Each week I regularly meet with various entrepreneurs working on all sorts of startup ideas. All of them are seeking additional capital, but most of them are also looking for validation, recommendations and referrals. Sometimes I’m so impressed by a particular entrepreneur I wonder if he’s spending his time wisely. Is his particular startup idea big enough for him to commit the next three to five years of his entrepreneurial time on? Entrepreneurs need to be very careful (far more careful than investors need to be, I’ll get to that in a second) choosing the right projects to pursue.
Think about it. The average startup is taking longer and longer to build. In the 00’s most people assumed it would take you three to five years to get your startup to failure, a single, a double or a homerun. ShopSavvy, my most recent startup, took seven years from start to exit. Let’s assume you’re going to spend 5 years per startup. If you believe the stats that more than 90% of funded startups fail (and even fewer provide ‘fuck-you’ returns to the founders) this means that you’re going to need to start more than one company in your career. Let me put this in perspective:
- Startup Number One: Ages 30-35 (chance of success 10%)
- Post Startup Downtime: 2 years
- Startup Number Two: Ages 38-43 (chance of success 20%)
- Post Startup Downtime: 1 year
- Divorce: 1 year (entrepreneurs usually make lousy spouses)
- Startup Number Three: Ages 45-50 (chance of success 40%)
- Post Startup Downtime: 1 year
- Startup Number Four: 51-56 (chance of success 50%)
Of course, this schedule assumes two VERY unlikely things; first that you’re going to have four fundable ideas and second that you’re going to be able to raise venture capital four times. Fewer than 2% of startups seeking capital actually raise venture capital in any given year. If you’re able to attract outside capital for your startup you’ll be in the 98% percentile of entrepreneurs four times in a row. For context, I’ve only been able to raise venture capital three times – once in my twenties, once in my thirties and once in my forties. I’m 44 today (don’t tell anyone, but Facebook thinks I’m 43) and I’ve got time for one more startup before my 50s. It is crazy how time flies. Just yesterday I was worried that investors thought I was too young and now I’m worried they’ll think I’m too old.
You might be wondering why the chances of ‘success’ increase as you get older (more experienced). The reason is actually pretty simple. After your first or second startup (failure or moderate success) you’ll suddenly realize that your interests and the interests of your investors are not aligned. Early stage investors expect (almost require) that 90% of their investments fail. This means that almost all of their returns come from just a few startups. For example, I’m an investor in one fund that made almost 100 investments – 90% of the fund’s return is coming from just two of the companies. A single or a double isn’t helpful for a venture capital firm’s return – they want you to keep swinging for the fences until you strike out. Why? In this case (i.e. the fund in question), the investors spent just seven years making 100 investments. They got 100 times at bat. How many times did each entrepreneur get at bat during the same time? Once. Get it? As an entrepreneur you’ve got three or four times at bat your entire career – at least one of them needs to be a single or double to make the math work. Sadly, most of us will never hit the home-run.
All of this being said, given the fact that you’ve only got three or four times at bat it is VERY important to be certain that your company is addressing a large enough market to create a large enough business to attract the right outside capital and to give yourself a chance at success (single, double or home-run). Listen to your advisors. Look at your market. If it isn’t obvious how you can get to several million dollars in sales within 24-36 months you really need to take a good hard look at your business. If you can’t be on track to generate one hundred million dollars in sales within five years you might seriously consider NOT raising venture capital. I’ll tell you a secret. It is MUCH easier to build a lifestyle business. Scott and I started Architel back in 2001 with less than $5,000 each. By 2003, we worked there full-time without pay for the first year. Since then we’ve paid ourselves generously and built a business worth millions of dollars. No venture capital firm (or other, outside investor) would have invested in the company – it was never going to be Google or Facebook. It was always going to be a profitable little company that would allow us to live comfortable lives and invest in cool ideas (like ShopSavvy and Uber). If you’re playing the startup game with venture capital investors you need to bring your A game. Good luck.