Stanford Students, You're Doing It Wrong

The following is a message to my fellow Stanford students, both past and present. I love startups and, like Paul Graham, I think that we should continue to encourage entrepreneurship. However, I also think that Stanford students are often choosing to do startups for the wrong reasons.

How Do You Define "Startup"?

For the purposes of this piece, I'm going to define startup as a company that you're working on full-time. It is a company that you intend to grow as fast as humanly possible. It is something that you will likely (though not necessarily) take venture capital for. It is not a side project that you work on outside of class. It is not a small SaaS application that you run on five hours a week[1]. It is not a "lifestyle business."

Why Do You Want To Start A Company?

Let's do a thought experiment. Suppose you're a Stanford undergrad, either hoping or actively trying to start a company. I applaud your appetite for risk; Stanford has produced an impressive list of entrepreneurs[2]; a list that will, no doubt, continue to grow. Now, pick a convincing startup idea: a Pandora for traveling abroad, or a two-sided marketplace for gay marriages. Once you have your idea, ask yourself: "Why am I starting this company?"

Reasons People Start Companies

1) Money

This seems to be the most common reason I come across, especially among my peers. How much is a startup really, worth, though? Time for another thought experiment.

You decide to start a consumer internet company with one other founder. You each have an equal share of 50%. Your company turns out to be fairly successful, surviving the Series A Crunch and getting all the way to Series B. Because of the investments, you've been diluted to 15% (your co-founder still has another 15% so the founders own a total of 30%). After 5 years of toiling away, your company ends up getting acquired for $50M and you receive 15% of that, which is $7.5M[3]. Some of that acquisition is in cash, but most is in stock, via a 3-year earn-out. So after 3 years at --Google-- your acquirer (eight years total), you've earned $7.5M. With taxes, call it about $5M in your pocket[4]. After 9 years. And that's assuming that your company is successful. Even if you had a 1/100 chance of a $50M exit (which you probably don't), your expected value is $50,000. Is that worth all those years of sacrifice?

It has been said before but it bears repeating: don't do a startup for money. Find a way to leverage your Stanford degree if you're after money. Go be a banker. Or a consultant.

2) Glory

Although most might not admit it, this is also a fairly common reason. After all, who wouldn't want to be a household name like Bill Gates, Steve Jobs, or Mark Zuckerberg? Hell, I'd kill to be well known among only techies, a la Paul Graham, Marc Andreessen, and Jack Dorsey[5]. But think about our last thought experiment. If I had to guess, I'd say that you would have to exit at well above $50M to become a "big deal". Bonus points if you manage to become a media darling in the process.

As with money, there are more straightforward ways to acquire glory. (Many involve shameless, shameless self promotion.) None are guaranteed, but surely there are some with better odds than working heads down on your own startup.

3) Autonomy

I see this one often as well; "I want to be my own boss" and "I could never work for a big company" are common refrains. As with money and glory, I also want to challenge how much autonomy founders have. While you may have the luxury of determining your work hours, your big-picture autonomy is drastically decreased.

For starters, you do in fact have a boss. Your board[6]. They monitor your progress at regular intervals, and can fire you for poor performance. But even if you're keeping your board happy, you don't have the freedom to make bigger decisions. If doing a startup is akin to driving along a highway[7], there are many, many more possible exits if you don't take VC money. Being valued at $10M+ means you have to go big or go home.

The role of a founder involves massive amounts of responsibility. Much more than an engineering position at a big company. You're responsible for the livelihood of your employees, the returns on your investor money, and the overall health and well-being of your brainchild. Even at a day-to-day level, being a founder has a huge impact on your relationships. You often have to cancel plans with friends and family, and when you manage to find some time to relax, you feel guilty about not being in the trenches with the rest of your team.

