Myth: Startups are risky

As part of the con­tin­u­ing series on star­tups myth, let me address the view that star­tups are risky.

Look­ing at the numbers

Look at the num­bers of star­tups cre­ated. Now look at the unem­ploy­ment num­bers. Look at the num­bers of startup that fail. Now look at the size of cor­po­rate lay­offs in large corporation.

Yes, star­tups are risky and most star­tups do fail. The ques­tion you have to ask your­self should not be whether a startup is risky but whether work­ing for a startup is riskier than work­ing for a large corporation.

I spent a decade on Wall Street and, dur­ing that decade, was wit­ness to count­less waves of lay­offs. Peo­ple with five, ten, twenty, thirty years with the same com­pa­nies found them­selves unem­ployed as a result of those lay­offs. When look­ing a star­tups in that con­text, I would ven­ture that they are less risky than large cor­po­ra­tions for peo­ple who are will­ing to work.

In star­tups, indi­vid­ual suc­cess is often a result of indi­vid­ual out­put. As an indi­vid­ual, you work hard and, as a result, have an impact on the com­pany. There are, of course, exter­nal ele­ments but I’ve seen star­tups thrive dur­ing both reces­sions and eco­nomic booms. Often-times, startup fail because they are not prop­erly man­aged and the team is not work­ing together to deal with exter­nal mar­ket forces: for exam­ple, when I was at Boo.com, a lot of the focus of the senior man­age­ment was on get­ting more mar­ket­ing out. How­ever, there was lit­tle inter­est in solv­ing some of the logis­tics and tech­no­log­i­cal chal­lenges we needed to address in order to suc­ceed. The senior man­age­ment (myself included) was unable to clearly address how essen­tial those chal­lenges were to the sur­vival of the com­pany and the imbal­ance of mar­ket­ing goals vs. tech­ni­cal know-how was a large part of the company’s failure.

By con­trast, I’ve seen large cor­po­ra­tions where, as a friend of mine in a large media orga­ni­za­tion once put it about his own firm, “there’s enough dead wood that it causes a fire haz­ard.” In large cor­po­rate envi­ron­ment, fir­ing indi­vid­ual low per­form­ers is often dif­fi­cult as the fear of legal ret­ri­bu­tion ends up with requir­ing sub­stan­tial amounts of doc­u­men­ta­tion if you’re going to let an indi­vid­ual go. In a lot of ways, it’s eas­ier to lay-off tens, hun­dreds, or thou­sands, than it is to fire a low per­former. As a result, lay-offs are com­mon and often push decent to good per­form­ers out along with poor performers.

In star­tups, there is lit­tle room to hide, which is why small orga­ni­za­tion seem to move sub­stan­tially faster than larger ones. An added advan­tage is that along with the lit­tle room to hide comes sub­stan­tial room for growth. In my expe­ri­ence, the big dif­fer­ence between small and large orga­ni­za­tions might have to do with resource sur­plus. In star­tups, there is almost always more work than there are peo­ple to do it. In large cor­po­ra­tions, I’ve often found the inverse to be true (and I sus­pect that many head offices look at things in a sim­i­lar way, thus jus­ti­fy­ing mass lay­offs in times of uncertainty).

The fact that there is more work than hands in a startup means that there is ample oppor­tu­ni­ties to learn new skills, skills that then can be reap­plied in the mar­ket­place if one finds himself/herself unemployed.

So are star­tups more risky than large cor­po­ra­tions? My answer is no, but it’s a qual­i­fied no and the qual­i­fi­ca­tion has largely to do with whether you want to work or not. If you’re part of the for­mer group (want­ing to work), then star­tups are no more risky than large orga­ni­za­tions and may pro­vide you with more room for growth.

Note: this is part of a 5-parts series about startup myths. You may want to read all the parts: ideas, path, risk, money, cap­i­tal.