All That Glitters: Dispelling the Myth of Wealth in Startups

Quick money lesson, for perspective: According to WhatsMyPercent.com, if you earn $100,000 in income per year, you’re in the top four percent of the United States. Hit $110,000, and you just leveled up an entire percentage point.

And that coveted top 1% we hear so much about? If your household earns an adjusted gross income of $388,905, you’re part of it.

The point? $100,000 is a lot of money – enough to make an entire generation more well-off than the entirety of the family tree before it. Earning that kind of scratch is not easy, and yet at least once a day I see another doe-eyed young job seeker looking for the next surefire, get-rich opportunity. Why blame them? The current VC culture gilds enough crap to make billion dollar valuations the standard aspiration.

Young entrepreneurs desiring to obtain successful positions isn’t unnerving in and of itself, but the descriptions of these jobs are. It seems more and more that jobs are trying to one-up each other to see who can emphasize the fail factor the most — failing for fun, failing to learn, failing harder than the next guy. Companies have romanticized failure as a bi-product of learning and growth and packaged it as entrepreneurship. Failure, or more specifically experimentation, is certainly part of the process, but companies are forgetting to stress the importance of success. Another bubble is around the corner, with another after that and on and on until someone starts putting value back in things that simply make sense.

It used to be that if you started a business, it had to not lose money – or at least not consistently.

The first venture capital firm was started in 1946, followed shortly thereafter by the first VC boom with some help from the U.S. government. The passages of the Small Business Investment Act and the investor-friendly Prudent Man Rule formed an atmosphere that birthed little companies like Intel, Xerox and Compaq — all makers of tangible goods.

This evolved into the system we all know and love (and some even envy) today. After the huge bubble of the 1990s burst, a storyline began to develop to quell the doomsday mantra of “it will happen again!” It revolved around the notion of perpetual curiosity. The timeline goes like this: get an idea to solve a problem, get others to believe in your idea, hire others to believe in your idea’s success, try to succeed in delivering on the idea. But this process results in an abysmal level of success – about one in every ten new companies actually make it.

This is not a rant against investing as a concept.

John D. Rockefeller’s Standard Oil had its roots in some small, upfront investment years prior to the company’s formation, and so do tens of thousands of successful businesses. There’s often no way to start a business without some form of outside capitalization, more so if the business has high up-front costs. The issues arise when companies refuse to value the role of liability in success.

Failure is hard and letting down employees is hard — but paying money back is much, much harder. Modern day startup culture is devoid of this and as a result is blind to the concept of avoiding loss (a key distinction here: not profitability, but simply lack of loss). Most startups are spending ten dollars to make a dollar, which is sometimes the decision that must be made because the expectation is that revenues will be deferred or the activity will have ripple-type returns. I actually did this at my company with a marketing stunt that yielded a -50% ROI.

There’s a catch here, however: the funds came out of my pocket. I knew the risks not only to the business but to me personally. Most “entrepreneurs” these days don’t know what this type of failure feels like and therefore don’t make decisions based upon it. Instead, they make decisions based on the possibility of a monster payoff. Many hopefuls view startup culture and entrepreneurship as a modern day, rigged slot machine that pays off every time. It’s fun, it’s exciting and it’s a vehicle for wealth creation. Only, for the majority of startups, it’s not.

The mantras of “move fast and break things” or “put a dent in the world” won’t pay the bills.

Those forced to abandon ship will have to get jobs working for someone else, which is likely what they would have done in the first place if someone had been honest with them. Ownership is costly — the buck stops there.

A business is not a place to test your hobbies, nor is it a proving ground to “find” yourself. When you have clear, invested owners and a clear vision for the company, there is surprisingly little gray area when it comes to the activities you should be investing in. The more gray area in your business, the farther away those dreams of wealth sail.

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