99% of startup founders shouldn’t be startup founders.
As an investor, I’ve listened to hundreds and hundreds of startup pitches. I’ve also played an active role in the grassroots startup ecosystem for over a decade. For example, I was a mentor at a university in Singapore where I would help young entrepreneurs develop business plans, prototype their ideas, and raise funding.
My conversations with aspiring entrepreneurs in just about every region of the world led me to the same conclusion—that there is a serious disconnect between what entrepreneurs really want to achieve, and what they are being pressured to do.
Specifically, the overwhelming majority of people aspire to become entrepreneurs in order to produce income streams for themselves. They aspire to become financially free and to shatter the income ceilings they would be subjected to by being a corporate employee. Furthermore, they also aspire to enjoy more work/life balance, usually by way of increased autonomy, time flexibility and location independence. The truth is that they will almost never achieve these goals by launching a startup.
We need to do better at distinguishing startups from small businesses, instead of lumping them all together in one category.
Let’s break these two scenarios down:
- A small business is a business that starts with the intention of producing income for the owners. The goal is to create a product or service that solves a problem in the world, while pursuing the clearest path to profit in the short and medium-term. When successful, small business owners have the potential to enjoy passive income in some form—leading to greater autonomy and freedom.
- A startup, on the other hand, is a specific type of business that prioritizes growth, scale, and market share over profits. To achieve these goals, the founders need to tap into financial markets, raise capital, and build out the business in a way that seeks to ensure category domination in the long term. Because startups are almost always loss-making, it is necessary for them to be funded by investors. The founders’ compensation is limited to their salaries as employees, but they also hold illiquid equity stakes that promise a life-changing windfall in the event of an exit.
Whenever I speak to aspiring entrepreneurs who are first starting out, I always ask them, “What does success look like to you?”
As a small business owner, you have the ability to create a fantastic lifestyle business for yourself.
You can solve a problem in the world and start making upwards of $500,000 a year in actual income for yourself and your family. You can choose the type of business you build, whether or not you want to work remotely, how much you want to travel. You’re the one in charge, and your income can eventually get to the point of being passive or semi-passive.
This is one version of success.
As a startup founder, your path is very different.
You too are solving a problem in the world, however because of the nature of the game you’re playing, you are most likely going to make less money than you did at your previous job. Instead, you’ll be spending money, and lots of it—drawing down on your savings, taking on debt, and paying everyone else before paying yourself.
In addition, you’ll be working more hours than you’ve ever worked before in your life. You’ll have to answer your phone in the evenings, on weekends, and you can forget vacations altogether. Then, when you reach your first inflection point and start adding investors into the mix, take all the stress and exhaustion you were experiencing before and triple it. Now, it’s not just your customers and your team you have to cater to; you will have to account to your shareholders and board members as well.
You will slog for six or eight years, with the outcome being a roughly 5% chance at making life-changing lottery money, that will come from either an acquisition or an IPO.
This is the other version of success.
The reason I believe shows like Shark Tank have ruined entrepreneurship culture is because they don’t make enough of a distinction between startups and small businesses. Not to mention, such shows put pressure on people to take the startup route, even when they are not mentally prepared to do so.
But when a person embarks on their entrepreneurial journey, they need to do so with intention. They ought to know exactly what they’re signing up for. Otherwise, they’re going to end up in a scenario where they take on an investment that sounds great in the moment, but doesn’t actually advance them toward their true goal.
As an entrepreneur, here are a few things you can do to fully understand what you’re getting yourself into, and decide which path is right for you.
1. Talk to both startup founders and small business owners and reverse-engineer the lifestyle you want for yourself.
If you want to increase your earning potential but also work from your laptop sipping Margaritas on the beach, you don’t want to be a startup founder—you want to be a small business owner. Meanwhile, if you know in your heart of hearts that nothing short of $100 million and a massive impact on the world will make you happy, and you’re willing to do whatever it takes to get there, then a lifestyle business isn’t what you want.
You want to be a startup founder.
It’s very easy today to get access to people who have been successful on both these paths. Communities like Reddit, Medium, and Clubhouse are filled with firsthand accounts of what it’s like to build everything from a nearly passive seven-figure lifestyle business to a $1 billion startup that took eight years off the founder’s life. Before starting your own company, read some of these stories. Listen to interviews. Get a sense of what it cost these founders to get to where they are today, and reverse-engineer the path that is right for you.
2. Have transparent conversations with angels and VCs about financial objectives.
40% of startup founders are depressed, and are stressed by the fear of loss or failure, according to a collaborative study from BDC in November, 2020. In addition, entrepreneurs are more likely to suffer from addiction or suicide—with examples like Tony Hsieh, the former CEO of Zappos, shaking the entrepreneurship world.
The root issue here is that financial objectives are rarely discussed openly and honestly between founders and their investors—and I believe both sides have to do better.
Founders need to be more proactive in initiating discussions about financial objectives for the company, and VCs need to be honest about the expectations they have for returns on their capital. Remember that investors are not donors or patrons of the arts. As much as we like to think that investors are simply looking to support your passions, the truth is that they are looking for outsized returns that justify the massive risks that they are taking in betting on an early-stage startup that is burning through cash.
If an investor’s expectations are to receive a 40x return on their capital, founders are going to be forced to make decisions in order to deliver on that expectation.
Which is why it’s so important to understand, for one, which game you’re actually playing, and two, which investors/partners best align with the vision you have for yourself.
3. Not every business needs to scale or be investable.
Finally, the great demise Shark Tank has had on entrepreneurship culture is positioning raising money as being the ultimate goal.
It’s not.
Receiving an equity investment is one way to finance your fledging venture, but so is taking out a loan (debt), or pre-selling your product on Kickstarter or Indiegogo (crowdfunding), or even getting clients to make advance down payments on purchase orders (pre-sales). These are other viable ways of injecting cash into the business to catalyze growth without giving up equity or having another party influencing the decisions you make and potentially steering you down a path you don’t truly want for yourself.
Which brings us back to all the incubators and pitch days—and the ‘startup curriculum’ that is popping up all over the world these days.
Why are you building what you’re building? What sort of life do you want to live?
Before we can even talk about your idea, we both need to know the answer to that question.
