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Startups are Financial Suicide

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Re: Startups are Financial Suicide

#31

Post by ghaff »

Judgmentality wrote: post #20
quickConclusion wrote: post #12

>"Over 90% of startups die" One of those widely repeated number, but not true: number is below 60%. https://www.google.com/amp/amp.timeinc.net/fortune/2017/06/2...

> Cambridge Associates, a global investment firm based in Boston, tracked the performance of venture investments in 27,259 startups between 1990 and 2010. Its research reveals that the real percentage of venture-backed startups that fail—as defined by companies that provide a 1X return or less to investors—has not risen above 60% since 2001. Even amid the dotcom bust of 2000, the failure rate topped out at 79%. I am…

It would be hard to really quantify. You have everything from worked nights and weekends for a year and nothing ever came of it to acquihires with a nice but modest payout to breakeven acquisitions to IPOs or other big exits. I'm sure if you include friends & family money (or personal money) and sweat equity the failure rate goes way up.

Re: Startups are Financial Suicide

#32

Post by ksahin »

tristanj wrote: post #22
hartator wrote: post #4

> We raised over $25m and sold millions of dollars of product to real customers. I don’t fully get this part, even if the startup wasn’t financialy viable, why didn’t he pay himseslf something around $10-35k per month as CEO? He won’t have his savings crushed now, and probably made money for himself. Maybe I am missing something obvious.

>Why didn’t he pay himseslf something around $10-35k per month as CEO? I take you've never planned a startup budget before ;). Try running the numbers on how much it costs to run a startup with 5 employees for 3 years given $2m. You can't afford to pay the CEO $35k/month because you will run out of money far to quickly.

You are right, but paying a founder $120k/y is totally fine when you raised $25m. It's more than that, money shouldn't be a problem for founders, so that they can focus 100% on their company.

This subject has been discussed over and over again by top tier VCs !

Re: Startups are Financial Suicide

#33

Post by jacquesc »

hartator wrote: post #4

> We raised over $25m and sold millions of dollars of product to real customers. I don’t fully get this part, even if the startup wasn’t financialy viable, why didn’t he pay himseslf something around $10-35k per month as CEO? He won’t have his savings crushed now, and probably made money for himself. Maybe I am missing something obvious.

He wouldn't have been able to raise $25m if he was paying himself that much. Investors are very sensitive to founders who pay themselves enough to live comfortably.

Sadly this biases investors towards funding either the young and the rich.

Re: Startups are Financial Suicide

#34

Post by ksahin »

keeptrying wrote: post #9
uptownfunk wrote: post #2

Sound advice.. a sobering note for anyone looking to get into a startup like myself..

Yes! And if you're actually heeding this advice it means you're smarter than most. BUT this should not stop you either - just need to find a way to work around it. :) Essentially you should calculate your opportunity cost. And then figure out a dollar number you are willing to lose. So lets say you save $10k per year. Also assume that you will reduce your lifestyle so as to spend only 2k/month (including medical insu…

What about the learning/experience that goes with a "failed" startup? Can we put a number on it? I think so !

Re: Startups are Financial Suicide

#35

Post by xenonite »

nicodjimenez wrote: post #21

Everyone over-extrapolates based on personal circumstances. On one end you have guys like Paul Graham and Peter Thiel that truly believe in the startup way of life. On the other end, you have people that quit their job at Google, posted a "Why I left Google to do a startup" article on medium, and then ended up regretting the decision years later. Most people that start companies are either people that are unemployabl…

Hi! Interesting point. Makes me interested in reading more about your quoted ex googlers who regret it. Do you have any particular links to share?

