These particular numbers don't remind me that doing a startup is brutal. They tell me that investing in a startup is quite brutal, but doing a startup is about so much more than the money and the (potential) exit. If the possibility of failing was a reason not to do a startup then no one would ever do a startup.
To have the opportunity to work on an idea that you're authentically passionate about, that you truly believe in, that gets you out of bed in the morning and keeps you awake at night, even at a poverty level income, was completely worth it (for me). I have a litany of failures behind me and absolutely no regrets. No personal regrets anyway. I'm sorry that I failed the people I've employed and I'm a bit sorry that I've lost investors some money, but I'd do it again in a heartbeat. Hopefully without failing this time.
Ok... I have to ask: Why in the world would stay there for 4 years, knowing after just 1 year, that you were only going to make 20K a year?
Seriously... the only thing I can come up with in my head is greed. You told that you would eventually receive this huge payout and that clouded your judgement.
I agree. We absolutely shouldn't be harsh on him. He made a mistake and has learned about it.
Yes, he did something phenomenally stupid, by taking on the credit card debt and (much worse) the fucking tax debt (the IRS are not nice people) on behalf of any startup, much less one where he wasn't a founder. Bad decision. He seems to have learned his lesson.
That said, he deserves a fuckton of credit for having the courage to talk about it. Most people sweep their career mistakes under the rug. This guy has the guts to come out and talk about something stupid that he did and I commend him for it.
These second-circle startups that underpay egregiously, are sloppy with paperwork, and continually promise that "funding is just around the corner" may be more common than the VC darlings (which are pretty ethically sloppy themselves, but more prestigious on account of selectivity). They don't get much press because few people ever admit to having worked for them.
I've done similarly stupid things. Why? Because I was young, didn't know what I was getting in to, was easy to take advantage of, and got played.
Social class and access play a major role in this. Someone from Stanford is going to know not to take $2000 per month working for a smooth-talking douchebag who "knows investors" and "just needs a programmer". Some sharp but naive 21-year-old kid from Indiana who moved to California not knowing anyone? That's exactly who the douchebags prey upon.
Also -- the IRS debt comes from not paying taxes over those 4 years, because the only way you survive in the Bay Area making that kind of money is to not pay your taxes.
Not sure this makes sense. If you only made $20,000 each of those 4 years, you would have been below the poverty threshold, and you shouldn't have had income taxes owed (after credits and deductions).
If you're saying that you made $80,000 for each of those 4 years...then you deliberately lived beyond your means and you deserve to have the tax debt hanging over your shoulders.
Yeah, something seems dodgy there. $20K income is well below the EITC threshold. I just stuck it into BankRate's tax calculator [1], and it claimed total tax owed was $1616 without any further deductions, so it's quite possible the OP owes nothing. He should consult a qualified tax attorney or accountant; much of that IRS debt may not really exist.
Also, if I understand his post correctly, it seems like he was paid as a 1099 contractor the whole time but received equity and operated like an employee. There's likely something highly illegal about that (on the part of the startup), but it's not worth going after them because I doubt they have any money.
Sorry to hear that. Not being able to pay taxes is a bad situation, as the taxman often has the most powerful means at its disposal to get the tax paid.
Typical. Sure, the VC darlings pay close-to-market salaries, but are even harder to get into (and much more unethical and faster to fire) than the big-name tech companies.
There's a huge underclass of shoestring startups, most of which you'll never hear of, paying $2-5k per month, with some zero-interest deferred-cash arrangement and equity that is impossible to valuate. They run on some small amount of angel funding (often month-to-month) but never get to the point where they have enough product to get an A round.
These second-circle startups occasionally hit the first circle (great product, fortunate connection) and can get funded, but the odds aren't great, and you should never work for one as an employee.
I worked for one, at one point. I took the CEO at face value on his level of connectedness, so I believed that funding (and full salary) was "just around the corner". What he didn't tell me (and what took some research on my part, that I should have done sooner) was that most of his bridges were burned and that a lot of his connections were irrelevant to tech startups.
"Expara probably paints the most accurate picture since it’s been around longest. 13 out of 16 of its investments from 2007 to 2011 were written-off. That’s a failure rate of 81 percent."
Am I reading it wrong? In the chart it says 27 total, 13 dead. So around 50%.
"Douglas Abrams, CEO of Expara, explains that its two full exits made 2 x and 36 x the invested capital, while one partial exit earned the firm a cool 246 multiple. That’s a staggering average return of 95 x."
This seems like shaky math as well. What about the others that returned 0x?
