Photo by Dimon Blr on Unsplash
I read an article on why starting a company is dumb. It was an interesting read, and there was a particular point that echoes with me:
“The role of luck in success or failure is underestimated.”
If we read the mainstream technology media or business publication, we are often led to believe that a start-up/business’s success is always due to great execution and strategy that sets them apart from chump competitors, and often led by a heroic CEO that seems to be fated since young for greatness.
This is especially so when we come across long-form articles covering entrepreneurs on publications such as The Atlantic, Business Insider, etc. A programming wizard who makes his first program at 6, a born businessman who sells things to classmates in elementary school, that rebellious kid that doesn’t fit in…
My view on this is that when you achieve “success”, in retrospect, everything looks as if it had a purpose, every move seems like a piece of a beautiful puzzle, and every part of your life and experience can be weaved together to form a convenient narrative of an incredible story of human triumph and ingenuity. Somewhat Objectivist and Randist, if you ask me.
But one thing seldom emphasized is how disproportionately important is the element of luck and pure contingencies in determining the outcome (to be discussed more in later posts.)
Let’s assume P(success) = 1%, i.e. you have 1% chance of succeeding for each startup venture.
Assuming independent events, if the number of attempts is 10, P(success>= 1) = 9.6%, i.e. even if you start 10 companies, you odd of failing every of them is >90%.
On a meta level, how do we get to at least 50% odd of achieving at least one success? You'll need to try 80 times in your life time. And even then, it's a coin flip.
Startup is a journey of struggle against contingencies and odds that are heavily stacked against you. I guess that’s why they say you should only do startup if it's your raison d'etre and you're trying to solve a problem you are unshakably passionate about.
Here’s the excerpts from the article:
In January, I’m going to wander from college to college begging the soon-to-graduate to apply for jobs at Big Nerd Ranch. Several of the most promising will tell me something like, “I’m starting a company with a friend. It is like Instagram for pet owners.”
This post is about why starting a company is just dumb. And I know: I started a successful company.
You are more likely to fail than you think. Nearly every story that you read about the founding of a company is one that ends with a successful company. In reality, most companies fail. This survivor bias is well-known, and I would not belabor the point, except that it is exacerbated by the next point:
The role of luck in success or failure is underestimated. You have a good idea? You are the smartest guy you know? You have a mature business advisor? So you think, “The ‘most companies fail’ rule does not apply to my company.”
You have wildly underestimated the role of luck.
Let’s take me as an example: I was a smart guy with a lot of real-world experience. I decided to start a professional services company for Apple technologies when Apple’s stock was below $10 per share. I had worked in the professional services team at NeXT and Apple, and I thought there was an opportunity doing training and consulting on Objective-C and its related technologies. I ran around explaining the beauty of these technologies to anyone who would listen, and Big Nerd Ranch managed to grow to seven employees.
Being smart and hard-working got me to seven employees. Luck took me the rest of the way.
If you read interviews with successful entrepreneurs, some will tell you that having the right people is the most important part. Others will say that a carefully planned strategy is key. Or core values. Or passion. Or the right investors. Or failing fast and pivoting. Or a commitment to doing something great. Why so many opinions? I suspect that few people appreciate the role that luck played in their success.
Or, even more importantly, the role that luck played in other people’s failure.
The first few years of a company’s existence are a terrible awkward adolescence. You will work like a dog. You will spend a large percentage of your energy on stuff that will eventually be thrown away. You will live on the edge of poverty.
But here is the worst part: Every company that you are competing with has an advantage over you. They know the industry. They have customers and revenues. They have their payroll system set up. You know how “fresh eyes” and “the beginner’s mind” are often touted as advantages? Well, 99.4 percent of the time, they are a liability.
When you start a company, economies of scale are working against you: Having one employee introduces just as much overhead as having a hundred. The value of specialization is working against you: You will spend hours doing something that would have taken someone else 10 minutes. (I have done every job at Big Nerd Ranch, most of them poorly.)
When you have Enough, the extra money means very little. I’ve been broke, and being broke sucks balls. Having Enough is awesome. How would I define “Enough”? Enough means that you can take a friend out to a nice lunch and not have to worry about how much it costs. I have hung out with a couple of billionaires—my experiences indicate that being a billionaire is just incrementally better than Enough.
Thus, as you look at your future, the question should not be, “How can I become a billionaire?” You should ask, “Where can I get Enough?”
Very few entrepreneurs have Enough; most of them eventually go get jobs.
You are guessing about problems. When you start a company, you look for a problem to solve. You hope the problem is real, that no one else is trying to solve it, and that someone will pay you for your solution. But you don’t really know.
When you work for a company, like our client Procter & Gamble, they will present you with a problem. “Here,” they will say, “is our problem and a big bucket of money. Please create a solution.” There is no need for guessing.
The point is, old companies are desperate for innovation and they have the resources to take your ideas to fruition. You will probably have thousands of customers the same day you ship. There is a deep satisfaction that comes from being genuinely useful in this world.
The best part of creating a company is defining a culture. If you can find a company that has a culture you like and will pay you Enough to solve problems, go work for that company. Don’t start your own.