Are You Ready for a Startup?
"If my wife was here, she would give you a hug," he said.
Mike (not his real name) is a corporate executive who took the leap to join a startup. After working there for two years, he left. It wasn't his decision. It was the investor's decision.
Mike did talk to me just before he joined the startup. Back then, when he briefed me on the company, we talked about the market opportunity, the leadership, and the investor involved. It was clear to me the market timing was right. It was a great opportunity except for one thing. There was dysfunction in the leadership team. I explained to him the most likely scenario.
"You'll be caught in the middle, between the investor and the entrepreneur. I believe this will be frustrating for you. If this leadership dysfunction is not resolved, you will be forced to leave," I told him.
Sadly, I was right this time.
Now he was asking for the next step in his search.
"I have two different paths I can pursue. One is to pursue employment opportunities with the other early-stage competitors in the market. Or two, armed with my new market expertise, I can go back to corporate," he explained.
While exploring these opportunities further, he told me that he is being pursued by a corporation. They were attracted to his newly acquired market expertise, and they liked that he has the corporate executive chops. The conclusion: He will fit right in.
But Mike was drawn to the startup life. He liked the excitement of cracking a market and working hard to build value every day. He also liked the startup life of wearing different hats. In other words, the variety of doing what needed to be done when it needed to be done. Lastly, beyond the chase, was the possibility of his stock being worth millions.
"What about the corporate opportunity?" I asked.
He said, "I know I can do the job, and there would be upside advancement opportunities. But it is a salaried position with no equity."
"Tell me about your personal finances and family responsibilities," I enquired.
Mike is in his late forties with a wife, three kids, a mortgage, cars, and the near-term need for college tuition.
"How much were you making at the startup?" I asked.
With a bit of hesitation, he said, "I was making half of what I was earning at corporate."
I said, "When our kids get older, they cost a lot more. Given the age of your kids, you are approaching the high end of the family expense curve. When they are under ten, they really don't cost that much. But as they get into their teens, the costs escalate much more quickly."
"I agree with you. I just hadn't thought about it," he commented.
"Because of this, I believe the corporate job is the right choice. If you join another early-stage company, you'll be giving up the higher earnings. They will pay you in a combination of cash and stock. This will cause financial stress as you try to meet your family's increased expenses which you'll have to deal with every day."
He agreed again.
And that's when he told me his wife would hug me for this advice.
I've seen Mike's situation play out over my twenty-five years as an angel investor in startups. Corporate execs love the idea of working for a startup and cashing in on the big valuations.
Startups aren't for everyone, but they are for some corporate executives. I’ve found there are three personal criteria that have to match to make it work long term.
1. Age
2. Stage
3. Calling
Age
There is an age sweet spot for startups. I found it to be the early to late thirties. This is when the exec's children are under eight years old and the family expenses are still reasonable. In addition, the exec has not moved to the VP level and is earning a corporate salary within range of a startup.
And the exec brings a lot to the startup. The exec has the industry and management experience necessary to bring high value to the startup immediately. The only sacrifice is income. But as I said earlier, this sacrifice is manageable. The family is deciding together to give up on an incrementally improved lifestyle in pursuit of more meaningful wealth accumulation via stock appreciation.
And if the startup fails or goes nowhere, there is time to recover the exec's career, either in another startup or back to corporate.
This timing just works.
Stage
Stage is all about the startup. Every startup goes through three stages. It is up to the executive to decide what stage fits his/her skill set best.
Seed stage - Product-market fit
Growth stage - Process development
Expansion stage - Functional management build-out
The seed stage is the Monday morning whiteboard stage. The startup team is trying to figure out who to sell to, how much to charge, and how to reach them. This can be terribly frustrating because the days and weeks are marked by fits and starts. You want to go fast, but every sale seems to be a different customer. There is no consistency in product or customer. The startup is groping for a consistent customer and product.
The growth stage is focused on process. The startup has figured out their customer and has achieved market acceptance of their version 1.0 product. This stage is marked by coalescing a management team that is focused on a repeatable process, especially in sales. With a repeatable sales process, the company is truly ready to scale. The end of this phase is marked by a management team with functional expertise working well together and hitting sales forecasts.
The expansion stage is about building out teams that can execute on the process. This is where the Series A money is interested in investing. The market is clearly responding and the management team knows how to make, sell, install, and support the product. Their challenge is to build cross-functional teams that can do what they've been doing in the growth stage.
Most of the execs I talked to over the years are best equipped to contribute during the expansion stage. But the younger the exec, the better suited they are for the growth stage. It takes a unique exec to survive and add value to the seed stage. It usually burns them out as their corporate skills don't include nailing product-market fit.
Calling
All this said, if the exec knows in his heart of hearts he was meant to be in startups, then he has to quit corporate. He will sacrifice family, income, and resources to become a leader in a startup. The test here is based in motivation. If the exec is focused on getting rich, it is not a calling. If, on the other hand, his focus is on building something from nothing, the exec will make it through the most frustrating of times to move the startup to a sustainable business.
Startups are the land of the great unwashed. There is lots of passion, great ideas, and energy. What's missing is the resources and expertise necessary to build a business quickly. This is why it is so difficult. The corporate exec is used to plenty of resources in qualified people and cash to do their job. Move into startups and the exec finds himself trying to build something from nothing with nothing.
You must be called to do this if you are going to survive.