Winter Reflections [1]
The Unreasonable One
There’s a lot of fuss around entrepreneurship in Finland, especially amongst young people. Why do they want to get into it? What are the motives? If we ignore those “unemployment-in-disguise” types, and “just-to-be-cool” types, then it may be fair to say many of them give off this “wanna-be-a-billionaire-so-f***ing-bad” vibe. Let’s for a moment acknowledge that wealth creation is a valid motivation for building a new venture — a dream is motivating when it remains in the abstract — we should talk about the science.
What is a “life-changing amount of money”? When asked about the “dream job”, I often say mine is to be a benevolent dictator of a small, rich, beautiful country (roughly the setup of Finland), then I can apply all my amazing ideas transforming urban planning, business, education, and everything else. Now equally fantastical is if you had billions, then it’s really transformative, of course “life-changing”. This is like imagining being the Queen of England, or fantasising how to spend a massive lottery windfall — it is hardly meaningful.
Well, to be seemingly realistic, $10M is also good. You get to de-frugalise your choices of goods and services, stay in nice hotels and fly business with lie-flat seats — all this comfort could do wonders for your quality of life and sense of wellbeing. So yeah, multiples of deca-million is also life-changing.
Then we go down a step, what’s the price of an annuity (converting a lump sum to a life-term periodic payout) that pays an engineer’s equivalent income? I’m not an expert, my estimate is somewhere from $2.5M (optimistic). Then you still need to be frugal, but have a good range of options. This is similar to economical “retirement”.
Now let’s do the maths in reverse. Depending on dilution, you would probably have to sell a company at 5 to 20 times the value to net a certain amount. Say you sell a company for $20M and own some part of it, after preferences, splitting, and taxes, you might end up with $1–2M. Many Finns would consider that ($20M sale) a success story, and the chance is already very low. Unicorns are rare. They also take a long time, often even longer than publicised [1]. A startup often takes 8, 10 or more years to reach wild success. The length also invites dilution. What is the net for 0.5% of a unicorn?
Let’s think about “risk-adjusted returns” or the opportunity cost of starting a startup [2]. If you’re good, you have other options, and foregoing the second option has its price. If what you want is the pot of gold at the end, why not work for an established company? Over that same decade, you would get paid handsomely each year, plus thousands of RSUs that grow 10x in value. It’s very likely, that you would end up with a few millions, or even better. Larger companies have capital, and therefore the power to plan strategically and capture opportunities (market, technology, business logistics). Being on that larger ship gives you leverage to amplify your impact.
Consider the motives, don’t just be bad at statistics [3], though the generic person is probably bad at statistics [4], successful entrepreneurs must be distinct from the generic person. If they make a choice, especially an irrational one (not a Shavian reference here), it had better be for a reason [5]. Because it is the antithesis of “get rich quick”, it is the long game.
[1] WSJ. The Secret to Startup Success? Fudge Your Age. https://www.wsj.com/articles/forever-young-tech-startups-like-hollywood-celebrities-fudge-their-age-1502461847
[2] Hacker News. First employee of startup? You are probably getting screwed. https://news.ycombinator.com/item?id=2949323
[3] Phil Libin: No Exit Strategy for Your Life’s Work. https://youtu.be/PVH0SmUXpAc
[4] List of cognitive biases. https://en.wikipedia.org/wiki/List_of_cognitive_biases
[5] Why Should I Start a Startup? https://blog.ycombinator.com/why-should-i-start-a-startup/
