For Entrepreneurs

Why I never founded a start-up…

A few cents on how I think about start-ups from the DNA perspective. How investment of money and time and how networks and jack-of-all-trades capability mix to create entrepreneurship DNA.

1. I love everything that is related to start-ups

It is true. If I ask myself if there is anything that an entrepreneur does that I do not like, I can’t really find anything. Working the entire day including weekends on making a technology work. Yes, that’s for me. Inspiring people and learning about the domains related to my start-up to select good candidates and lead them towards the goal? Yes, that’s me. I’m that ENTJ/teacher kind of guy. Be laser focused and have that “driver” personality type? Something that is a bit harder for me, but building milestone and roadmap plans, aligning them with simple missions statements and rules for the culture, and finding that small microsteps in between and hammering through the to do list as effective as possible in an 80/20 fashion is somewhat something I learned to do. Do I love product development? Hell yeah I do, from paper prototypes, to pain identification, value proposition modelling, trimming down features, applying design thinking to the intuitiveness of the “interface” or handling of the product, to the clear analysis of call to actions of the “surface” or “interface”, to smoothening and modelling state transitions of the product along the call to actions? And aligning all this with the user experience from an emotional and attachment point, creating dominant representations of the problem and a way to solve it? Yeah, that’s me. Grinding over financials and trying to make everything run more smoothly, risking that capex for lowering that opex, going over every bill and financial position to ask for relevance and impact of the spending, yeah, I can do that if it increases the performance. Do I like to go into sales pitches with companies and iteratively learn how to improve the pitch, how to activate more animal cells in the brain to stir excitement and do I enjoy reversing the decision processes in the client company by talking about it? Yeah, I do.

The list could go on. When I look back what I was always claiming on what is holding me back…it probably was my perceived inability to bootstrap teams and delegate work. I never would join an “idea”, unless I strongly believe in the people and they can talk me very well into following them. My reaction to this was learning about Venture Capital and getting into the business to understand how to raise capital, once you at least you have some type A co-founders on board. The product development and team formation challenge all of a sudden appeared to be just have become a philosophical issue about offering equity and luring people into an idea or just getting employees via the regular job market. The latter certainly works better. When looking at co-founders, the markets for finding them improved drastically and there were still angel networks to tap into to build short-lists. And of course, that is why you go to the pitch events and start-up conferences to network. This networking part was another issue, coming from a degree program and university where nobody really was that type A founder personality.
Finally, my biggest issue still appears to be sales on the customer level. In B2C, this isn’t really an issue, I thought at first. But in the end, every B2C deal is a B2B deal when you have to onboard your key resources and partners. In this case, it is doable once you have the contacts. So all in all, no reason any more to hold myself back.

2. Cash is King

The first thing that really stood out for me as it does for every entrepreneur is that you have to put skin into the game. I never had enough cash at hand to fund the initial 50k to start working on a company from 0 with a perceived risk of failure of 99.9%. That’s where you are when you start on any idea. Looking at the opportunity cost here, forgiving a potential future revenue stream with almost certainty given German labour law and the almost impossible termination if you are in a big corporation, you are easily looking at a forgone interest of a rising salary from let’s say 60k when you start working to potentially 400k and beyond untill you retire. Vs. potentially entering a worse trajectory and going 40k to 120k max. when you blow up the company and just wasted another 50k. The idea of blowing this money using FFF and owning them up to 100k for bootstrapping the company also was not very appealing. Let alone that I still have to cover rent – 5-10k a year -, insurance – 6k a year -, food and everything – 10k a year. That is the best case single individual burn you have, blowing 30k a year for 14*365 or roughly 5000 workhours. And this does not include travel and networking expenses. Let alone infrastructure cost if you are not going all Google Docs.

And all else equal, if you just don’t put your money into the wrong stocks and you are waiting for the next crash to happen, youj are surefire making your 2x or 3x money within half a year while making around 20% a year if you are a decent trader with a decently working strategy. Adding the salary losses and the losses from capital gains, you are very quickly looking at an unfair disadvantage for most simple and not-so-huge entrepreneurial endeavers.

But that is only one part. The more relevant part of the cash is king problem is the illiquidity of your company. Okay, if you do well, you can increase your base to 50k and even get a decent appartment again. And if you are turning profits, you might even think about giving yourself a dividend – not really. But you are looking at a 5 year minimum time of frozen investment. If you forget about angel and VC money, you might get out quicker, but you also don’t have the network to build a huge company. You are back to doing either a very simple business or spending 20 years scaling to a decend income. With risk all on the road, including risk from hiring so many assholes into your company that you don’t like working on it any more. And of course there is a chance that you are doing things you didn’t want to do, because your key accounts drive your entire company.

