Everyone has heard a variation of how "risky" it is to start a business. After all, one out of a million VC's will invest in you and then one a million of these companies will be acquired.
At the same time, you also hear and meet individuals that have started two,three, even five successful companies in a row. What gives?
Before we delve too deeply into this subject, let's look at the "risks" of entrepreneurship, by taking a case study.
Person X is an engineer inside corporate company Y who would like to be an entrepreneur. How would I advise him to proceed?
In any startup, there is a great number of risks that are experienced at different phases of the company. Here are the risks associated. Here are the stage of entrepreneurship that are most common. I've outlined the optimal acquisition points for a company that balances time invested and the value of the company.
Risk 1: Tech Viability
Risk 2: Customer Viability
--Acquisition Potential--
Risk 3: Raising Venture Capital
Risk 4: Customer Scaling Viability
--Acquisition Potential--
Risk 5: Follow up VC
Etc, etc.
The first interesting point is that risk 1 & risk 2 can be significantly minimized and even neutralized without ever leaving corporate company Y. BTW, in case you think these tech acquisitions are trivial, keep in mind that these sort of companies sell somewhere between $1-$25MM according to Ben Horowitz, partner of Andreesen Horowitz.
Most people do not know that they can be acquired by a Google or Yahoo without leaving their day jobs. Of course, this is not EASY but it is RISKLESS. Which brings me to two definitions that are often confused:
Hard - Difficult to achieve
Risky - An activity that has serious reprecussions.
An activity can be very hard but risk-less as it can be very easy and risk-ful.
What are the typical risks that are associated with entrepreneurship?
99% of the risks come from unnecessary amateur activity. More or less they come from the following belief: "In order to be successful, I must be 100% die-hard inclined to make a project work (however viable or not), therefore I must mortgage my house and entire future based on this belief or else I'm not truly dedicated."
OK, this is an exaggeration but basically captures the main belief.
In reality, this is a problem for many reasons. One of the reasons is that success in the tech world comes from iterations and flexibilty and not dedication to unviable businesses.
Another reason this is a dangerous idea is because in entrepreneurship of the 21'st century it is not necessary to put in significant personal resources to test a concept.
In fact, if you are worth your money, angel investors will invest in your company AND offer you a salary to get the project going ($100-$120k/year for a founder according to Peter Thiel).
What's more important, and even more relevant is that if you can't sell the concept to any angel investor then good luck selling it to a company. The idea of someone who constantly is rejected by the market and then makes it big is an occurence that happens 1 out of every 100 times (at most). Usually the idea is rejected by backwards looking people but accepted by any angel investor that is worth his dime.
The ability of an entrepreneur to sell a company to an investor is directly correlated to an entrepreneur that is able to sell the product to a customer, so if you can't do either you might want to work on improving your sales skills (an acquirable skill) instead maniacally clinging to a technology .
So what happens to the "huge failures"?
Usually, these huge failures that are drummed up are very relative. The company could have been worth $100MM but instead it sold for $25MM. Sure, this is unfortunate, but in these cases the founder has carried a salary for a number of years and often times makes millions of dollars off this "failure".
Judging the failure or success of a company based on it's potential is one way to value a deal but is not very relevant as far as the financial risk of the entrepreneur is considered.
OK, back to work.
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