no ceiling to the level of wealth created.

Time

You want to spend your time on the right things. Not doing so over a long period is the risk. I would argue that this is the most important dimension to get clarity on. However, what’s right for you is a very individual question. It depends on your values, the people you want to be surrounded with, the kind of impact you want to create and more.

Most ambitious people want to develop themselves: skills, expertise, network. Founding a startup is one of the steepest learning curves you can find. Learning how to be relentlessly resourceful, switching continuously from micro to macro, practising resilience, convincing exceptional individuals to join your tribe – highly valuable even for most “non-founder roles”. The upside of learning is unlimited thanks to the fundamentally changing nature of challenges. Simply think about what it takes to go from 0 to 1 vs. scaling a company from 1 to 10 million EUR ARR.

Reputation

Even if your startup fails, as long as you have played well, people will rate your journey as something highly valuable. Remember: The default expectation is failure – smart people know how hard it is. Every inch of progress achieved by you as an entrepreneur has the potential to impress. In other words: the reputational downside is often overestimated.

If you succeed in creating a meaningful company of decent size, you’ll be associated with the success of it. Founders gets disproportionate credit and publicity for the success of their companies – a very compelling upside from a personal brand perspective.

To conclude: Start building your company – Don’t postpone (it again), hedge your bets and hope to learn A, while practising B.

Elon Musk says entrepreneurship is like eating glass and staring into the abyss.

Reid Hoffman says it’s like throwing yourself off a cliff and assembling a plane on the way down.

Both are wonderful quotes, yet, (potential) founders can easily draw the wrong conclusions by associating them with the wrong type of risk. Hopefully, This post has helped you gain a bit more clarity on the concept of risk in the startup context.

Founder’s view: Avik from Freshflow

I invited Avik Mukhija to share his thoughts on this topic. Taking the plunge to found a company is his default mode: He moved on from doing state-of-the-art deep learning research at ETH Zurich to found a blockchain startup in the middle of China for which he raised half a million USD. Today, he’s building Freshflow together with his co-founder Carmine.

How do you think about risk as a founder?