I completely nodded along with this — as advice for a normal, sustainable business. But this is not what startups do.
The whole point of a "startup" as conceived in Silicon Valley and as desired by VCs is that risk is HIGH. Let's set aside whether this is good or bad (I would argue the drive for "100x or bust" returns is corrosive, but the word "startup" is tied to that kind of risk/return model right now in the commonly accepted definition).
So let's go through his principles and show what low risk means for hypothetical business idea "XYZ":
-Founder has proven track record doing XYZ
-Lots of potential customers WANT to do XYZ
-Startup is making many hard (cash, full price) sales of XYZ
-XYZ is fully functioning and "amazing" and customers are loyal
-Prices are high
-Incumbents are successful
etc etc
When you have these kinds of attributes you have a nice business in an established sector. By definition. Lots of customers, incumbents, and sales means the XYZ idea has been well exploited. Great.
The whole point of a startup is to make a bold bet on something not entirely proven and safe. That doesn't mean take DUMB risks, but this piece actually says you should try to get your business to the sort of low risk situations I list above.
But if you have an actually good idea you WANT to go into an area with few incumbents and where potential customers are skeptical and where you have no proven track record — because if something is genuinely NEW then guess what - there are no incumbents because no one is doing it yet - many of the customers don't know they need it because it doesn't exist yet - and you have no experience in it because no one on the planet has done it.
I mean you can definitely argue that many startups today take excessive risks and don't take basic steps to minimize risks. Absolutely. And you can also argue that the world needs more sustainable practical businesses and fewer 100x startup attempts. I personally agree with that. But a substantial degree of risk and of lack of "proof" for a business idea is what makes a startup a startup. So if you want to de-risk a startup, find the sort of business that will qualify you for a bank loan. Maybe a nice plumbing enterprise :-)
> The whole point of a startup is to make a bold bet on something not entirely proven and safe. That doesn't mean take DUMB risks, but this piece actually says you should try to get your business to the sort of low risk situations I list above.
I agree with you that startups are often making bold, unproven bets. The post was trying to say that yes, you're starting somewhere risky, but how can you de-risk your assumptions? How can you start proving the unproven? The proof might be a 5-10 year process, but it's important. The goal is not to reduce risk for safety's sake, but to validate that your end goals are reachable.
For example, if you came up with Snapchat 10 years ago, there would be many risks, including "do people want ephemeral messaging?" and "can an engineer build this product?" I would argue that the first risk is much more important to validate, but a lot of founders -- especially tech founders -- would focus on the 2nd risk. Using terminology from the blog post, the first risk starts out at a 1, and the second starts out at a 4, but too many people would focus on moving the 4 to a 5 instead of moving the 1 to a 3. A 3 still isn't a home run, but at least you know you're on the right track.
> [...] doing your own startup is one of the few relatively low risk gambles one can take.
I was under the impression that around 90% of startups failed. Was I mistaken, have the numbers changed, or do we just have very different thresholds for "low risk"?
Isn't running a business and especially a startup is supposed to be risky?
"We have an idea that's not materialized yet, give us money so we can live comfortably and reap all benefits it it works out and not lose anything if it doesn't." - sounds like a wishful thinking.
No one is saying that startups are for everyone. People just say that they're undervalued. The upside is ignored (probably because of scope insensitivity [http://wiki.lesswrong.com/wiki/Scope_insensitivity]), and the risks are misunderstood.
No one is saying that startups are for everyone. People just say that they're undervalued. The upside is ignored (probably because of scope insensitivity [http://wiki.lesswrong.com/wiki/Scope_insensitivity]), and the risks are misunderstood.
I think key part of this article is this sentence: "Watching your savings dwindle isn’t a risk, it’s a fact." There's no risk in founding a startup, if you take "risk" to mean "possible downside". There is a _certain_ downside; maybe that doesn't qualify as "risk".
If you go into a startup thinking that you'll have dwindling savings, lost time with family and friends, and mental and physical health impact, there's nothing "risky" about it.
> Isn't running a business and especially a startup is supposed to be risky?
