
Startups are Financial Suicide - codentropy
https://medium.com/@mikeknapp/startups-are-financial-suicide-e36143e4c3ca
======
BIackSwan
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 startup succeeds and have no safety net. That sets up for a
disaster.

~~~
ramen-san
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/](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.

~~~
collyw
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.

~~~
ramen-san
Ha! No doubt. No shortage of schleps and ‘tech debt’ at startups too. But if
the company is doubling every year it will hard to not be swept up by that
rising tide in terms of seniority and responsibility.

------
hartator
> 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.

~~~
tristanj
>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.

~~~
ksahin
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 !

~~~
AstralStorm
Why would a founder of a start-up need 120k$/y though? Are they saving to buy
a property? Renting in an extremely expensive place? Perhaps hiring servants?

If none of this happens (and I bet some of this could be set add cost of
business) yore just filling your bank account with VC money and reducing the
chances of success.

------
nicodjimenez
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 unemployable and
can't help themselves, or employable people that could do well in more
traditional career paths. If you're in the employable group, I think it's
important not to start a company for the sake of doing it because it's cool.
The type of startup becomes really important. As an old man, would you regret
not trying to solve this particular problem that you're passionate about? It's
different for serial entrepreneurs / hustlers, who are always scheming for new
ways of making money no matter what.

~~~
ghaff
Or: at one end you have people who got really lucky and at the other end have
people who didn't--and walked away from a fairly sure thing in the process.
Grass is greener and all that.

There are definitely people who just wouldn't be happy any other way. And
people who are at least seemingly in the right place at the right time to give
it a shot.

------
matchagaucho
For some context, the _" startup"_ in question appears to be an online woman's
shoe website.

[https://www.crunchbase.com/organization/shoes-of-
prey](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 first to deliver a product online is not a sustainable competitive advantage.
    
      * Amazon is crushing everyone in retail.

~~~
patd
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)

------
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.

~~~
lifeisstillgood
could you expand on this - sounds interesting

------
quickConclusion
>"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...](https://www.google.com/amp/amp.timeinc.net/fortune/2017/06/27/startup-
advice-data-failure)

~~~
Judgmentality
> 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 wildly skeptical of these numbers, and could not find the actual study
after a quick search on Google. It seems to ignore seed investments for
starters, and many "exits" (acquihires) aren't public information, so how they
quantify this is ambiguous.

If we consider a startup to begin when someone decides to quit their job and
work on it full-time and a successful exit as a positive ROI to most investors
in less than 10 years, I'd estimate the number as closer to 99% (most people
never get any funding for their startups at all). Of course, I have no hard
numbers to back that up.

~~~
ghaff
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.

------
tim333
For the curious the startup was Shoe of Prey, I think "bespoke, hand-made
women's shoes designed by the customer"

The article is a bit light on details.

forbes
[https://www.forbes.com/sites/davidhochman/2017/05/31/shoes-o...](https://www.forbes.com/sites/davidhochman/2017/05/31/shoes-
of-prey-delivers-womens-custom-footwear-in-two-weeks-at-retail-
prices/#65d420d23971)

crunchbase [https://www.crunchbase.com/organization/shoes-of-
prey](https://www.crunchbase.com/organization/shoes-of-prey)

------
alphabettsy
Pretty sure all new businesses are startups. Many just don’t work, part of
entrepreneurship.

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

~~~
keeptrying
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 insurance) on living expenses to start your company.

So for a year of unpaid work you will be down the hole of 24k + $10k + $6k (it
will take 3 months to get a job after 1 year of being an entreprenur) + $10k
in incidentals (server hosting costs to seeing the doc a few times). So thats
a total of $50k. Now thats in fantasy land or Utah.

In NYC and SF you're looking at probably $120k or more per year if living in
decent housing. The more you make the higher this number becomes, becuase of
the opportunity costs.

So its should become very apparent to you that you need to raise money if you
start a startup in SF or NYC. Else move somewhere else immediately.

It should also make apparent that you should work as much as possible in your
free time before quitting.

After this you should put a number in your savings account after which you
will quit entrepreneruship. So say on hitting $100k in your bank account
(after starting with $200k) you'll quit.

People focus too much on just their monthly bill and I think thats the biggest
mistake. The opprotunity cost is very very real. You don't get that time back.

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

------
not_a_moth
> 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.

~~~
ghaff
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.

------
vannevar
As someone who has spent a significant part of his career (and income) in
startups, I strongly agree with this succinct advice. Particularly the bit
about the 401K.

------
trevyn
There are more things to optimize for in life than finances. :-)

------
m3kw9
Ain’t all companies used to be startups?

~~~
analog31
Something I learned from reading enough HN, is that "startup" specifically
refers to companies that are started for the purpose of ultimately being sold.
This is as opposed to a so called "lifestyle business," which you expect to
operate and produce an income to support yourself and your family.

Of course these businesses can look similar from a distance, one can turn into
the other, and it's possible to bet wrong on which category your business
should align itself with.

~~~
matchagaucho
More specifically, the equity in a "startup" is not solely owned by the
founder(s). There are liquidity exit expectations within 7 years.

------
tomashertus
This is meaningless article.

I think this is common sense that when you are starting business, you have to
adjust your life style to that. Suddenly, you won't be getting regular hefty
paycheck from Google and have to rely on your business income. If the income
is not able to sustain your current life style, you have to adjust otherwise
you will burn through your cash. That is reasonable in the short term, but
should ring a bell if it takes more than 1 year to be able to live from your
startup salary.

On the top of that, you have to adjust the company to the "startup" budget as
well. I have seen so many people go nuts with hiring, benefits and useless
spending after getting large seed or series A.

~~~
keeptrying
Thats like saying weight loss is common sense and theres no need to talk about
diabetes.

Also building muscle and weightlifting is common sense and thus theres no need
to talk about growing old.

And finding the right spouse is common sense and theres no need to talk about
divorce.

~~~
tomashertus
ohh c'mon this is childish argument, we can do better no?

Have you read the article? It does explain why they, after 9 years of hard
work, end-up having financial issues. What was the reason for them to not to
have financial viable product? Was it cause of over-hiring; over-engineering;
wrong market? There are always problems in companies, so what was the unique
experience they have that they can confidently put all startups into one
bucket and say: "Look this bucket, this is suicide bucket!".

