Lightning Strikes in the Startup World

Lightning just struck in San Francisco, and I don’t mean an electrostatic discharge. Fresh off its deal with Canadian cannabis company Cronos Group, Altria just invested $12.8 billion for a 35% stake in e-cigarette startup JUUL Labs—making the founders the first vaping billionaires and their 1,500 employees all millionaires.

If this lightning strike is like many of the past, the JUUL deal will re-ignite unreasonable hopes among the droves who are coming to Silicon Valley and the Bay Area to get in on a startup assuming they’ll strike gold.

The Tech-Rush isn’t the first time California has attracted folks with dollar signs in their eyes. Since the late 1920s aspiring young actors and actresses have flocked to Hollywood in hopes of being discovered. Before that, the Gold Rush brought 300,000 to California in the 1850s.

If you’ve recently come to Silicon Valley with a dream of striking it big with a tech startup, be careful what you wish for. And read on for another Godley rant.

Beware the Cult of Celebrity

There’s a couple of reasons that the current California Tech-Rush irks me. First, I’ve seen the results of a local culture built on celebrity before. My first five years in California were in the Los Angeles Area, and you couldn’t avoid the Hollywood culture no matter how hard you tried. Even though I wasn’t in the Entertainment business, it permeated every event, conversation, and interaction within a 50-mile radius of Hollywood. It was ever-present with pretty people jostling to be discovered and seen. And this was before the Internet, social media and the Kardashians.

The Silicon Valley and Bay Area culture seems to be headed down the same celebrity path that has come to define Los Angeles. Much of that, I think, is the result of the growth of the consumer-tech sector. We’ve always had titans in our industry—people like Vint Cerf, David Packard, Scott McNealy, Andy Grove, and Robert Metcalfe—but they weren’t household names. Today’s most successful tech companies are B2C and are with us 24/7. They are in our pockets and on our screens every waking hour of each day. We feel like we know Spiegel, Bezos, Zuckerberg, and Hastings as if they were our besties because we spend more time with their applications and content than we do with some of our real-world friends.

What Are Your Odds of Becoming Startup Rich?

I’ve got good news and bad news. Let’s start with the bad so I can try and end on a positive note.

While we’re not quite within the odds of a shark attack (1 in 11.5 million in US waters), the startup numbers are pretty sobering:

• Roughly 500,000 people try their hand at entrepreneurship every month in the United States.
• Small Biz Trends estimates about 90% of startups fail, and the information sector has a 63% failure rate.

Still willing to bet a million-dollar payday on a 10% likelihood of not failing? Then consider this:

• In 2013, Y Combinator founder Paul Graham reported that of the 511 companies that had gone through the startup accelerator program in the last 5 years, 37 had sold for or had a value of $40 million or more. Omit the graduates of the past two years, as Graham suggested, on the grounds that they haven’t been out there long enough, and we’re down to 37 out of about 300…or roughly 10%. BUT…that’s 10% of the most promising startups as Y Combinator selects the top 3% to 5% of applicant companies.

Are you sobering up yet?

• PitchBook listed its Unicorn Class of 2018 and reported that 47 tech startups joined the billionaire companies. Number one is JUUL.
• CB Insights reports that the odds of a company becoming a unicorn are less than 1%.

So here’s the bottom line. A company may get a few friends, family and an angel to invest in their unproven, yet interesting idea. It may survive a follow-on round of professional, institutional investment and even close on a B-round of funding. But that’s mostly money for proving the viability of an idea. It won’t be funding your big payday. Most of these companies that have accepted professional money, when sold, won’t have such a fantastic exit to change the lives of most employees who helped make the exit possible. ‘Exiting’ has a mystique about it that doesn’t match up to how funds are distributed to classes of shareholders on the cap table.

Have I dashed your dream yet?

The High Cost of Banking on a Startup

Despite the bleak picture I’ve just described, working for a startup can be exhilarating, rewarding and a real learning experience. What I object to is the startup fantasy. It’s not all cool campuses, throwing Nerf footballs in the hallways and riding Segways. And odds are you’re no more likely to find gold in them their startups than being “discovered” while waiting tables in Hollywood.

Still, I consider myself a startup junkie. But for reasons that I’ll get into later. As someone who has worked for five tech startups and advised maybe a dozen more, I feel like I’ve seen it all. I’ve quit, been fired, been put out to pasture, watched companies go down the tubes, and I’ve missed out on cashing in my stock shares more than once. And I’ve had a successful run compared to many!