No, it is risky, and you want to actively eliminate as many of the risks as possible. Having a decent sized pile of cash is one way out of several of the risks. Supply chain shortages, founder medical expenses, mishaps and accidents, rising costs of living, personal emergencies happening to founders or employees requiring leave, there are a million things that will bite you if you don't have cash and runway.
"Supposed to be risky" isn't a good way to think about it, IMO. A lot of the time you'll hear people romanticize a couple of fresh graduates living on couches in a garage, living on ramen, and building a unicorn, but the reality is that most billion-dollar companies weren't actually built that way, and it isn't the best way to optimize your chances of success.
I hear this almost as much as the "90% of startups fail" piece of wisdom, and I was a little surprised to see it in a PG essay. I'm not saying it's necessarily wrong, just that I don't totally understand it.
Risk is "the possibility of suffering harm or loss; danger." So what's risky about a startup? If you are paying for it yourself, maxing out credit cards, etc, then the startup is indeed likely to be harmful to you.
But, if you get YC funding, and are the under 30 crowd that PG refers to with low living expenses, then it's pretty unlikely that you're taking that approach. Instead, you're simply not saving any money for awhile. So there is opportunity cost lost, since surely most of the YC founders could make a nice chunk of change working for the man. But is this really the harm that's implied by the reference to risk? Especially when you factor in the experience you gain from a failed startup, it seems pretty questionable to say that serious harm will likely befall you. It's more like, less savings and a great experience will likely befall you.
So I wonder if the sentiment is just referring to the harm that may happen to the startup itself. As in, it's quite likely -- 90% likely! ;) -- that the startup you create will die. But isn't that kind of like saying it's risky to scratch off a lotto ticket that someone gives you? It's "risky" for the lotto ticket I suppose, but not really for you.
A high reward for low risk is a good strategy, especially if you know you lack some essential skill like epic motivation.
Most startups fail: they are NOT a sensible financial investment as an individual. Your poker stack is your time and the opportunity cost of a normal job. Your reward is too variable to be a sensible risk to take.
A common statistic is one success per 10 VC investment. But a VC turns down 100 startups for every one they fund, so your individual chances of success are much lower than that.
If a person only does startups then they have a very significant chance of getting $0 in return.
The kelly criterion[1] for 100x return (say 100MM after 10 years work == 5th of working life and opportunity cost of $1MM wages) and 1 in 20 chance of success (a large overestimate) says you should invest 1/25th of your pot.
For that to be sensible as an individual you could:
A. hugely reduce time invested (hard if you want outsized returns),
B. lower risk i.e. don’t take all-or-nothing VC money,
C. pool your risk with other startups (now you are a VC - hard)
D. already have millions (so 1/25th is big enough)
E. live forever (infinite dice rolls).
F. value the social outcomes of being a founder very highly (I think this is common)
G. Have some inside knowledge that changes the risks (large risk you are kidding yourself - reality shows that).
I seriously think being a founder is not a sensible financial decision, and I think it is very smart not to be a founder.
The risks aren't in entrepreneurship, they're in you. That's the long, the short, and the medium length.
I know this is hard to grasp, because it's counter-intuitive, but it's true.
My entrepreneurship approach is extremely low risk. (That sob story above was from consulting. Anyone can get taken by a conman.) It's a SaaS we built in our part time.
My business is growing 15-20% in revenue each month; even if we didn't touch it again, it'd earn more than $120k in the next 12 mos, but since we are working on it, by the end of 12 mos I expect our outlook to be greater than half a million for the year ahead of that.
See, I'm not worrying about "externalities." I'm not looking for funding or partners. I'm not trying to get somebody other than my customers to approve of what I'm doing and pat me on the head. I'm not trying to get bought (in part because I've seen how miserable people are after their startups are bought, they become employees again, watch BigCo destroy everything they've built.)
The only thing I'm gambling with is my time, and honestly, I've wasted more time sitting on my ass being sorry for myself than I would have wasted on this product if it fell apart tomorrow.
