The Insider Guide to Careers
Insider information, secrets and tips about getting hired and building careers. For employees and job candidates.
Since the job market is down and a recession is in the making, many employees are considering a stint in entrepreneurship. With a peripheral examination of risks and rewards, being an entrepreneur has many advantages. First, you can get seed funding for just an idea. Then, if you are willing to commit to a couple of years, your company can get acquired for millions of dollars or even go IPO, making you a billionaire. So what can go wrong with such an idea? I can think of a multitude of reasons.
1) Entrepreneurship is not for everyone:
This career choice is not for people who like structure and regularity in tasks. As a founder, you will be idle for long periods in the beginning, followed by intense bouts of work. For example, when IBM wanted to work with Bill Gates, Bill got the MS-DOS product ready in just six weeks, mainly by copying the creation of a company called Seattle Computer Products. In addition, there is a lot of ambiguity and a need for direction in a startup, where the team expects you to know everything, even if you are clueless like everyone else. These expectations day after day can create irritation and frustration.
In a traditional company, direction and goals are never an issue. Your manager will keep giving you more work and keep you engaged. However, when the workload is spread unevenly in a startup, it is easy to feel lost.
To get entrepreneurial experience, you don’t necessarily need to be a founder or co-founder. On the other hand, working in an early startup under a small team of co-founders is also a wise choice. This way, you get the experience of a startup without necessarily being in the line of fire.
2) Giving up control:
Even when you get seed funding, there can be a lot of expectations from the investors. Outside your friends and family, others will demand a seat at the table and may request a substantial amount of equity. Before you know it, you could end up reporting to the investor or their representative regularly. This management control is specifically true if you are a recent graduate or have little experience. The investor will then try to pull you under their wings, and your experience may resemble that of reporting to a corporate boss on a daily basis. One of my friends quit his startup as the CEO after securing millions of dollars in funding and started a new company. This switch happened when the investor would ask him to leave the room when he was late for meetings by even a minute. Startups require as much discipline and hard work as a regular MNC company.
The other option is to wait till Series A to get funding and exist on your personal or angel funds till that point. This way, you will not need to give up excess equity for very little initially. In addition, by giving away less equity, you have more management control.
3) Understand the purpose of VC funding:
Investors want companies that can become the next blockbuster in the next few years – the next billion-dollar company. So if you’re going to scale your company to five or ten million dollars and stop there, no marquee investor would bother to invest in your idea. Therefore, if you wish to be successful and small, Angel and VC funds are not for you.
The other aspect that founders and co-founders ignore is that once you get funding, it is a mad rush to execute. Ideally, you should have your revenue-making model, customers, and partners figured out well in advance. VC funds matter when you have to capture the entire market in the shortest span of time. If you are still figuring out your business model and still need to make your first dollar in revenues, investor money is a step in the wrong direction.
Finally, investors don’t invest in ideas. Fantastic ideas are cheap but a dime a dozen. Anyone can ideate, but very few can execute. So it is not just about believing in the idea and being around for a long time, but also having the tenacity and grit to get through the tough times. Getting funding for just an idea is a sign of the corruption of our times. Instead, it would be best to do a pilot study, validate your ideas independently, and get an excellent product market fit. All these things take time, so wait it out and have patience while you build your product.
Many a time, investors are not even looking for original ideas. Instead, they prefer ideas already tested and validated in a different country or sector. In that way, investors don’t always reward risk. Instead, they try their best to minimize the risk of failure by avoiding completely novel but unproven ideas. So don’t be surprised by investors asking you to follow the herd.
4) You should make every dollar count:
Unlike the popular stories of the Theranos CEO, Elizabeth Holmes, or FTX CEO, Sam Bankman-Fried, VC money is not meant to be splurged and spent lavishly. VCs get their money from other investors and wealth funds looking to increase their wealth. VC funds expect a 4X to 10X cumulative return in 4-5 years, depending on how early stage they invest in. They understand that many investments will turn out to be duds because that is how the startup ecosystem works. Even the best idea with the best team can fall flat because of a sudden change in the macro environment. For example, a VC investor may choose to invest in 20 companies after doing a lot of due diligence. Even though the VC wants a blockbuster exit on all 20 investments, it never works that way. The nature of VC investment is such that if 19 of the investments fail, the one blockbuster success should make enough money to not just cover the cost of investing in the 19 startups but also make a 4x total profit. That is a lot of expectations for a startup and the founding team.
You will have to treat every dollar as yours and pay yourself well below your market compensation (for the upside of high levels of equity). In addition, you are expected to travel economy class and be frugal at all times. These privations will go on for 12-14 years before your company finally goes the IPO route. Only then can you sell your equity and cash out.
5) What do you bring to the table?
Ask yourself the most critical question of all: why only you will succeed compared to every competitor? Is it the business or technical expertise you bring to the table? Is it your determination or attitude? Or is it a mix of both?
It is easy for an inexperienced person to be determined about entrepreneurship, even though they know little about it. There are examples of Michael Dell, Steve Jobs, and Larry Ellison, who made it from scratch. On the other hand, for an average person, it is challenging to convince others about your ideas if you are not an expert. Since a lot of expertise is gained by work experience, understand the product by working in a company and doing advanced research in a specific space. This advice is for students to consider getting some work experience to get out of blue sky academia and get some practical exposure to the world of work, where things rarely happen as planned.
Ask yourself what unique expertise you can offer that nobody else has. The second question is can you execute better than everyone else? When you answer yes to both questions, you can then think of being an entrepreneur.
Conclusion: To sum it up, entrepreneurship is a challenging and lonely path. It is not for everyone. But, at the same time, it can be a fruitful experience for someone willing to embrace the risks, extremely passionate about the space, and want to change the world for the better!!
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