Startup. A yet hipper word.
So hip that that’s probably what most metropolitan Finns think nowadays when they hear “entrepreneurship”.
Now, if you are planning to found a startup, because it’s cool to have a startup and call yourself a “founder”, I have one message for you:
Stop! Don’t do it!
Firstly, as mentioned in the previous post, entrepreneurship overall is not suitable for everyone.
Secondly, being a startup founder is only a very specific form of entrepreneurship.
Steve Blank’s definition of a startup is “a temporary organization looking for a scalable business model”.
"Scalable" means both that the business can be grown cost-efficiently and long-term-profitably.* This is often means that there are notable benefits of scale, i.e., the marginal cost of serving new customers is relatively low. Most commonly, the potential market should also be quite large, over 100 M$ per year in potential revenue. Software and online services are notoriously very scalable, since there are hardly any unit production costs. But hardware businesses can also be scalable if you can achieve high margins (e.g. Apple), sell them "as a service" or otherwise generate recurring revenue (e.g. through a software/content marketplace, think: AppStore, Kindle, PlayStation...). But hardware is hard. And capital-intensive.
"Temporary” in this case is relative, since founder teams are expected to commit to the project for at least 4, if not 7-10 years. That’s usually how long it takes to get a successful startup to some kind of decently exitable (i.e., sellable) state.
Of course, many startups end up being nearly life-long projects and extensions of self for the entrepreneur, like Facebook for Zuckerberg, Microsoft for Gates or Amazon for Bezos. However, "startuphood" is still temporary. It ends when you've found that scalable business model and are in a position where you can be profitable if you want to. (E.g. Amazon has strategically chosen not to be profitable for a long time, even if it certainly could, if that were it's priority).
Even within startups there are different types of scalable business models and different finance strategies that can be employed. The archetype is a venture-backed startup, raising increasingly larger investment rounds of finance from venture capital firms (“VCs”). But you can be a startup and quite a successful one even if you aren't "venture class", which mostly requires the potential for reaching billions of dollars in valuation.
Moreover, if you can achieve the same results without raising outside equity finance, that's almost always a better alternative. E.g. Vainu and Timma are great example of Finnish startups that have been mostly "bootstrapped", i.e., grown mostly with the founders' investments and sweat equity (unpaid or underpaid work) as well as revenue from customers.
Good reasons to raise outside finance are that (a) you can't afford to get the company past the "death valley" to a cashflow positive state (i.e., your business model is quite capital intensive), or (b) there are strong reasons to aim at faster growth and expansion, such as a competitive threat or notable economies of scale or cost savings in sustaining momentum (as often is with e.g. marketplace businesses). But there are always downsides to raising finance, not only limited to dilution of ownership. (More on different finance strategies and their upsides and downsides in later posts.)
Entrepreneurship isn’t for everyone. Furthermore, startup entrepreneurship a good idea for a small fraction of the entrepreneurial minority of people. You may consider it if:
- You are very persistent...
- ...but simultaneously very capable of questioning everything you do all the time.
- You enjoy building new things...
- ...but also abandoning and trashing them after thousands of hours invested in them.
- You are adaptable to new circumstances and generally good at getting along with people...
- ...but willing to commit double-time to one project for years to come.
- You enjoy risks and are very good at handling rejections, failures, and other nasty surprises. (E.g. sales experience helps.)
- You (or a co-founder of yours) has a really strong network where you are based – especially among potential recruits, but preferably also in the industry you are targeting and among potential investors.
E.g. working in a startup and learning from others' mistakes (on their expense) before founding your own company can be a very good idea. It can give you many valuable lessons, clarify what you really want to work on, and allow you to figure out at least a bit better whether you really want to be a startup founder after all.
If you are drawn to entrepreneurship because of the freedom to do varying things and control your own work-life balance, or you are hoping for future “semi-passive income” and/or "financial independence" you should probably skip startups altogether and rather investigate other kinds of entrepreneurship. There are many easier types of entrepreneurship with a much bigger chances of success (of some kind), better control of the risks involved and less skills and commitment required. Other semi-scalable (but non-startup) types of entrepreneurship include consulting, online course sales, bloggin/vlogging, and dropshipping. Tim Ferris’s 4-hour workweek might be one good place to start.
On the other hand, IF you have the above described qualities and are open to:
- learn a bunch of big, expensive lessons,
- jeopardise friendship (with e.g. co-founders) and personal relations (with your spouse and family), as well as
- risk you entire career,
THEN startup entrepreneurship offers a uniquely exciting form of life. At best (and at worst) it can be like living a movie. There are always unexpected surprises and challenges around each corner. Few things are predictable.
Just remember, that in real life, most of the most exciting thrillers have their farce moments and end up as tragedies of some sort.
But life is all about the ride, the song and dance along the way, and what end up learning and experiencing. We all end up dead in any case ;) *(As a startup entrepreneur, the formula you should be worshipping is NOT that of present profitability or quick ratios (liquidity) or gearing (solvency). It's LTV-CAC or LTV/CAC: Customer Lifetime Value versus Customer Acquisition Costs. Lots on this later.)