A Good Reason To Start A Company

The best reason to start a company is that you are obsessed with solving a problem-- there is some pressing issue that you need to fix, or some product that you need to exist. Don't chase hot new technologies or perceived market opportunities (especially not as a 21-year-old newbie to the real-world market). The road to a successful startup is so long and hard that, without insane levels of conviction, most will fail. Don't start a company for the sake of starting a company-- start one because you honestly believe that you have to.

Admittedly, there is a another reason: to learn. The rate of learning at a startup is extraordinarily high, especially for a first-time founder. But it's often too easy to claim you're doing something "as a learning experience," when your true goal is fame and fortune. I've deluded myself with that line of reasoning in the past.

Some would argue that it's also fine to start a company if you have no "better" options[8]. While I can almost see the merit in that, I would still have to caution those in this position. There are quite a few benefits to doing a startup, but many of those can be had while working elsewhere. Joining a small, fast-growing company, for example, can teach you quite a lot about how to hire, how to manage, and how to find product-market fit. There are opportunities for learning and autonomy (inside and outside of work) with less risk/stress than being an early stage founder.

Why Stanford Specifically?

I love Stanford. I really do. But as a member of its startup culture, this is something that I've wanted to write about for a long time. Stanford's entrepreneurship culture focuses too much on the act of starting a company, and not the act of solving a problem.

Luckily, improvement is far from impossible. There are heaps of resources for students looking to get an idea off the ground, but barely any for students trying to evaluate an idea in the first place[9]. I have some ideas about how to help students evaluate potential ideas, and how to go about looking for ideas in the first place. I want to write more about this topic in the future, but for now a great piece to read is Paul Graham's "How To Get Startup Ideas".

I realize that I'm a bit cynical about the whole startup game; I'm sure that my own biases and experiences have a lot to do with that. Yes, startups do have their fun moments, especially when you're working with friends. However, undergrads should also be aware of the realities involved. Founding your own company is not all fun and games; there are no overnight successes and it's a big responsibility for which you need to be prepared.

Disclaimer: Although the bulk of my writing here talks about "Stanford students" collectively, I want to clarify that I primarily mean undergrads. There are many fantastic companies emerging from graduate research, driven by a core technology that solves an interesting problem.

Agree? Disagree? Message me and let's start a conversation.

Tremendous thanks to Molly Mackinlay, Chris Barber, and Parth Bhakta for reading drafts of this.

[1]: Patrick McKenzie (aka patio11), an incredibly savvy software engineer and consultant, calls this a micro ISV (independent software vendor).
[2]: William Hewlett and David Packard of HP, Larry and Sergey of Google, Andy Grove of Intel, Jerry Yang of Yahoo!, Steve Ballmer of Microsoft, Michael Arrington of TechCrunch, Vinod Khosla of Sun Microsystems, and the founders of Instagram, WhatsApp, LinkedIn, IDEO, Netflix, SnapChat, and WhatsApp all have ties to Stanford. The institution does a damn good job of producing capable founders.
[3]: Not to mention any liquidation preferences that your investors have.
[4]: Yes, I realize that this is, for the vast majority of people, a truly life-changing amount of money. More than I ever dreamed of having as a child. More than my father ever dreamed of having. However, I'm assuming here that the ideal exit for someone starting (or funding) a venture-backed company is in the hundreds of millions. $5M just won't cut it at that scale. As I heard someone say recently, $5M is "rest of the country rich, Silicon Valley poor."
[5] I'd kill for it, but I wouldn't bet on it. List all of the "startup heroes" that you can. How many of them are not white men? I don't put much stock in the traditional king-making process.
[6]: Let me reiterate that I have a very narrow definition of startup here. Your side project or passive income stream is obviously not going to have a board. Your seed funded company may not have a board. If you intend to do startups as a career though, you are going to end up being responsible to board members.
[7]: Along the Autobahn in a McLaren F1.
[8]: Realistically though, you always have some reason for doing a startup over joining another company. If you don't know what it is, I would encourage you to first figure out what your priorities are before making that decision.
[9]: Partly because startup ideas are hard to evaluate in general (ahem, Snapchat).