Not All That Glitters is Gold
I recognize in my last post that I highlighted the difficulty in raising capital and received responses from individuals dejected about the prospects for their potentially independent future. Let me roll back the script, being independent is NOT for everyone, however if you have the itch to be an entrepreneur, you should scratch it sooner vs. later. A mentor of mine suggested that he viewed all businesses as melting ice cubes (e.g., customers die, credit cards for recurring revenue transactions get cancelled, etc.), even growing ones (they just happen to stack multiple ice cubes — one on top of the other, faster than the layer below it can melt).
Every year the value of your call option on your career to be independent shrinks in value (from a net present value perspective) as you reduce the number of years for your efforts to compound. Every year, lifestyle creep grows, increasing the bar for which you measure the size of the prize necessary for you to give up the comfortable life you’ve built. Fast forward from your career wherever you are — say a Managing Director (at age 35). You likely have another 30 years of steady income, cash compensation likely is capped although carried interest might add significantly to that. The day you retire, that income stream likely will come to an end shortly thereafter. There is NO terminal value at the end of the day.
I’ll take this discussion in two directions (a) as a Founder and (b) as an early employee.
(a) Founder: There is NEVER a good time to start a business. The deck is and always will be stacked against you. Your job is to just (i) get started, (ii) be realistic and (iii) fail fast! You will labor in silence — the days will be long but I promise you the years will be short. As many of you know, I grew up religious. In 2017, after receiving news that I viewed as fatal to the business, I stood in my shower for what felt like hours that evening, I remembered repeating a verse I had memorized as a young child, “Take this cup from me” Luke 22:42. If you are NOT struggling, you’re not growing. Think about the butterfly who has to struggle out of its restrictive cocoon to achieve its destiny. Nature forces a period of trial and tribulation to ensure that you are prepared for what’s on the other side. Being on your own forces you to grow far beyond anything any you have likely done. Even if you fail, you’ll become stronger, more resilient to life’s challenges, and, I would argue, an even more valuable contributor long-term to whatever organization you are part of.
I have NOT had the privilege of being (i)
married or (ii) a father (except to @tacoboutcorgi) but my sneaking suspicion is that entrepreneurship takes on many similar characteristics. The need to find aligned partners (in the business, for the business and outside the business), being stewards of your employees careers and the daily knife fights in the trenches. The endeavor can be all consuming!
(b) Early Employee: I am shocked whenever in casual conversations, individuals would express a desire to depart their firms given a lack of firm growth (basically capping their internal progress), but when offered new and exciting opportunities at upstart firms they are focused on the need to be made whole relative to (i) their current compensation (to make up for the risk of that new firm) or (ii) shown a direct path how they would get to being part of the Partnership. In response, (i) I recognize that upfront economics are an important aspect, but in my mind (that is such a short-term mindset), the value of the call option of joining a firm that has found product market fit and is building go-to market fit is so much more valuable. If you put your head down, deliver value (in excess of your cost), the firm would be hard pressed to NOT promote and pay you. The experience itself should be viewed as significant compensation. Remember, the economics today pale in comparison relative to the future economics (be long-term greedy). Compensation comes in so many facets including (a) exposure to stakeholders (investors, management, sellers), (b) running point on important workstreams and (c) being part of organization defining conversations. (ii) cream rises to the top. If you are truly THAT talented and bring substantial value, stakeholders will naturally recognize your contribution. I’ll happily make you a Partner AFTER you actually bring Partner-level value, but few do — if you did, I would highly encourage you to become a Founder. Firms that do NOT value / pay their employees would struggle to retain top performers and naturally atrophy. I remember a legendary investor once told me that my job as a Founder was to make every potential candidate that turns us down regret it, by making Parallaxes more successful than they ever imagined.
If I was to analogize this to a private equity return, it comes in three parts, (a) earnings growth, (b) debt paydown (or cash accumulation) and (c) multiple arbitrage. Think of (a) as your annual compensation growth, (b) where you maximize the value of your re-investments and (c) terminal value (which if you’re an employee — shrinks to zero at the end of your career). Opportunity cost really manifests itself in earnest in (c), most think of it as (a) and (b)