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Recently when I visited IIT Madras, the top engineering school in India, some of the faculty informed me that students face much pressure to get involved in startups right in their college days. Students are desperate to jump into the startup bandwagon and forget their academic expectations, causing an escalation of stress.
Since it is easy to find articles extolling the virtues of working in startups, I will spend some time discussing the downsides.
1) Compensation is a place where startups do well. The base compensation pay is higher than the market because there is an element of risk working in startups. That risk has to be rewarded; otherwise, top talent would instead join an established company with a track record of success compared to a startup. Studies show that the chances of startups folding up before IPO is close to 95%. 70% fail by the time they move from seed to Series A funding.
Stock options are another valuable tool to attract employees, as early-stage startups give more ESOPs and options to attract top students. Since the value of ESOPs is realized only after IPO, it is substantial money on paper. If the company fails to meet funding milestones, all that paper money can quickly be worthless. Secondly, it is a long wait for IPO’s to happen. Uber was an example where the CEO strung the employees for a long time before the IPO occurred. There are many examples where the CEO promises an IPO but keeps moving the dates frequently.
2) Startups have enjoyed the benefit of low-interest rates in the US economy for a long time. In this scenario, startups were flush with funding. Even simple ideas got millions of dollars of funding, and a real bubble was building up. All this has come to an end. After the US Federal Reserve has dramatically jacked up the interest rates, most investors would prefer to invest in safe bonds and treasury bills compared to risky startup investments. Startups have reached their winter of despair with all their traditional sources drying up. One can expect many startups to fail in the next couple of quarters. In addition, all startups are becoming cost conscious and productivity-focused. This change means that fancy salaries and perks are all being eliminated.
3) Suddenly, traditional brick-and-mortar companies are looking like a safe option. They offer job security and an opportunity for students to work a conventional 9 to 5 job. These jobs ensure that employees have time to pursue other interests like hobbies or even their startup dreams. In a startup, most employees work 12-18 hour days, with many working even on weekends. This culture causes burnout and has been getting worse with startup layoffs. When a layoff happens, one employee has to multitask and often do the additional role of the person laid off.
4) In some startups, the CEO and management team tend to be recent graduates or people with little work experience. Early-in-Career employees are often rash and immature when handling delicate company issues. Even though the media eulogizes college dropouts, it isn’t easy to work under leaders who make decisions without rhyme or reason. Real-world experience of working in top companies for an extended time gives people a good sense of what a healthy company culture is. Lacking this experience, leaders can sometimes make rookie mistakes. Since most campus recruits are in entry-level roles, they have to face the consequences and make amends for bad business decisions. It makes more sense to spend time working in well-established companies to understand best practices before working in a startup.
5) In well-funded early-stage startups, the leaders are spoilt because they are flush with funds. The only goal, as defined by their VC funders, is to hire and expand as fast as possible. These expectations can result in inefficient processes, hiring mistakes, and questionable decisions. The employees do not have the freedom to question these decisions of management. Traditional companies do not operate this way. They are way more focused on operational costs. For example, a startup may pay any compensation to hire top talent, while other companies will balk at this. Over-the-top compensation can cause many adverse consequences to the team and company. The HR organization needs to be more mature in most early-stage startups. Because of this, it is easy to find obnoxious managers and hostile work cultures in some teams.
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