Re: Startups are Financial Suicide

#36

Post by patd »

matchagaucho wrote: post #23

For some context, the "startup" in question appears to be an online woman's shoe website. https://www.crunchbase.com/organization/shoes-of-prey I would hope this Founder has more to share in retrospective explaining the true reasons for suicide, such as: * The margins of an online retail shoe business are poor (typically single digit). * The costs of carrying unsold inventory will bury a company in debt. * Being the…

For some context on why it might have seemed like a good idea at the time (April 2009):

* Zappos hadn't been acquired yet by Amazon (July 2009)

* Amazon failed to compete with Endless (launched in 2007)

* Shoes seemed like a great vertical at the time : Zappos did 1B in revenue in 2008 (vs 19B for Amazon) and competitors were popping up all over the world (Zalando launched in 2008)

Re: Startups are Financial Suicide

#37

Post by ghaff »

not_a_moth wrote: post #26

> To be clear, my startup is still very much alive and, apparently, well. I left the company over a year ago. I might get a return in the future... This kind of takes the bite out of his argument.

Well, he's arguing that he spent close to 10 years (in his 20s/30s ?) depleting his savings. But, yeah, "financial suicide" seems a bit strong. Lots of people get grad degrees and take jobs that don't work out (and don't save as much as they probably should) during that period. Of course, there have also been a couple of serious stock market dips during the past 20 years even for people who did save.

As other have said, "don't bank on the home run" is good advice but if the worst you do is to give something you really want to do a try when you're young and it doesn't work out financially, you'll probably still be fine.

Re: Startups are Financial Suicide

#38

Post by jandrewrogers »

The mistake many founders make is not analyzing the financial impact of doing a startup in the context of their entire life, both before and after a startup. You can mitigate much of the financial risk by choosing the right times in your life/finances to do a startup and having a plan for executing the startup that minimizes the downside if you fail. It is a long-term financial modeling exercise that let's you optimize the risk-reward ratio.

Too many founders, myself included at one time, start companies because the passion strikes without seriously considering if their finances/life are well-positioned to minimize long-term downside or the constraints on the startup required to ensure that failure doesn't empty your bank account. If you are careful and thoughtful about when and how you do a startup, the downside risk can often be a reduced rate of financial growth (versus a normal job) rather than financial ruin. It is quite possible to build startups without jeopardizing your financial future but it requires some diligence and discipline.

Re: Startups are Financial Suicide

#39

Post by ramen-san »

BIackSwan wrote: post #5

The point here (which seemed to be muddled in the post) is that you can’t assume that your startup succeeds and not save with that expectation. Its not that startups are financial suicide - the suicide is not saving and not keeping the personal burn rate low. A clearer way of saying the same point - keep on saving like a regular employee would - you will protect yourself in case startup fails. Do not assume that the…

To put a finer point on that, it’s important to remember not all startups succeed. We never hear the TechCrunch stories about the startup that quietly shuts down, or was sold to make the investors whole, leaving founders and employees holding the bag.

Reality is starting your own startup is a very risky proposition. Huge upside potential (serious generational wealth), but tons of downside scenarios. If financial security is important to you, then pursuing a more measured approach to reaching some basic level of financial independence is probably a good idea before going that route - I write a lot about this here: https://ramenretirement.com/

On the other hand, starting or joining a startup can be a huge accelerator to career and skills growth. You’ll get opportunities you’d have to wait years for at a larger company. That’s (arguably) the best reason to join someone else’s startup.

Re: Startups are Financial Suicide

#40

Post by collyw »

ramen-san wrote: post #39
BIackSwan wrote: post #5

The point here (which seemed to be muddled in the post) is that you can’t assume that your startup succeeds and not save with that expectation. Its not that startups are financial suicide - the suicide is not saving and not keeping the personal burn rate low. A clearer way of saying the same point - keep on saving like a regular employee would - you will protect yourself in case startup fails. Do not assume that the…

To put a finer point on that, it’s important to remember not all startups succeed. We never hear the TechCrunch stories about the startup that quietly shuts down, or was sold to make the investors whole, leaving founders and employees holding the bag. Reality is starting your own startup is a very risky proposition. Huge upside potential (serious generational wealth), but tons of downside scenarios. If financial secu…

Interestingly the startup I joined had work very similar to the big established company I work for now - cleaning up someone else mess and trying to keep it running.
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