There are two kinds of people in the world

You’ve either started a company or you haven’t.  ”Started” doesn’t mean joining as an early employee, or investing or advising or helping out.  It means starting with no money, no help, no one who believes in you (except perhaps your closest friends and family), and building an organization from a borrowed cubicle with credit card debt and nowhere to sleep except the office. It almost invariably means being dismissed by arrogant investors who show up a half hour late, totally unprepared and then instead of saying “no” give you non-committal rejections like “we invest at later stage companies.” It means looking prospective employees in the eyes and convincing them to leave safe jobs, quit everything and throw their lot in with you.  It means having pundits in the press and blogs who’ve never built anything criticize you and armchair quarterback your every mistake. It means lying awake at night worrying about running out of cash and having a constant knot in your stomach during the day fearing you’ll disappoint the few people who believed in you and validate your smug doubters.

I don’t care if you succeed or fail, if you are Bill Gates or an unknown entrepreneur who gave everything to make it work but didn’t manage to pull through. The important distinction is whether you risked everything, put your life on the line, made commitments to investors, employees, customers and friends, and tried – against all the forces in the world that try to keep new ideas down – to make something new.

If you aren’t getting rejected on a daily basis, your goals aren’t ambitious enough

My most useful career experience was about eight years ago when I was trying to break into the world of VC-backed startups. I applied to hundreds of jobs:  low-level VC roles, startups jobs, even to big tech companies.  I got rejected from every single one.  Big companies rejected me outright or gave me a courtesy interview before rejecting me. VCs told me they wanted someone with VC experience.  Startups at the time were laying people off.  The economy was bad (particularly where I was looking – consumer internet) and I had a strange resume (computer programmer, small bootstrapped startups, undergrad and masters studying Philosophy/mathematical logic).

The reason this period was so useful was that it helped me develop a really thick skin.  I came to realize that employers weren’t really rejecting me as a person or on my potential – they were rejecting a resume.  As it became depersonalized, I became bolder in my tactics. I eventually landed a job at Bessemer (thanks to their willingness to take chances and look beyond resumes), which led to getting my first VC-backed startup funded, and things got better from there.

One of the great things about looking for a job is that your “payoff” is almost always a max function (the best of all attempts), not an average. This is also generally true for raising VC financing, doing bizdev partnerships, hiring programmers, finding good advisors/mentors, even blogging and marketing.  I probably got rejected by someone once a day last week alone. In one case a friend who tried to help called me to console me. He seemed surprised when I told him: “no worries – this is a daily occurrence – we’ll just keep trying.”  If you aren’t getting rejected on a daily basis, your goals aren’t ambitious enough.

Every time an engineer joins Google, a startup dies

VC returns over the last decade have been poor. The cause is widely agreed to be an excess of venture capital dollars to worthy startups. Observers seem to universally assume that the solution is for the VC industry to downsize.

For example, Fred Wilson says about VC:

You cannot invest $25bn per year and generate the kinds of returns investors seek from the asset class. If $100bn per year in exits is a steady state number, then we need to work back from that and determine how much the asset class can manage…. I think “back to the future” is the answer to most of the venture capital asset class problems. Less capital in the asset class, smaller fund sizes, smaller partnerships, smaller deals, and smaller exits

Similarly, Bill Gurley writes:

There are many reasons to believe that a reduction in the size of the VC industry will be healthy for the industry overall and should lead to above average returns in the future.

All of these analyses start with the assumption that aggregate venture-backed exits (acquisition and IPOs) will remain roughly constant. I don’t see why we need to accept that assumption. The aggregate value of venture-backed startups, like all valuations, is a function of profits generated (or predicted to be generated). In technology, profits are driven by innovation. I don’t see any reason we should assume venture-backed innovation can’t be dramatically increased.

For example, innovation has varied widely across times and places – the most innovative region in the world for the last 50 years being Silicon Valley. What if, say, Steve Jobs hadn’t grown up in Silicon Valley? What if he had gone to work for another company? Does anyone really think Apple – and all the innovation and wealth it created – would exist if Jobs hadn’t happened to grow up in a culture that was so startup friendly? Jobs is obviously a remarkable person, but there are probably 100 Steve Jobs born every year. The vast majority just never have a chance or give a thought to starting a revolutionary new company.

