Is Starting a Tech Company a Terrible Mistake?

Forget the 1 percent. If you're in tech
you want to be part of the 4 percent.

That is the number of startups that actually survive to go public and generate a significant 'liquidity event' for their founders and investors.

So, yeah, most startups are doomed. The lucky ones get acquired. The truly blessed make it to IPO. As for the  others? Dont cry for them, Palo Alto.

Many will end up recycling onto another startup. They just cant live without the risk and the carrot of that potential payday. Others will be consigned to the salt mines of mid level codership at Google or Yahoo or a dozen other jazzy enterprises, damned to the perdition of eternal foosball, free food and Birkenstock discounts.

Is this inefficient? Orwellian? Hardly. Darwinian? Possibly. A system has evolved to outsource risk to the startups. Costs are relatively low, as are the downsides. Those that make it, make it. Those that dont serve as relatively inexpensive r&d for the next round. Live, learn and prosper.  JL

Will Oremus reports in Slate:

The Silicon Valley of the popular imagination is defined by its success stories. But they’re the outliers. Just 4 percent make it big on their own. Startups that turn into billion-dollar companies are so rare that they’ve acquired the nickname “unicorns.”

When you think of a Silicon Valley tech startup, what do you think of? Razor scooters and beanbag chairs? Billion-dollar IPOs? Twitter, Yelp, Uber, Dropbox?

The Silicon Valley of the popular imagination is defined by its success stories. But they’re the outliers. According to CB Insights, which tracks the venture-capital industry, three in four startups go nowhere. Another 21 percent get acquired by a larger company. That leaves just 4 percent with the chance to make it big on their own. Startups that turn into billion-dollar companies are so rare that they’ve acquired the nickname “unicorns.” Yet they’re the ones you hear about in the news every day—the ones that fuel the Silicon Valley dream.

So what about the other 96 percent? What’s it like to work for a startup that isn’t destined for fame and fortune? That’s the subject of Gideon Lewis-Kraus’ timely new book No Exit: Struggling to Survive in a Modern Gold Rush. He follows the frantic founders of a startup called Boomtrain as they scramble to piece together a round of seed funding from unsympathetic investors before they run out of money to pay their sole full-time employee. Lewis-Kraus’ conclusion: In most cases, founding a startup is a waste of time and talent that borders on tragic.

What looms over our heroes if Boomtrain goes bust is not exile or debtor’s prison. It’s a six-figure job as a product manager at Yahoo.

Like so many startups, Boomtrain starts out as a grand idea to disrupt and democratize a market—in this case, online video—and ends up as a scheme to help e-commerce firms get more people to click on their links. Even in that diminished form, it appears to stand little chance of long-term success, despite the heroic efforts of its sleepless founders.

The saddest part: As one particularly jaded investor tells Lewis-Kraus, the very goal for which the founders are sacrificing their youth and sanity—another round of venture capital—might be the worst thing that could happen to them. It would chain them to their doomed startup for another year, whereas failure would set them free.

It would be easy to conclude, as Felix Salmon does in Reuters, that “Silicon Valley is gripped by a mass delusion”—a headlong rush for fool’s gold on the part of hordes of misguided techies who’d be better off simply getting jobs at Google. “In the world of startups,” Salmon concludes, “the only winning move is not to play.”

As a corrective to the prevailing mythology, this is a useful point. A glut of seed money—cheap bets on startups that are unlikely to succeed—has made it easier than ever to found a company. That also means that it’s easier than ever for founders to get in over their heads, especially since the seed-funding boom hasn’t been matched by an explosion in follow-up funding. That disconnect has come to be known as the “Series A crunch,” and it’s the big-picture backdrop for Boomtrain’s struggles.

But is it really such a tragedy? It’s almost certainly true that Silicon Valley founders overestimate their chances of success. At the same time, Salmon and Lewis-Kraus appear to be overestimating the cost of failure in Silicon Valley—and underrating its value.

For most small-business owners, failure means hardship, regret, and loss of reputation. For Silicon Valley startup founders, it often means none of those things. Sure, the Boomtrain founders have to scrimp to make rent and payroll each month. One commutes an hour each way from Petaluma because he can’t afford San Francisco’s exorbitant rents. But their circumstances are hardly Dickensian. In No Exit, the shadow that looms over our heroes if Boomtrain goes bust is not exile or debtor’s prison. It’s a six-figure job as a product manager at Yahoo. That’s thanks to a Silicon Valley hiring culture that looks upon failure in a real-world setting not as a black mark, but as a qualification on par with an MBA.

A cushy corporate gig may not the most inspiring consolation prize for a pair of idealists who moved to San Francisco intent on building the next YouTube. But it’s certainly a softer landing than the one that awaits young strivers who fail at other high-stakes pursuits, from art to professional athletics. And the funny part is it’s exactly the type of cushy job that Salmon believes they should have taken in the first place.

“Engineers,” Salmon argues, “tend to do quite well in structured environments, where there are clear problems to solve, and relatively badly in the chaos of a startup.” On the contrary, I know plenty of engineers who thrive on autonomy and chafe at structure and hierarchy. In any case, Salmon is conflating engineers with startup founders. The latter may or may not have engineering skills, but almost by definition possess a high tolerance for risk and uncertainty.

The former, meanwhile—the ace engineers, of whom only one is represented in Lewis-Kraus’ book—take on almost no risk by going to work for a startup. As Lewis-Kraus observes, top programmers are in such high demand that they could “walk alone into an investor meeting wearing a coconut-shell bra, perform a series of improvised birdcalls, and walk out with $1 million.”

There’s a reason Silicon Valley takes failure so lightly, and it has nothing to do with empathy. It’s that failure, and lots of it, is essential to the proper functioning of its economy.

Innovation requires endless experimentation. Not every idea is a good idea, and not every good idea is a good business. In theory, established companies like Google and Facebook could run thousands such experiments in-house, using their own salaried employees, with the understanding that many will fail. But they’d prefer to focus on building the profitable businesses they already have.

So, in effect, they outsource the experimentation—and the failure—to startups run by hungry young hopefuls. Then they try to buy the ones that work, and hire the best people from the ones that don’t. As a founder, if you’re in the former group—the 21 percent—you’ll reap a small windfall in the form of cash or equity in exchange for selling out. If you’re in the latter, you’ll just get a regular old salary and benefits. And if you’re one of the unicorns—rare as that is—you end up rich beyond belief.

There is genuine risk for some people in the Silicon Valley ecosystem, but for the most part, they aren’t the ones in Lewis-Kraus’ story. They’re the workaday middle-aged coders who have families to feed but lack sexy skills, the immigrants on H-1B visas who can’t leave their jobs without getting deported, and the small-time investors who’ll lose their retirements if the bubble bursts.

So what became of the Boomtrain boys once they inevitably failed to secure their next round of funding? Spoiler alert: They didn’t.