An Email to an Employee on Startup Success Rates

Hey Friend,

Good talking to you yesterday. To summarize, here are a few tips/thoughts to help you think through startup success/failure rates.

When you have time, check out:
https://www.quora.com/What-is-the-truth-behind-9-out-of-10-startups-fail
Lots of interesting opinions in here. I won’t explain further, I’ll let you draw your own conclusions.

A few things that are important for assessing risk:

1) Arithmetically, you’ll want to calculate Expected Value.

To do this, you identify scenarios (including ‘crazy’ upside scenarios like “MM becomes a $1Bn company” and negative scenarios like “I work for MM for 5 years and it goes bankrupt”), then compute their expected probability and the expected impact on your life. (“I make enough cash to buy a house” or “I have to declare personal bankruptcy”.)

But I think this is really hard to do in practice, because it’s hard to get realistic data on the outcomes.

In theory, looking at VC statistics would help, but in reality 60%+ of VC returns are realized by 20% of funds (Sequoia, etc.) so that’s tricky. Also you’ll want to look at B2B (higher probability of success) vs. B2C (higher payoffs in the rarer case of a success). And many great companies don’t raise.

People would love to know the numbers behind this, but instead of figuring it out yourself (you don’t have the data), I suggest you talk to someone who looks at a lot of deals (David Chang, Semyon Dukach, Allan Tear or someone similar).

2) You’ll want to know what your risk appetite is.

Extreme example: if I gave you a deal where you’re 90% likely to get $5Mn and 10% chance to be $10Mn in debt, would you take it?

Maybe map out a few probabilities and positive/negative payoffs and see what you think.

People who go into dentistry generally want steady, predictable jobs. King crab fishermen take jobs where they may die, but if they don’t, they make a lot of money quickly. Where on the spectrum are you?

3) Ultimately, you want to listen to what your gut tells you.

90% of your brain’s processing power is subconscious, so your gut is often much better than your conscious mind. Logic helps, even if the answer seems “crazy”.

Sometimes in life black swan events happen (low-probability, high-impact). According to Nassim Nicholas Taleb, they are usually the things that make the biggest impact on our lives. (E.g. “I’ve only gone on 2 dates with this girl but I already know I want to marry her.”)

4) You should probably talk to peers who have done this.

Don’t listen to people who haven’t done it before, but talk to entrepreneurs who have founded startups. Try to find a few that have succeeded and a few that have failed, and ask them what their experience was. See if you get a pattern of why they’ve succeeded or failed.

To find startups in our peer group, I suggest reaching out to TechStars companies (both that have succeeded and that have failed).

My perspective: at OpenView, I talked to 700 CEOs in 9 months. The biggest commonality that I saw was, CEOs who are close-minded were the ones who failed. (These CEOs claimed that they understand the market because of their “industry experience” or because they went to Harvard or whatever.) The more open-minded a CEO was, the more likely they were successful.

5) I believe there are specific factors, approaches and techniques that can help de-risk and improve the chances of success.

My overall strategy is on “de-risk vs. over-optimize”. I’d rather bring on partners, take VC money, jump into incubators, etc. to reduce risk, vs. assuming that I know exactly how to build a startup, because I’ve never built one.

In our company, Jesse’s the only person who had successfully co-founded a software startup. Others have co-founded software-enabled service companies, or been early employees at software companies, but nobody else has co-founded a software company. So, ask him.

Personally, my thinking on this is:

* There’s nothing I’d rather do than what I’m doing right now, so I don’t think too much about it.

* For me personally – I can’t really fail. When we came to the US, we lived below the poverty level for 5 years. To quote Game of Thrones, “what is dead may never die.”

* I’ve created something from nothing, so I’m not worried about raising money.
I don’t think that startups are ‘risky’ (maybe 20% chance of some external factor wiping us out), but I do think that they’re highly uncertain – 100% guaranteed to be unpleasant at times.

This job, 20% of the times it sucks, is frustrating and hurts both mentally and emotionally, but 80% of the time it’s one of the best jobs in the world. You don’t know when the 20% pain will happen, so that makes it worse. But if you can deal with the pain, then it’s an amazing job.

From Joe Caruso – an angel in Boston who’s done probably over a hundred investments: “If you want to make money, go work for a hedge fund or investment bank. But this job is a lot more fun.”

At the end of the day, a startup is basically about “building stuff” and “selling stuff”, so I don’t spend too much time computing probabilities. I either get back to writing code or getting on the phone with customers. If we do that well, we’ll succeed. Pretty much nothing else matters.

Personal Values

Post 1. I’m putting together a list of personal values. Here are some ideas below:

Think Big
“Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it is the only thing that ever has.”

Adaptability
From evolutionary theory (paraphrased): “It is not the strongest, nor the most intelligent that survives. It is the one who is most adaptable to change.”

Berraquera
Colombian slang: Bold, reckless.
https://bothsidesofthetable.com/what-makes-an-entrepreneur-four-letters-jfdi-1c36e8214b6e

Do The Right Thing

 

What else – any ideas?¬†Anything I’ve missed?