Some people blame our education system, or assume that there is some fixed number of entrepreneurs born every year. I think the problem is cultural. As much as we like to think of our culture as being entrepreneurial, the reality is 99% of our top talent doesn’t seriously contemplate starting companies. Colleges crank out tons of extremely smart and well-educated kids every year. The vast majority go into “administrative” careers that don’t really produce anything – law, banking and consulting. Most of the rest join big companies. As I’ve argued many times before, big companies (with a few notable exceptions) aren’t nearly as successful as startups at creating new products.  The bigger the company, the more likely it suffers from agency issues, strategy taxes, and myopia. But most of all: nothing is more motivating and inspiring than the sense of ownership and self-direction only a startup can provide.

Whenever I see a brilliant kid decide to join Goldman Sachs, McKinsey, or Google, I think to myself: a startup just died, and as a result our world is a little less wealthy, innovative, and interesting.

Shutting down

I’ve seen a number of situations recently where entrepreneurs decided to shut their startups down while they still had cash in the bank. (Contrary to popular mythology, I’ve never seen a case where investors forced an early-stage startup to shut down before they ran out of cash — it has always been voluntary).  Shutting down is an incredibly hard thing to do.  It takes great maturity and intellectual honesty to realize things aren’t going the way you hoped and that it might be better to just close shop and do something else.

How entrepreneurs handle shutting down is very important.  First, try to return as much capital to your investors as you can (after paying off employees and other important debts – but don’t waste money on an expensive legal process). Second, if you’ve developed IP, spend a few months trying to sell it to recover as much capital as you can (often investors will offer a “carve out” to incentivize entrepreneurs since the likely return to investors will be under total number of preferences).  Don’t go off starting a new venture before you’ve properly closed down your current one (I’ve seen this twice recently – very bad form).  Finally, for your own learning as well as your reputation, write a detailed post-mortem about what went right and wrong and send it to your investors, and then try to follow up with in-person discussions.

Here’s the good news.  One of the great things about angel and venture investors is that failure is accepted, as long as you do it in the right way. Venture investors will often fund entrepreneurs who’ve lost their money in the past. They understand that if you build an interesting product and, say, market forces turn dramatically against you, that’s a risk they took — and the type of risk they will take a again. Also, entrepreneurs tend to be judged by their wins (max() function), not their average.  You’d be surprised how many entrepreneurs have failures in their past that no one remembers once they have some success.

Twelve months notice

Generally speaking, there are two approaches to relating to other people in the business world. The first approach is transactional and legalistic:  work is primarily an exchange of labor for money, and agreements are made via contracts.   Enforcement is provided by organizations, especially the legal system.  The second approach relies on trust, verbal agreements, reputation and norms, and looks to the community to provide enforcement when necessary.

In the startup world, the latter approach dominates.  It is almost unheard of, for example, to see entrepreneurs or VCs sue each other.  The ones who do tend to leave the startup world, either by choice or by having ruined their reputation.  It is very rare to see someone in the startup world break a verbal agreement.  And, in most cases, employees and employers show loyalty far beyond what is seen in larger companies or what is economically “rational.”   (Most startups do spend considerable legal fees on financing, employee, and IP documents, but that is mostly because they know that those are necessary if they decide to sell themselves to a large company where the legalistic approach dominates.)

For this reason, if you are an employee working at a startup where the managers are honest, inclusive and fair, you should disregard everything you’ve learned about proper behavior from people outside of the startup world.

For example, let’s suppose you are a two years out of college and have a job at a startup.  You like your job but decide you want to go to graduate school.   The big company legalistic types will tell you to secretly send in your applications, and, if you get accepted and decide to attend, give your boss two weeks notice.

What you should instead do is talk to your boss as soon as you are seriously considering graduate school.  Give them twelve months notice.  Any good startup manager won’t fire you, and in fact will go out of her way to help you get into school and get a good job afterwards.  They will appreciate your honesty and the fact that you gave them plenty of time to find a replacement.

(Now don’t get me wrong:  if you work for bosses who have a legalistic, transactional mindset, by all means give two weeks notice.  I gave 4 months notice once to a boss with that mindset and was duly punished for it.  But hopefully if you are at a startup you work with people who have the startup, relationship-centric mindset.)

This way of relating to other people is one of the main things people are talking about when they talk about “startup culture.”  It is why so many people coming from other industries have difficulty fitting into startups (especially people coming from Wall Street where the transactional mindset is at its most extreme).  I personally find the community approach a much nicer way to operate, and try to only professionally associate myself with people who prefer that approach as well.