Between failure and Facebook

Recently, a friend was trying to recruit a programmer to join his early-stage startup. The programmer had just graduated from college and his impression of startups was shaped mostly by popular media. His main concern, he said, was: “What if we end up being the next MySpace instead of the next Facebook?”.

Of course, for those of us immersed in startup world, creating the next MySpace would be considered a huge success. MySpace was once the most visited website in the US and was acquired for $580M. It flamed out later under its corporate owner, but that happens to a lot of great startups.

Mainstream culture seems to depict startups as either being complete failures where everyone loses their shirts or else huge hits like Facebook. But the reality, as usual, lies in the middle: in 2010, according to Dow Jones, there were 522 venture-backed exits with a combined exit value of $53 billion – implying an average exit price of around $100M.

The best thing about startups is you get to work with great people on interesting projects, and can be successful by conventional metrics, even if no one outside of tech has ever heard of you or what you’ve built. There’s great stuff between failure and Facebook.

http://www.altgate.com/ fnazeeri

Thing is, the programmer in question doesn’t make any money (not real money) in either MySpace or Facebook (remember she’s joining after the pop)…so for her it’s about meaning not the money…

So her question is valid…which company is going to have more meaning…

http://www.cdixon.org chris dixon

well, this was a very early stage company where she would get meaningful options that aren’t under preferences.
JamesHRH

I disagree with the premise.

Almost no one joins ‘after the pop’, based on meaningfulness – unless they are senior execs who can shape the path for the company.

Seriously, if you are working on the redesign of the Like button, you are working @ Fb for the resume or the sense of being a winner.

Meaningful SW work left that building ages ago.

http://twitter.com/andyidsinga andyidsinga

I don’t think meaningful work left that building .. there are engineers and IT folks in the depths of facebook data centers solving incredibly difficult scaling problems that *literally* only about 4 or 5 other companies are dealing with.

http://reecepacheco.com/ reecepacheco

for those of us deep in tech, we have to be aware of our “curse of knowledge” – we take for granted our deep knowledge of startup outcomes and the understanding that “failure” is ok

your average engineer coming out of college is still just learning about startups, thinks their CS degree taught them everything they need and thinks they need to put it to use in a ‘career’ position

in reality, the next 5 years post-graduation likely won’t go anywhere near what they planned… and the sooner they develop their appetite for risk and their threshold for ‘failure’ the better
http://www.about.me/briankung Brian Kung

How did this story end? Was the programmer successfully hired? What did the founder learn from the experience?

http://www.cdixon.org chris dixon

yes, successfully hired, but startup is too early to say whether it worked out

http://www.facebook.com/luke.chesser Luke Chesser

If I were your friend I would have probably dropped that programmer as soon as I heard the programmer say that. To work in such an exciting industry and not understand where the majority of innovation is coming from shows a disconnect between schooling and interest. Not that every programmer needs to be following VC’s and reading about S-1′s, but they should show some initiative and passion for programming outside of the classroom.

http://www.cdixon.org chris dixon

I dunno. It’s easy when you read hacker news all day etc (like me and probably you) to think this is all normal but there are lots of well adjusted, smart people who don’t know much at all about the real world of startups.

Andrew Barron

How many startups do VCs typically back in a year?

http://www.cdixon.org chris dixon

Totally depends on the VC and their model.

Andrew Barron

Oh, I was wondering if you had the total number of VC funded startups on average, per year. That way you could figure out the likelyhood that any given startup will exit.

http://procause.com/ matthewhughes

A few years ago I left a big company to join a small start up.

We got to $10mil when I ran into a former boss.

I told him we had hit $10mil to which he replied:

‘Ain’t nothing wrong with ten million dollars.’

http://twitter.com/andyidsinga andyidsinga

I have a huge amount of respect for people (and teams) who can turn nothing into any millions cheers to 10 million!

http://procause.com/ matthewhughes

I’m embarking on my own start-up now…

I respect that process more than ever.

http://twitter.com/gingerjet gingerjet

His main concern should be less about ending up like MySpace and more about surviving until a second or third level of funding let alone being bought out or (if you are extremely lucky) going public. I know programmers who have burned through a dozen startups. Personally I have been through four. They can be exciting and fun experiences but not always the best place to build a career.
http://www.facebook.com/biaohs Shoaib Khan

The real motivation behind startup hitherto has been the passion and the drive to roll out something exciting. Not so cool when programmers jump in to startups to earn “cool billion dollars.”

http://www.cdixon.org chris dixon

I don’t think the programmer was just trying to make money. I think money in this case is a proxy for popularity / success / doing something that has impact.

http://about.me/johnrevay John Revay

Great perspective and metrics re: implied average $100M
http://www.facebook.com/rajatsuri Rajat Suri

I’d say Myspace was a failure because the product did not have a lasting impact. Exit valuation means nothing, impact is everything. The best talent is driven by this. Saw a Max Levchin talk where he said he felt Slide was a failure because he didn’t fundamentally change much with the product

http://www.cdixon.org chris dixon

Yes, but you could debate whether this was a result of News Corp mismanagement.