Prepare yourself if you pursue a startup career because …

Chances are you’ll spend a career working for failed companies

I’ve known a lot of founders of tech startups. People who have made millions. And even these folks get to a positive exit less than 50% of the time - although you never hear about their failed ventures. We mere mortals who have been around the block a few times have maybe a 20% to 25% success rate in joining pre-revenue or early-stage startups that make it to an exit. The vast majority of the companies you work for will fail. If you think baseball players batting a 0.26 need a pep talk now and again, the average startup tech worker will need a lifetime subscription to Headspace in comparison.

You’ll be out of work…and probably more than once

As I said, I’ve been fired. I’ve left. And I’ve gone down with the ship. You need to be prepared both financially and mentally that, when you work for a startup, it’s completely normal to have bouts of unemployment.

Shit will happen, often impacting you, and usually beyond your ability to influence the outcome. Most startups are purposely losing money and funding operations not on revenue but investor cash.  This is a fragile existence, to say the least. One day when your company suddenly goes under, your department gets completely gutted or you get fired, you’ll need to fall back on your own resources. Paying your mortgage, childcare for kids or friday nights out on the town are all at risk on a daily basis of your startup career.  Planning for the inevitable circumstance of being ‘between jobs’ is essential if you want to make a career in early stage tech companies.

You’ll have to deliver the bad news to others

If you stay with startups long enough and rise to some level of management, sooner or later you’ll have to fire good people for decisions they didn’t make. You have to look them in the eye as you throw their lives into turmoil. Believe me, that experience can haunt you the rest of your life. I’ve had to fire friends. I’ve had to fire people who relocated families for the job. I’ve had people look me in the eye with utter anguish, watch them be reduced to tears and then proceed to cuss me out like a sailor. And I’ve deserved those reactions and I carry a portion of the pain I’ve inflicted on others with me every day. I can, rightfully, rationalize that they knew what they were getting into, that there is a greater good of the company (possibly) being in a better financial position or doing the work of the owners (investors) which helps me get out of bed each day...but the human impact lingers.

You’ll lose money

If you average it out, you’ll make less money working for a startup as compared to an established technology company. This is a classic tortoise versus hare race. As a startup hare, you’ll have bursts of brilliance in which you’ll make great money...but it won’t last. Your selective memory of ‘remember that year at XX company?’ will gloss over the year prior to or after during which you bet on stock options versus income only to have that venture fizzle. For the same reasons that gamblers and stock pickers think they do better than their bank accounts would substantiate, the reality of your long-term income, based on both wages and stock option liquidity events, is sobering. Your buddy working at a big tech company, punching a clock and not getting the startup dopamine fix you crave, may not have as glamorous a resume like yours, but the consistency of work and relative stability of the stock will likely outpace you over time. Go tortoise go.

Your head might get too big

There’s an old saying that no one on their deathbed ever wished they’d spent more time at work. And yet, achieving even a modicum of startup success takes Herculean effort…and all your time, energy, mental acuity, and emotional focus. A startup is a demanding mistress—to the detriment of what should be your most important and life-long relationships with family and friends. And as you throw yourself into the all-consuming endeavor, it can become intoxicating. It can feel so important and meaningful. But don’t lose perspective. Really - it’s just a job and you need to define yourself as more than your current LinkedIn headline. If you find yourself relating every social exchange ‘back to work’ or judging someone based on ‘...and what do you do?’, you’ve lost perspective, become a bore and, at worst, might even be an asshole. Don’t be that person.

So Why Am I a Startup Junkie?

On Thursday, January 3, 2019, Herb Kelleher, co-founder, CEO and chair of Southwest Airlines, died at the age of 87. Kelleher had perspective. He focused on short flights (originally limited to Texas) and low-fare air travel - neither of which were in vogue in 1967 when the lawyer, at the time, jotted down the preposterous airline concept on a bar napkin. He had humanity too. He knew that customer service started with his employees. In 2015, Southwest Airlines was listed as the fifth most profitable airline in the world. I’ve made lots of money owning LUV stock, that I knew to buy after spending a year of A-List Preferred status observing the efficiency of their operations.

Kelleher loved his work, his family and he had a full life. He believed, “If you’re crazy enough to do what you love for a living, then you’re bound to create a life that matters.”

I agree 100%. Although Kelleher wasn’t in tech directly, the boldness and brashness and thumb-in-the-eye, change-the-world attitude which birthed and drove Southwest for the past 50 years is the same passion that causes many of us to make a career out of startups. I toasted a Wild Turkey to Herb in the past week and he’ll remain an inspiration and model as I attempt to create, in his words, “a life that matters.”

I have this quote from Teddy Roosevelt on the wall of my home office and I think it explains a bit about the mentality of those who spend a career in startups...

“The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”

So get in the arena. Dare greatly. Yearn for the triumph of high achievement. But if you fail, don’t say I didn’t warn you.