Friday, December 21, 2007

Dreaming of a startup...

Horatio Alger was a writer in 19th century America who made his name publishing rags to riches stories. His heroes, starting invariably poor, through hard work and determination achieve spectacular successes. Here's a representative title: "The Errand Boy; or, How Phil Brent Won Success".

Horatio Alger's spirit is alive and well in America today - how else can one explain that half of the population reliably votes to give more and more money to the rich, very rich, and the richest through the tax cuts, something that is absolutely unparallel to the developments in the rest of the industrialized world.

But nowhere it is more relevant than in the startup world of the Silicon Valley. Thousands of new graduates from the best software engineering schools all around the world stream into the Valley every year hoping to strike it rich by joining the right company.

Well, let's see what the real chances are, however.

A typical new grad joining a new startup can expect to get somewhere around 0.1% of equity in the new company on joining. If this does not sound like a lot, consider that a 100 person comany would be giving 10% of its equity to the employees - a very fair number, considering that there will be 2-3 founders and 3-4 rounds of financing in which VCs will get another 30-40% (or more) of the company.

So to make our new grad a millionaire (after taxes), a startup should become worth more than $2B. Looking at Google Finance, Software and Programming section, there are roughly 40 such companies. Most of them have been in business for at least 10 years (the average is probably closer to between 15 and 20).

Some companies get acquired before reaching the public stage, of course, but there are fewer than 5 of such high-profile acquisitions per year.

But does $1M really make you rich in Silicon Valley? Considering that a reasonable house there is $2-3M, that would make for a nice downpayment, assuming that the base salary can carry the rest of the $5000/month mortgage. But it certainly would not make you financially independent.

What would it take to be really well off there? I'd say that would be $5M minimum - this way one can buy a house for cash, and then have enough money left to invest (or maybe start your own startup). Unfortunately, $5M after tax for our new grad means $10B in startup capitalization.

At this point you can forget about acquisitions - there aren't any at this price. So back to the Google Finance page we go, and the results are not encouraging: 12 companies in software and programming section. Out of hundreds of new startup every year, hitting approximately 0.5 that ends up being a hit is about as likely as winning in a lottery.

Morale of the story: if you want to make money in a startup, be a founder.

More here:


dzembu said...

But of course :-) Founder ! That is all the fun !

But there are much more in strat-up then just money:-)

Say, you need about 100k$ a year or so to survive , but how can you mesure satisfaction of making some thing cool all by yourself ? This is priceless :-)

Sergey Solyanik said...

Of course! And for everything else - there's Mastercard!