Startups are risky | #1

Friends,

In this first piece of BS-Startup-Advice, I want to write about the truism “Startups are risky”.

Risk is defined as the possibility of something bad happening. What does bad mean in the context of entrepreneurship? Two ways of looking at this

1. Bad from a company perspective: The firm is not succeeding in reaching the targeted outcome.

2. Bad from a career perspective: You hurt your career.

The company risk (1) could not be more different from the career risk (2) – the problem: both concepts are sometimes conflated in a cognitively lazy way.

The former risk is high. Building a company is hard and most startups fail. To put it in perspective: 100% of VC-backed firms successfully convince investors that their startup can return the fund, yet, only 1.1% of these firms succeed with this endeavour.

The career risk is much lower than a lot of people think.

Why is that the case?

You enjoy a limited downside with an unlimited upside across three relevant dimensions: financial, time and reputation. If you’re talented and ambitious it’s riskier to not start a company vs. to start one.

Financial

There have never been more options for raising a first funding round from angel investors and accessing grants. At the same time, costs for building a first software product (yes, not all startups build software) have never been lower. As a consequence, your entrepreneurial success does not depend on your savings or a financing round done by “family, friends & fools”. The downside is all about your financial opportunity costs.¹ You’ll earn significantly less as an early-stage founder in comparison to some high-paying jobs.

Starting a company, however, entails a disproportionate financial upside. Owning a significant piece of a tech company gives you powerful leverage through technology (very low marginal costs of replication) – you don’t get rich by renting out your time. It’s an uncapped financial upside. If things go well, there is no ceiling to the level of wealth created.

Time

You want to spend your time on the right things. Not doing so over a long period is the risk. I would argue that this is the most important dimension to get clarity on. However, what’s right for you is a very individual question. It depends on your values, the people you want to be surrounded with, the kind of impact you want to create and more.

Most ambitious people want to develop themselves: skills, expertise, network. Founding a startup is one of the steepest learning curves you can find. Learning how to be relentlessly resourceful, switching continuously from micro to macro, practising resilience, convincing exceptional individuals to join your tribe – highly valuable even for most “non-founder roles”. The upside of learning is unlimited thanks to the fundamentally changing nature of challenges. Simply think about what it takes to go from 0 to 1 vs. scaling a company from 1 to 10 million EUR ARR.

Reputation

Even if your startup fails, as long as you have played well, people will rate your journey as something highly valuable. Remember: The default expectation is failure – smart people know how hard it is. Every inch of progress achieved by you as an entrepreneur has the potential to impress. In other words: the reputational downside is often overestimated.

If you succeed in creating a meaningful company of decent size, you’ll be associated with the success of it. Founders gets disproportionate credit and publicity for the success of their companies – a very compelling upside from a personal brand perspective.

To conclude: Start building your company – Don’t postpone (it again), hedge your bets and hope to learn A, while practising B.

Elon Musk says entrepreneurship is like eating glass and staring into the abyss.

Reid Hoffman says it’s like throwing yourself off a cliff and assembling a plane on the way down.

Both are wonderful quotes, yet, (potential) founders can easily draw the wrong conclusions by associating them with the wrong type of risk. Hopefully, This post has helped you gain a bit more clarity on the concept of risk in the startup context.

Founder’s view: Avik from Freshflow

I invited Avik Mukhija to share his thoughts on this topic. Taking the plunge to found a company is his default mode: He moved on from doing state-of-the-art deep learning research at ETH Zurich to found a blockchain startup in the middle of China for which he raised half a million USD. Today, he’s building Freshflow together with his co-founder Carmine.

How do you think about risk as a founder?

Trying to achieve or create something remarkable always comes with risk. Every exciting life story involves somebody taking a big risk - if they never did, what would be exciting about it? As startup founders, we naturally have a higher risk appetite - most of us have the ability to do (incredibly) well in stable career paths, but we choose not to, in favour of a (statistically low-probability) shot at creating something significant. How I think about risks while building Freshflow: first of all, I don’t ignore risks, that would make it gambling. In fact, I do everything I can to identify every risk and constantly try to mitigate it. It needs to be calculated. While founding a startup requires faith-based risk-taking in the beginning ("push the canoe into the ocean"), building and running it is different: it requires being aware of the countless things that could go wrong and actively fixing them ("now that I'm in the ocean, do not sink"). So, don’t be blind to risks, take them seriously and work hard to mitigate them. But most importantly, don’t ever shy away from them, have a guiding north star that is bigger than any immediate risks. And of course, even then, you’ll not see every risk coming, so you’ll still fall on your nose sometimes - getting up after that is the "grit" part of it.

What’s the biggest risk you’ve taken?

I've been founding startups (& companies) since my early university years, so I've taken the plunge many times. Probably the biggest one was moving to China and starting a company there, without speaking the language or having a network (except exactly one Chinese friend, who became my co-founder). I was in the middle of my CompSci studies at ETH in Switzerland when I caught a flight to China to brainstorm business ideas with my friend - and I basically never returned for the next 2 years, just stayed in China with my friend and built up a company to 15 people. Our whole team, our customers, the contracts (!), everything was Chinese, and I didn't speak a word - luckily at the time I was the CTO and not the CEO like I am now, so most of my communication was internal at the company, where most people (but not everyone!) spoke English. For the first phase of the company, we even lived in the very outskirts of a Tier-2 Chinese city. Countless things could've gone wrong and many did - it honestly wasn't the smartest risk-taking in hindsight - but overall things worked out well and it was an incredible opportunity.

What’s one piece of advice you wish you had heard earlier?

This one is generic because everyone feels that way at some point: I only wish I had started taking risks even earlier. In my teenage years, I had lots of ideas for things I wanted to build, and technically had unlimited time & energy, but felt it's risky to potentially sacrifice my grades at school for those endeavours. In hindsight, especially with the path I always knew I would take (which is the one I'm on as a founder), I should've made that trade-off. So, the advice I wish I would've heard even earlier: you got nothing to lose kid!

Three recommended content pieces

• Starting a company is less risky than you think by Erik Torenberg

• Entrepreneurship: A high-risk investment by Reid Hoffman

• Marc Andreessen: How Risk Taking, Innovation & Artificial Intelligence Transform Human Experience by Andrew Hubermann

I want to thank Matt Clifford, CEO & Co-Founder of Entrepreneur First for influencing my way of thinking about risk.

¹We’re assuming the absence of significant duties such as taking care of someone financially.

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