Start a Business, Not a Startup Part 3: Time and Customers
This is part 3 of a 4-part series about why you should start a business, not a startup. In this installment, we’ll be covering two critical topics: time and customers. You can navigate to any part of the series below:
- Start a Business, Not a Startup Part 1: Introduction
- Start a Business, Not a Startup Part 2: The Money
- Start a Business, Not a Startup Part 3: Time and Customers
- Start a Business, Not a Startup Part 4: The Advantages of Not Taking VC Capital
In the previous section, I concluded that starting a startup company isn’t a great idea if all you care about is money. It’s a form of gambling where the exact odds of success are hidden from the players. But I think VC-backed startups are bad for founders in other ways.
Specifically, startups make it hard to protect your time and customers.
Baseline Working Hours
The Bureau of Labor Statistics keeps detailed records of the working habits of Americans. Their 2022 American Time Use Survey is illuminating as a way to understand how much Americans work. People in the survey report working ~7.8 hrs / day when they worked outside of their home. The data for people who work from home was a bit more complex, so I’ll use 7.8 hrs/day as the average. This roughly matches the average hours worked per week reported by the BLS across professions. [source]
The average private sector employee in the US receives 15 days of paid time off. [source] In addition, there are 10 national holidays [source] recognized by the federal government. Add paid leave + national holidays and the average US employee has 25 days off per year, or a bit under 4 weeks.
There are 52 weeks in the year. If 48 of them are spent working at an average of 7.8 hrs /day, that’s 48 weeks * 5 days per week * 7.8 hrs per day = 1,872 hours per year. This is a bit lower than the often-cited 2,087 [source], but is at least in the same ballpark.
How Much Do Startup Co-founders Work?
This is a very thorny question. The startup ecosystem worships the ideal of working long hours. Apart from folks like Tim Ferriss, most startup founders either work long hours or remain intentionally silent. This makes a lot of sense for the founders. After all, how would their VC backers and employees feel if they learned the boss was only working 20 hours/week?
So you would expect to find under-reporting of short working hours in the industry. I included my own data point at the beginning of this post as an example. I was working about 80-90 hour weeks for the first year. In the second year, I intentionally dialed back a bit to ~60-70 hour weeks.
This seems to be fairly typical. In this 2014 HBR article, a survey of ~80 founders reported working on average 12 hours/day. The author doesn’t mention whether survey respondents worked on weekend. Based on my own experience, I think it’s fair to assume that those founders are working on Saturdays and Sundays. If you assume 4 hours of work per weekend day and 12 hours per weekday, that’s 68 hours per week. That seems approximately right to me based upon my personal experience and that of my peers.
Co-founder Vacation Time
Similar to the hourly trend, it’s very hard to know how much vacation co-founders take. I’ll lean here again heavily on my experience and that of my peers.
When I was running my own two companies, I took about 2 weeks of vacation per year. And it was always a struggle. When you are the owner and CEO of a business, the buck always stops with you. If you care about your team, it’s hard to ignore a request that could unblock someone.
Total Co-founder Hours Per Year
Putting this together, startup co-founders work 68 hours a week on average and take 2 weeks of vacation per year. That means they areworking for 50 weeks * 68 hours per week = 3,400 hours per year.
Is Working More Bad for You?
Okay, this surprised me. When I started this post, I thought it would be easy to prove that long working hours were bad for you. It turns out there isn’t really a lot of evidence to support that hypothesis. This jives with my personal experience. The best parts of my career have been when I was working very hard on a problem with people I liked.
That’s not to say that the hours spent on those projects were completely costless. A friend of mine who has been running his startup for more than 5 years once told me that he didn’t have any friends anymore. Friendships die if you don’t make time for them, and he’s been heads down on the business for a long time.
Towards the end of my time working on CodeCombat, I had to dial my working hours back. I had gained 20 pounds and my marriage was struggling. In hindsight, I could have been much healthier with my body and relationships and still worked like a madman. But working more hours does make it more challenging to accomplish that goal.
A Philosophical Take on Working Hours
At the end of the day, the way you live your life depends on your values. I find myself most drawn to the philosophy of virtue ethics and the Aristotelian golden mean. The idea is basically to seek balance in all areas of life. “Balance” will mean different things to different people. The goal isn’t to identify and achieve some perfect balance defined for all humans alive today, just to identify your ideal balance.
I think that working a lot is not the ideal balance for me. I have so many things I want to do that at times I’m paralyzed just thinking of them all. Increasingly, I want flexibility in my work so that I can experience other parts of life. I want to sail, summit more mountains, and learn to be a better mountain biker. I want to get better at sketching, make a music video, and read more books. I want to spend more time my kids, go on dates with my wife, and learn more from my parents. I want to re-watch the AFI’s top 100 films, replay a couple great video games, and learn to race sports cars. And that’s just the stuff that comes quickly to mind. You can’t do all that with the scraps of a work week focused entirely on one thing.
I can’t prove it, but I suspect I’m pretty average in my desire for variety. And so I think that over-specialization is probably not good. Especially among young people that haven’t yet had a wide variety of experiences.
The Co-founder Hourly Diff
It’s pretty trivial to show the stark difference between hours work by startup co-founders and the average US worker:
Let’s put that difference into perspective. If you sleep 7 hours per night, the above difference would be the equivalent of 1.5 years of life. There’s a lot of living you could do in that time.
It also means that even the meager financial returns I calculated in section one need to be further adjusted down.
If you can get a job at a big tech company and spend 9,168 fewer hours in a 6 year period, that seems pretty great. And you don’t even have to sacrifice money. You can earn almost exactly the same amount of money with less stress. Why wouldn’t you do that?