> This seems like shaky math as well. What about the others that returned 0x?
They're either complete write-offs, or a small percentage of the unused capital is returned to the VC fund. I'm pretty sure the author didn't mean to imply that the return on investment for the entire VC fund was 95x. Any VC fund has a bunch of writeoffs and a bunch of homeruns. The homeruns have to compensate for the writeoffs. Looking at the average return for successful exits is a reasonable metric because if the successful exits are only 5x then clearly the fund is a hopeless position. And if there are a number of great exits it doesn't matter much if the fund has many duds or only a couple. The average-return-on-exit metric isn't great either, because the largest exits matter most and the average doesn't properly reflect that.
The part that I find scandalous isn't that businesses have a high failure rate. That's been true since antiquity. It's that VCs are, to a large degree, responsible. They don't have to play get-big-or-die. There will be a nonzero failure rate no matter what, but it doesn't need to be this high. To a large degree, it's the VCs' fault for pushing their companies to take unreasonable risk. Often, worse yet, that risk is often counter-innovative... it's not creative risk but "hire 200 people next year and do Pearson's grunt work in large amounts" risk.
At the low end of the risk spectrum, you have small consultancies with minimal overhead and businesses with secured assets that you can take bank loans for. At the high-risk, high-growth end, you have companies that will either be 100 times their current size, or dead, inside of 3 years.
The mid-risk, mid-growth businesses, targeting 20-60% annual growth, tend to be too risky for bank loans but not interesting to VCs. Those will be 5-10x (at 10 years) most often with an occasional 200x, but rarely a 10,000x.
The thing is, the goal of the game shouldn't be to maximize your chances of getting (extremely rare, and difficult to get in to) 10,000x's. It should be to make money. If you can do that with a string of 5-10x results and a lower (say, 30%) failure rate, instead of swinging for 10,000x and having a 90% failure rate, then maybe you should. Not only are those 10,000x's rare no matter what you do, but unless you're extremely well-connected you're not going to be able to put more than a small amount of money into them.
Why is the Valley like this? Ultimately, it's not about making money. It's about the VCs' careers. You get a lot of credit, as an individual, for having "been in on" Facebook or Twitter. It's difficult to predict the successes in advance, which is why you get the creepy co-funding culture, which doesn't make money for anyone (in fact, they make less money because of it, because they fund lower-quality stuff) but spreads around the career credit of being an early investor in something that hits big.
You have indeed identified an underserved market: capital for mid-risk, mid-growth companies. You could serve that market by organizing a venture fund.
Keep in mind: it's not like nobody ever had that idea before. Many people did, and proceeded with it, and discovered something that caused them to either give up or pivot to the traditional (high-risk, high-growth) VC model instead.
Some of the reasons why they didn't stick with mid-risk, mid-growth are bad: vanity, careerism, principal-agent problems. I believe there are some good reasons too, but you might be able to overcome them.
It would be really great for the world if you figured this out. Seriously, I'd encourage you to try. There are ways to start small and have the financial mechanics taken care of, such as an AngelList syndicate. If you succeed, you'd be enabling hundreds of people to have rewarding and more stable careers.
I think that one issue is that it's harder to manage them, especially because they tend to be high-skill niche businesses. The thing about social media is that any fucking idiot has, at least, the technical knowledge to run one. This makes them attractive to bikeshedding investors and also ripe places to put underachieving friends who are owed favors.
The economics are marginal. You need to put in a large amount of money over long time periods before you get any returns at all, so if those returns aren't great, you might end up losing money and not being able to continue.
A large portfolio of mid-risk companies is not low risk, because they are correlated in various ways. For example:
- macroeconomic shocks can hurt your entire portfolio.
- your entire portfolio might have a selection bias
High-beta funds can let go of companies that fail. But if you're counting on most companies not failing in order to make money, you'll have to step in and rescue some companies where the founders break up, or give up, or move on to better opportunities. It's very painful to recruit and install new management.
The real reason is they take much more effort on the part of the investor to back companies like this. Much better to burn through hundreds of naive young guys trying to pick "outliers" than building businesses with a good chance of moderate success.
To have the opportunity to work on an idea that you're authentically passionate about, that you truly believe in, that gets you out of bed in the morning and keeps you awake at night, even at a poverty level income, was completely worth it (for me). I have a litany of failures behind me and absolutely no regrets. No personal regrets anyway. I'm sorry that I failed the people I've employed and I'm a bit sorry that I've lost investors some money, but I'd do it again in a heartbeat. Hopefully without failing this time.