This all sounded pretty damn bad if you don’t have a billion dollar idea and you could – at the same time – sit on a VC fund. Something that also appeared quite interesting and probably to some portion is if the fund is decently managed, does the right things and you are on partner level. On an analyst level and associate level, not so much. It’s grind work. But setting asides the pros and cons of VC, both VC and PE have this problem of illiquidity, too. The benefit is, you can manage or work on 5-8 companies in parallel. Making everything more challenging. If you are good at pushing the companies you actually like into the pipeline, you might end up enjoying the fruits of 6 companies in parallel and you learn way more about the markets they are in than you would do as a founder. But chances are you don’t have all the say in choosing the companies, and if things work out badly, you don’t even manage a single investment you like. Also not very attractive. And the politics….

From that point of view, if you are interested in markets, technologies, sales dynamics, valuation in markets, and people that run the markets, you are better off in a hedge fund. You are more active yourself in identifying deals right from the analyst level. If you rise to the associate level, you might even actively manage a portfolio. From that point, you are better of at an analyst level where all you do is pitch deal opportunities: including the identification of the target and the trading execution strategy from buy to sell. You likely have almost zero impact on the board, even if you have a controlling ownership – since that is what the partner or associate would do -, but you at least have your mind all across the markets. Some hedge funds involve networking over the phone, some involve travelling to conduct research on things that are not really part of the public data universe. And the best about everything, you almost surely are not holding a company for more than one year, and you will work on more than 50-100 deals a year. Sounds intriguing enough. Once you nailed the M&A/PE part of the financial analysis, you understand the market dynamics and players interests like a VC guy and you have enough ops background like a strategy consultant to see what drives the businesses. All in all, it seems like the perfect game. But you are so fast in and out that you just have to be made for it. Period. And it takes years to prepare for it and the chances are slim and dim no matter what you are doing.

All in all, all stints suck. VC, PE, HF, Start-Up. But from a liquidity perspective it is HF over PE/VC over Start-Up. From the stakeholder and “must-do-but-hate-to” perspective, they are equal. So another reason why I didn’t start a start-up was, because it closes the doors to at least PE and HFs. But since I also didn’t get very close to any of these and I really hate PE for the illiquidity and lack of growth – making PE somewhat the easy chicken, growth is projectable and you are in enough to make a clear predictable impact and end up just fighting over valuation during the buyind and selling bids. If I could choose now, I would probably immediately go for a hedge fund. Unless…

3. I love big ideas

So, if you choose the most illiquid of investments – the start-up -, you like the massive risk you are taking, you accept it as a complete career killer that doesn’t prepare you for any regular job as a fallback option except maybe VC, then you really should be very sure that all the risk you are taking is paying off. Which brings you to pass on every smaller and not-so-unicornish idea. And that’s what I did over the last 30 years in my life. I passed on everything that wasn’t potentially going to be big.

The problem now, working in VC and seeing all ecosystems around the globe maturing is that you simply have a massive competition. It is hard to find a great idea, it is hard to understand it as a great idea, it is hard to structure it into a business opportunity, and it is fucking hard to stay committed when every idea seems like very far from successul development into a product and company and you have not real network to start moving quickly. Chances are that you gut is telling you: the idea is not big enough. Or it is telling you: you don’t care the least about the idea. Or: you just won’t manage to pull every stage of the path off to actually make it, due to the unpredictability of where things are going, the unproven market demand ahead and your sheer lack of balls to buy all-in on a lottery ticket. And that’s what a really big idea is. It’s not the same odds. Maybe it is 1:10000 only. But would you put all your life savings, energy and fallback options on the line to play a lottery ticket that has an odd of 1:10000? One that has 1:1000 chances? Maybe that is easy when you having nothing else on the table. But if you are having kids, a not so stellar career path on your back, and your FFFs are not driven entrepreneurs that will push you towards success, you are still feeling like it is too big of a shot.

3. Summarizing about the DNA

In order to be successful as entrepreneur, you must have blind spots. Blind spots for the illiquidity, blind spots for the actual riskiness of the idea, blindspots for very very big ideas. What you have to do is search spaces that are unvacated where you can somehow have a reasonable and defensive argument that there will be market demand, and you are very certain that the market is big enough to be attractive. And the entire roadmap to first customers must be small in complexity and easy in execution. And once you have all that, you need to find one or two people that complete your skillset, bring in some network and money and that can drive your development roadmap.

So why didn’t I found yet? I didn’t solve the networking puzzle to find and attract some right co-founders. Time to get to work.


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