Are You Sure You’re Ready For This?
Author: Aaron ross
Excerpted with permission of the publisher, Wiley, from From Impossible to Inevitable, Second Edition by Aaron Ross and Jason Lemkin. Copyright (c) 2019 by Pebblestorm, Inc. All rights reserved. This book is available wherever books and ebooks are sold.
Any expectations you have about how long it will take,
or how hard it will be, are pretty much guaranteed to be wildly off.
But it’s worth it.
ARE YOU SURE YOU’RE READY FOR THIS?
One night Jason had dinner with the founder of a pretty successful web company who asked how long he’d worked on EchoSign. Jason told him, and the founder nodded their head, “Yeah, same for me. It takes about seven years to get to exit.” That’s true in the software/SaaS business and it’s true for many businesses and even career paths. You have to be ready for it to take years longer than you hope or want before you hit your big goals.
You may have heard that SaaS companies usually take longer than consumer Internet companies to get to $75–$100 million in revenue. But it’s not always clear how much longer.
Let’s look at some basic math: Assume it takes you a couple of years to get going and Nail a Niche, and then you grow 100% a year through $50 million or so in revenue (which isn’t easy, mind you):
● Y1 revenue: $0
● Y2 revenue: $1 million
● Y2 revenue: $3 million
● Y3 revenue: $6 million
● Y4 revenue: $12 million
● Y5 revenue: $24 million
● Y6 revenue: $48 million
● Y7 revenue: $80 million
Having done extremely well, hitting $80 million ARR in Year 7—it took you seven years—you’re ready for your IPO in Year 8. If you do well, but not quite as well as this, it can take a decade. A friggin’ decade.
What about mergers and acquisitions? The challenge here is that in most SaaS M&A, unless it’s trivial stuff, the acquirer wants to wait for some scale—they want you to have from $10 million to $20 million in recurring revenue at least. With the math above, that can take five or six years to get to a healthy exit as well. It took David Ulevitch 10 years from founding to clicking into hyper-growth and then selling OpenDNS to Cisco for $635 million. And that doesn’t include the extra earlier years preparing to found OpenDNS.
Speaking as people who’ve done a lot of M&A deals (as buyer, seller, and advisor), we’d say never count on selling your company. Selling a company, especially a tech company, is risky and complicated. It’s like getting married but 10 times more convoluted . . . and once it’s done, you can never go back.
This math isn’t new. Everyone used to talk about seven years to an IPO. The problem is that a lot of folks who are doing first-time startups, or coming out of the consumer Internet world, don’t get it. In consumer Internet companies, you can think in terms of 18- to 24-month time frames. With companies that sell to consumers, it’s a much faster business cycle: build, try to sell, pivot, and find a niche. Generally, you know very quickly if something is going to take off or not. There may be faster possible success, but with more risk to succeed or exit, since there’s less of a template than in B2B.
You have to be willing to Do the Time. It takes longer to get your team together, get your product right, Nail a Niche, and see your sales cycles take off. The feedback loops take longer.
If you’re any other kind of company, this kind of time frame still seems to hold true: five to nine years to “make it,” where you’re making serious money that doesn’t feel like it could disappear at any moment. Even big career, life, and income leaps can take that long.
The press earns more views from rare stories like “Johnny was 13 when he created an iPhone app, and made a billion dollars overnight.” That’s the Exception, not the Rule. When Slack raised $120 million at a billion-dollar valuation, the press trumpeted, “Zero to a Billion in Less Than a Year!” What no one wrote about was that Slack had been started six years earlier (2008), and struggled for five years before their big breakthrough. And even after that write-up, they continued to struggle—although in this case it was to keep up with and sustain their growth.
The media loves to build people up and then tear them down, but they rarely print the whole, balanced story. It’s less dramatic that way, which usually means fewer readers.
So get excited about these overnight success stories, but take them with a grain of salt—and be prepared to Do the Time for as many years as it takes.
You Need 24 Months to Get Off the Ground
This is for all you VPs of Sales and Product and aspiring founders who are ready...who feel it’s time to go out on your own to start a fast growing company. Everyone else is doing it, and (according to social media) crushing it – why not you?
Awesome. We get it. Working for The Man can be a great way to make money in the interim, support your family, and get paid to learn. But no one who’s truly ambitious wants to work for The Man forever. Not really. If you’re wondering if you should start your own SaaS or fast growth company, here are three questions to ask yourself:
First: Are you prepared to give a full 24-month commitment to hit Initial Traction? Not 12 months. Not 18 months. But 24 months? Two years? Six months isn’t enough. Twelve isn’t. It’s going to take you 9 to 12 months just to get the product right, and another 6 to 12 to get significant revenues.
Maybe an Instagram or a WhatsApp or a Pinterest can explode in just 12 months (though again, it took years of development and trial and error before they got to their “overnight” successes). You can’t afford to expect miracles like that in business-to-business software, services, or whatever business you might be in. Can you afford to commit for 24 months just to get to something, to real initial traction? If not, you should pass. Slack went from $0 to $12M ARR in one year (2014). Whoa. But it wasn’t founded on January 1, 2014.
Giving yourself 12 months to get to initial traction won’t cut it. You’ll quit. Just 12 months in, you won’t have enough revenue to support your- self, if you have any at all. The honest truth is that most folks can’t really commit for 24 months, because of financial or personal or other reasons. That makes sense.