http://mikelewis.me pescatello

I agree with you Chris. MySpace is definitely a failure now but at the time they captured millions of users’ attention. Their music product was, at the time, unique. Who knows how it could have progressed, and i think it’s too easy to say that they would have definitely failed. Lots of services sell out and immediately stop innovating (Flickr, delicious come to mind)

Christopher Taylor

”
522 venture-backed exits with a combined exit value of $53 billion – implying an average exit price of around $100M…” — I think the median ($70M) is a more meaningful statistic than the mean in this case. A small number of large exits skew the mean upwards.
http://twitter.com/MogulAzam MogulAzam

I believe the experience of working in a startup is priceless. You deal with a whole lot of issues in a smaller firm, and the work prepares you for the future. Most successful startups are built on previous failures on a number of levels. Also, I think it takes an individual that can handle the rapid change and uncertainty involved to prosper in a startup. Also those individuals are the ones that enjoy the experience.
Anonymous

My comment will not be popular — I do not see what is so meaningful about working for pretty much any of these companies. You want meaning? Join Teach for America or WWF. Here is a world where millions of man-hours are spent playing Farmville, while thousands die daily for lack of actual farming. Venture capitalism is about capital first, meaningfulness second. Of course, it is nice to persuade your young hires that it is the other way around — helps them get through the 16-hour work days.

Anonymous

These ventures create jobs for people. That is part of their value to society.
Anonymous

Actually, lack of farming is not the cause of death. It is a logistics problem. We already produce enough food to feed everyone on the planet, but we don’t have adequate infrastructure to get it to the people who need it. In fact, HIV-AIDS is the leading cause of death in developing countries. Furthermore, working for a startup and working for social impact are not mutually exclusive. Social entrepreneurs tackle many of the largest problems in the world, and socially minded investors provide them financial backing. In that world, as with the for profit one, these concepts still apply.

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http://kirklove.tumblr.com/ kirklove

Great post, Chris. Thanks for reminding folks of this.
http://arnoldwaldstein.com/ awaldstein

Good reminder that success comes in different shapes.

More and more I’m working with ‘lifestyle’ businesses. They may get sold or get bigger or franchised, but these are $15-40M companies with strong profit margins that pay back in cash dispursements to the team.

Nothing wrong with that model. Different approach from an investment perspective but investments nonetheless. A lot of these in the food biz.
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http://blog.kwiqly.com/ James Ferguson @kWIQly

I would say the best thing about working in a startup must also include finding out about personal limits, facing ups and downs with character and discovering limits far beyond personal expectation. PLUS all the things Chris describes
Anonymous

There are parallel questions unrelated to the money.

A startup can be about culture, chance to make an impact, interesting people, ambitious projects, not being evil, whatever. Is the startup committed to its vision? An early employee motivated by the vision doesn’t want to sell out to News Corp.
http://essaychampions.com/ essay help

Cool!
http://www.paulmarshall.ca/ Paul Marshall

Defining success and failure is a very personal thing but FB is the exception not the rule…there are MANY levels of success between failure and FB…GREAT reminder Chris, thanks.
http://twitter.com/andyidsinga andyidsinga

Really good post Chris – thanks.

I would consider it a huge success to work on a project from zero to $100 million in revenue (or exit, or similar)

There are interesting projects and people in startups, bigcos and non-profits …but going from zero to success is really really hard almost anywhere.
As I get older I find more and more people who are thankful to have worked on lots of interesting things and with interesting people but are frustrated because they can’t point to anything successful.
http://engag.io/ William Mougayar

The average exit of $100M is a good number to keep in mind.

http://www.victusspiritus.com/ Mark Essel

An intriguing statistic. If 90% of startups fail (likely 95%), and the average exit is 100million, we can build a simple model to evaluate startup financial risks. If a founder owns 10% of a startup when it exits, the yield is $10million, minus capital gains. The time to that exit may be 5-10 years +, so the outcome is 5% success rate * $10 million normalized by 10 years. That’s conservative yield of $50k/year.

The advantage of failed startups is that they collapse much quicker than 10 years, and it’s up to founders to identify zombie businesses which will never exit or generate much more than ramen profitable revenue.

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John User

There are also a *huge* number of startups that never exit. I have founded several startups, still own a couple of them, only exited successfully on one. I now prefer to keep them and keep them running, rather than handing them over to people who are interested in the money first and foremost.
http://www.facebook.com/profile.php?id=206442 Josh Schwarzapel

Love the sentiment of this post and totally agree.

One thought though, I don’t think a mean is a good number to quote about a typical venture exit. I would bet that distribution is probably very skewed such that a few exits take a large proportion of the $53B.

That said, love the post.

http://www.cdixon.org chris dixon

fair enough. I think the median is around 70m

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Chris Dixon