I really enjoyed the interview but I found this exchange puzzling:
Emily Chang (quoting Max Levchin): ‘Entrepreneurs aren’t taking big enough risks … ’
Paul Graham: ‘Well, that probably isn’t true because it’s gotten cheaper and cheaper and cheaper to start a startup and when the cost of failing gets lower usually people can do riskier things’
Risk is the potential for loss. If the cost of starting a startup is lower then the potential for loss is lower which means the risk is also lower. More people are starting startups because it is less risky, not more. That means the number of companies being formed is going up; in turn, that means that more people are taking the risk of starting a company, whether they are risking much or not. This might seem a subtle distinction but I think it is an important one.
A week ago I sat down opposite an entrepreneur who built a 24-hour transaction layer on top of the UK’s banking system which runs on nightly batch-processing. It made the transition from 9-3 banking to 24-hour online banking possible. He started out with a really big vision and had to take really big risks and the result was a really big company that created a lot of value economically and socially. It took him two decades and nearly bankrupted him on dozens of occasions. His vision sustained him. It kept him going through all the terrible lows and in the end he shook up one of the slowest-moving industries out there. That was a big risk. That was a big reward.
Not clear to me why someone would want to invest in high risk startups for a low-mid return.. there are much safer options that would give similar returns.
> Risk is high almost always, with some exceptions.
The exception is taking on high risk with your startup.
I can imagine a pretty low risk scenario where you finish school, and start working in a relevant field programming. As you're making money and learning valuable skills you can spend your free time building your business. Unlimited runway and learning from your day job would increase your probability of being successful massively.
The billionaires and facebooks of the world are bad data points to model your future success by.
That's absurd. Are startups risky? Yes. But it's about calculated risk. For example, you don't just start a company and say, "Fuck paying taxes, because who cares about the risk that the IRS will find me."
A founder should take a fair bit of risk in terms of product and market, and manage that aggressively. But for things that can be done in a safe, standard way, by all means do that. E.g., you should pick the state and type of legal entity with absolute minimum risk that investors will have questions. You should also choose boring technology except to the extent that you need to do something risky to make the business work. Etc, etc.
Actually it's smart to take risks. The expected value of foundig a startup is sufficiently high to make it a rational decision in most cases.
I recently read an article which stated that most successful entrepreneurs are actually highly risk averse- they only take carefully calculated risks.
The whole point of a "startup" as conceived in Silicon Valley and as desired by VCs is that risk is HIGH. Let's set aside whether this is good or bad (I would argue the drive for "100x or bust" returns is corrosive, but the word "startup" is tied to that kind of risk/return model right now in the commonly accepted definition).
So let's go through his principles and show what low risk means for hypothetical business idea "XYZ":
-Founder has proven track record doing XYZ
-Lots of potential customers WANT to do XYZ
-Startup is making many hard (cash, full price) sales of XYZ
-XYZ is fully functioning and "amazing" and customers are loyal
-Prices are high
-Incumbents are successful
etc etc
When you have these kinds of attributes you have a nice business in an established sector. By definition. Lots of customers, incumbents, and sales means the XYZ idea has been well exploited. Great.
The whole point of a startup is to make a bold bet on something not entirely proven and safe. That doesn't mean take DUMB risks, but this piece actually says you should try to get your business to the sort of low risk situations I list above.
But if you have an actually good idea you WANT to go into an area with few incumbents and where potential customers are skeptical and where you have no proven track record — because if something is genuinely NEW then guess what - there are no incumbents because no one is doing it yet - many of the customers don't know they need it because it doesn't exist yet - and you have no experience in it because no one on the planet has done it.
I mean you can definitely argue that many startups today take excessive risks and don't take basic steps to minimize risks. Absolutely. And you can also argue that the world needs more sustainable practical businesses and fewer 100x startup attempts. I personally agree with that. But a substantial degree of risk and of lack of "proof" for a business idea is what makes a startup a startup. So if you want to de-risk a startup, find the sort of business that will qualify you for a bank loan. Maybe a nice plumbing enterprise :-)
reply