Second: Are you able to commit to 8,760 hours a year? That’s 24 hours a day times 365 days. We don’t mean committing to being in the office 14 hours a day—that’s not really necessary (that’s for the Y Combinator kids). But can you really, honestly commit to obsessively thinking, worrying, and stressing about how to do The Impossible? Every . . . Single . . . Moment?
You’ll be thinking of nothing but work, even when you are playing with the kids or having dinner with your husband. That’s what it’s going to take. If you don’t have the mental bandwidth you should pass.
Everything today is insanely competitive. In starting a company, you’re going to have to be the VP of sales, Customer Success, marketing, and probably product, too, in the early days. There’s endless drama with paying customers. You’ll almost lose your best logo accounts. You have to be intensely, painfully committed to do all this.
Later, there will be fat—once you get to $5 million ARR or so. It’ll get easier in many ways as you grow (and harder in others). But it’s hard to get recurring revenue engines going.
Third: Will you Take the Leap? This is, perhaps, most important. If you keep a mind-set that you’re “just trying it out” but you maintain other options, it never works. “I’ll try for a while and go back to Salesforce.com if it doesn’t work,” or “I’ll do a lot of consulting while I see if it works,” or “I’ll raise $500K and see how it goes.” This just never works, at least not for high-growth startups. Great founders Take the Leap. Not because they are crazy risk-takers, but because they see the risk and decide to go for it anyway. They know there will be many challenges—with funds, customers, family—but they decide to figure them out along the way. They have doubts. They have fears. They have money troubles. But they see The Future and believe in their own (eventual) success. If you aren’t ready to Take the Leap, you aren’t ready to do a startup.
What If You’re Close?
Okay, what if you aren’t quite there? You can’t pass tests 1, 2, and 3 above, but you are close. Then take a pause—don’t say no yet. Instead, go do some more homework. Do 20 customer interviews. Find a great cofounder who can pass the three tests, commit to 7–10 years and the overall 24-plus months to Initial Traction. You almost certainly can’t do it alone; do that and then see how it feels. Even great founders that can see The Future sometimes need help. Twenty interviews and an amazing co-founder can be the missing pieces that really show you how to do your own company.
A Double Check: Are You Really Sure?
There’s been one huge change in “entrepreneurship” over the past 10 years. No, it’s not that it’s cheaper than ever to do an Internet startup. That’s not even true. When software came on a disk or a CD-ROM in the old days, it was even cheaper. You didn’t even need a single server to start Microsoft, or Intuit, or Borland, or Lotus. Although distribution today is far broader, if not cheaper.
It’s not that the web and tech are so much bigger, creating so many more opportunities. That’s true, but even when tech was smaller you could scale very quickly. Inflation-adjusted, Lotus 1–2–3 did more than $100M its first year and IPO’d in its second year. What SaaS company ever did that?
What’s changed is the culture of entrepreneurism. Ten years ago, to be a founder you were a bit of a nut—a mad scientist, a crazy kook, someone who didn’t realize the odds of success were 0.00001%. Some- one so smart, so gifted, so bonkers, that they did something wild. Found- ers were a breed apart. You might have met some of them, but you could never imagine being one of them. Ten years ago, if you joined a startup post-traction, you were still taking a big risk. You were stepping out of an accepted career path and potentially taking a big hit; and you were definitely taking a big salary cut.
By contrast, today even a pre-traction entrepreneur is supercool. Even being just a wannapreneur can make you feel cool. The risk is low, failure is fine, and you can always go join Facebook/Google/Zynga/ Square if it doesn’t work out. Joining a post-traction startup? No salary cuts necessary. And your resume? It’s enhanced by that cool, hyper-scaling startup, which is zero risk. That’s okay by me, but TechCrunch, Y Combinator, The Social Network, and so on have over-glamorized entrepreneurship.
Our one piece of advice:
First, your startup will almost certainly fail, and while that’s okay, you won’t really get any credit for it. No one will care about your failed startup that got no traction and that no one ever heard of. They won’t judge you, but they won’t care.
Second, risk-adjusted economics suck. If you are smart and driven rather than risk-adjusted, you’ll make more money by joining a top web company, staying, and getting promoted. While the comp delta between a startup and BigCo doesn’t seem huge at non-leadership levels, it really grows when you get promoted and into management.
Third, even if you want to do a startup, you’re much better off join- ing an existing rock-star, super-strong team. Great startups need great teams, which are rare. Better to join one than try to start one from scratch, which is close to impossible.
Fourth, it’s far, far harder than you can imagine. The highs are higher, for sure, but the lows are so low. Most people really aren’t up for the lows and can’t handle them properly, if at all. For example, are you okay sign- ing a full recourse $750,000 promissory note to fund payroll when all the funding falls through (like Jason did at his first startup)?
While you’ll have more “freedom” doing a startup, it’s such all- consuming hard work, you probably won’t appreciate it—at least not while you are going through it. It’s hard to enjoy the view when you’re glued to a screen.
Having said that, if it’s your calling, go for it. But that’s really the only great reason to start a tech startup—the only logical reason, even though it is illogical. Passion is supposed to be illogical!
You have to see something the rest of the world doesn’t see, be so confident in it that you don’t see all the risk, and have nothing in the end that’s “better”/higher ROI (all things considered) than doing a raw startup.