The Start-up Myth
Broadsight August
By Valentin Fischer
Approaching graduation is an interesting and nerve-wrecking time in any college student’s life. Soon, one will be heading into the business world, getting hands on experience and hopefully achieving financial independence. Graduates today face new challenges and enter unknown territories. Nowadays, one can read of new start-ups popping out of seemingly nowhere, making recent graduates millionaires or even billionaires. This exceptional success of the very few has made many students eager to work in start-up companies with the hope to cash out big. But is it really a smart career move to join a start-up or even build your own company after graduation?
According to a study by Shikhar Ghosh, a senior lecturer at Harvard Business School, 75% of venture capital backed start-ups fail to see positive return on investment. Non venture-backed companies have an even higher failure rate. Typically because they don’t have the capital to keep going if the business model does not work, according to Mr. Ghosh. Furthermore, a survey done by Compass indicates that 73% of start-up founders make 50,000 USD annually. Only a small fraction of start-up founders actually receive high salaries.
The data shows the vast majority—73% of founders—pay themselves less than $50,000 per year, regardless of if their company has been funded or not (not including any ownership stake or additional benefits).
Regular employees in start-ups earn even less than that. Start-ups like to hand out stock or stock options instead of paying decent salaries thereby avoiding commitment towards their employees, whilst saving funds needed to grow the business. The hope to receive a stake in the business that will increase sharply in value is one of the reasons for graduates to join a start-up company.
However, it is difficult to get a big piece of the cake. According to Kevin Fox, a design advisor to start-ups, the standard offer to new employees is now less than 1% of total equity. The later you join the company the smaller the piece you will receive. Owning a small part of the total equity, combined with a low probability of reaching a high equity valuation leads to a low expected payoff. Similar to buying a lottery ticket, potential employees generally overestimate low probabilities. This might explain the willingness of people to accept below market wages in start-ups for years. Employees and founders overestimate the financial payoff that comes along with working in a start-up. Imagine you work in a start-up company, accepting a below market salary for years in return for stock options that does not result in actual monetary gain. At the same time, an employee could have worked in a large company earning a decent and less volatile salary while enjoying benefits such as health care and pension funds. These are considerable opportunity costs, at least from a financial perspective.
But it is not all about the money. Whether you should join a start-up or a large company depends largely on the work environment and the culture you would like to be a part of, as well as the career goals you have in mind. If you aim to be a VP in a big corporation, the prognosis would be to join a large firm and work your way up the ladder.
If you feel you want to be your own boss and eventually launch your own company in the future you might benefit from the experience you can get in a start-up. At a start-up, you will be required to wear many different hats. Working across departments and handle a variety of tasks requires a more generalist approach. Self-discipline, entrepreneurial mind-set, and the ability to give and take constructive criticism are among the main traits that you should possess says Glorelys Mora-Liz, the social media marketing manager for WiShi (Wear It Share It). In a corporate environment fewer and more specific tasks are waiting. Large companies provide a more structured and guided atmosphere where you gain in depth knowledge from leading experts in a certain field.
By joining a start-up you typically trade a high salary, regular work hours, and job security against flat hierarchy and a dynamic environment offering you to make an impact in a shorter time span. Finally, there is no clear benefit or drawback working in either of the two fields. It strongly depends on personal preferences. As a graduate it might be the best time to join a start-up since some graduates do not have big financial and social commitments, which allows younger employees work long hours and accept lower pay.