If that seems implausible, remember that is on offer right now. It’s called being a software engineer at Google, or many other big tech companies.
Why You Shouldn’t Start a Startup: Customer Value
The third big reason why I don’t think a VC-backed startup is a good idea has to do with customer value. It’s a second-order effect of taking capital that I definitely overlooked when I founded both of my companies.
Who’s the Boss?
It’s a common misconception that business owners and startup co-founders don’t have bosses. If your point of reference is a 9-5 job in a large organization, you would be right. Co-founders don’t have a people manager that handles their yearly performance paperwork, assigns them projects, and rewrites their emails.
But co-founders are still responsible to other people. Specifically, shareholders, members of the board of directors, customers, and employees, in that order. And this is a problem if you care deeply about solving a problem for your customers. The interests of investors trump those of your customers. That means your VCs can and will pressure you to do things that don’t benefit your customers.
This conflict of interest is always present in for-profit businesses. Even if you bootstrap a business, you will still need to balance the needs of your team against those of your customers. The problem with startup are that VCs speak with a very loud voice. Let’s look at an example to prove the point.
The VC Alignment Trap
Returning to the example in the previous sections, let’s again assume that you are the co-founder of Vendata.ai. You’ve taken Horodreezen’s money to accelerate your growth. But let’s imagine that instead of a rosy growth story, the company is struggling. Customers like the product, but growth has stalled, and you are running out of money. You try to raise another round, but investors aren’t biting. (This is a far more realistic example of the day-to-day experience of running a startup by the way.)
In scenarios like this, your incentives and those of your investors diverge dramatically. VC investors only make money if you absolutely knock it out of the park. Returning 20% yearly on an investment doesn’t come close to cutting it. So they will encourage you to do things that aren’t in the interests of your paying customers.
A popular recommendation is to pivot the business. That means shutting down the current product and building a completely new one for a different customer. The worst thing for a VC is for a business to keep slowly, profitably growing. They would much rather have you completely shut down than give up the possibility of a 100x return.
Not surprisingly, this is what VC-backed businesses typically do. They grow quickly, but if they experience persistent problems, they quickly and unceremoniously shut down. Many failed VC-backed startups are perfectly viable companies. Those companies shut down because they just aren’t capable of generating >100x returns in 5-10 years.
Startup Employees Demand Liquidity Events
If a lot of failed VC-backed startups are building fundamentally sound businesses, why don’t they convert into normal SMBs rather than shut down? It boils down to the costs associated with changing the purpose of the company.
The co-founders. As I discussed in the section about money, most co-founders have very good employment prospects. They could go work at Apple for $500k /yr if they wanted. So their opportunity costs are perilously high. Running a small business that generates $100k/yr in profit just isn’t a very good option for them. Their financial incentives are at least somewhat aligned with VCs.
The employees. Because most funding is available in very high cost of living areas, you have to pay employees a lot to lure them away from jobs at established companies. For cash-poor startups, the way to do that is to offer generous stock compensation. But stock can only be turned into actual dollars if the company is sold or goes public. Very, very few businesses get sold or IPO, but bootstrapped businesses do so far less often than VC-backed startups. Typical startup compensation packages are ~50% stock. Basically you “pay” a typical startup employee $1 worth of stock for every $1 in yearly compensation.
This has important ramifications for the company. Let’s say that you decide to announce to your San Francisco-based employees that you are returning your VC capital. Rather than trying to raise another round, the company will be bootstrapped going forward. What you’ve done is dramatically reduce the likelihood that their stock is worth anything. You’ve cut their compensation by 50%!
So for most of the team, it doesn’t make financial sense to work at a company that won’t get sold or go public.
Totaling the Business
If a car is damaged beyond a certain threshold, the insurance company writes it off as a total loss. In these cases, the car still has some value. Maybe it was involved in a rear collision on the highway. The back is destroyed, but the engine is in fine working order, for instance. But the insurance company knows how much it will cost to repair everything. They decide it’s cheaper to throw the car away than to repair it.
That’s what typically happens when a VC-backed startup falls on hard times. It’s not that the company hasn’t created value. It’s just that cost of restructuring it would be more expensive than shutting down.
From the co-founder’s perspective, it’s a more personal set of choices. If you are located in a HCOL area, you might need to personally move somewhere cheaper. You probably need to do layoffs to bring down your labor costs, cut expensive vendors, build in-house replacements, and even market to entirely different customers. Even without VC prodding, many founders decide that it’s better to shut down than go through that painful process.
Customers Bear the Cost
For most tech employees for the last 20-30 years, the cost of finding another job has been pretty minimal. They are unemployed for a month or two and then they get hired somewhere else. Normally, their new employer pays them substantially more than they were making previously.
Co-founders themselves often find soft landings at corporate juggernauts. Those big companies are often willing to give them some small perks to acknowledge their previous role’s prestige.
Venture Capitalists don’t miss the millions they pour into speculative businesses. After all, their business is to lose money on most of their investments. They just need to hit home runs with a small slice of their portfolio.
So who’s left holding the bag when VC-backed businesses cease to exist? It’s the customers. They are the people least capable of finding alternatives to the product they had previously purchased and relied upon. In most cases, this isn’t a big deal. It’s inconvenient if your favorite mobile game disappears, but it’s hardly a major life hurdle. But in other cases, the sudden disappearance of a product is a big loss for those who bought it. Maybe they had built a business of their own on your platform and now must shut that down. Maybe your product is the only thing that enables them to send money to relatives in another country.
Most founders build products to solve a problem that they care deeply about. Taking VC investment capital increases the risk that they have to abandon that mission suddenly and leave the people they wanted to help without viable alternatives.
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