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Will A Talented Entrepreneur Make $1m From His Startup?

Q: In your experience, what are the chances a talented entrepreneur will make $1M from his startup? (And no, I don’t mean making $150K/year for 6 years and 8 months. :)

A: (Brad): I have no clue as it depends on many different inputs as to be an impossible question to answer simply (e.g. you need to know a lot more to determine anything that resembles an accurate analysis of the potential outcome.  However, this is a thought provoking question which I’ll answer a different way then intended. 

If the goal of a talented entrepreneur is to make $1m from a startup, he should consider getting a job that makes $150k / year for 6 years and 8 months. Whenever I meet an entrepreneur that is focused on a specific economic outcome, I lower his chance of success because I think he’s focused on the wrong thing.  By definition, an entrepreneur should be striving for a significant economic payoff.  Yet the economic uncertainty of entrepreneurship is so high and the range of outcomes so broad that an entrepreneur just has to believe that if he nails it, good financial things will happen.

The direct tradeoff between a specific financial outcome ($1m) and a salary over time ($150k * 6.667 years) doesn’t really capture the essence of the financial trade in entrepreneurship.  In a success case, the $1m could turn into $10m, $100m, or even more.  Or $0.  The $150k * 6.667 is still going to be $1m.  Which would you rather have ?  (a) 0 < x < $100m+ or (b) $1m < x < $2m?  If (a) you are an entrepreneur.  If (b) you should stick with your day job.

December 27th, 2007 by     Categories: Exits    
  • http://spanningsync.com Charlie Wood

    I guess my question should have been “In your experience, what percentage of VC-backed entrepreneurs see a ‘significant economic payoff’?” I’m not asking what any individual’s chances are–I’m asking about your direct experience.
    Thanks,
    Charlie

  • http://www.feld.com Brad Feld

    10% – 20%

  • http://www.chide.it Matt (Mad) Chider

    I don’t like the 150k salary a year idea for entrepreneurs… its too safe… an entrepreneur has to be hungry in order to succeed… the way I see it, earning that type of a salary, an entrepreneur always has a “very comfortable” fallback strategy…
    Matt (Mad) Chider
    http://www.chide.it

  • http://www.feld.com Brad Feld

    Matt – I don’t think the idea was that the entrepreneur would get a salary of $150k / year. I think that’s the “I have a non-entrepreneurial job salary” that the person asking the question was benchmarking against.

  • http://www.graduatetutor.com Sam

    An entrepreneur should just want to make his business a successful business and not a $ figure. How success is defined can be profit margin and growth rates.

  • http://hauntingthunder.wordpress.com/ Maurice Walshe

    well when you consider that to get the the cash out phaze you may spend say 5 years to get to that point so you have to factor in the 5 years on presubly a lower income (dont forget the time value of money)
    And if I was a senior ie cto level if I put 5 years of my life into a start up id want more than 1$mil
    In the uk that buys you a nice house in the commuter belt and say an Audi R8.
    In london a nice house is proably more than 1 mill now.
    Btw back in 2000 my company did pass the 1$mill per employee stage (acording to our VC’s ) unforunetly the crash took us down.

  • http://500hats.typepad.com dave mcclure

    >>Whenever I meet an entrepreneur that is focused on a specific economic outcome,
    >>I lower his chance of success because I think he’s focused on the wrong thing.
    >>By definition, an entrepreneur should be striving for a significant economic payoff.

    hmm.
    well maybe $1M is too low, but for some folks “significant economic payoff” might only require $3-5M (after tax). $5M is probably enough for you to buy a nice house & put enough cash away so you could live off the interest & savings for the rest of your life. north of $5-10M, it’s basically all just high scores at that point.
    rephrasing the question, it might be more appropriate to ask something like this:
    “what are the chances i’ll make enough [F-you] money i’ll never have to work again?”
    call me a contrarian on this one, but i think it’s perfectly rational for entrepreneurs to be aiming for higher-probability outcomes at the low-end range of that answer.
    sometimes the interests of entrepreneurs and VCs may be slightly misaligned here… or at least those who have $100-250M+ to invest and are looking for 10x or better target outcomes.
    based on the structure of their funds & investment sizes, i think a lot of VCs might not consider a $25-75M liquidity event a “good exit”, and may be looking for something more like $100-300M+ as a low-end target.
    on the other hand, suppose a startup has 2 key founders who split 80% of the company to start, and after ~3 rounds of funding are each diluted down to 20% each. after a few years, if they sell out for $50M, each would stand to make $10M pre-tax, or perhaps $5-7M post-tax depending on how good their tax lawyer is.
    that could be a pretty decent outcome for the entrepreneur, tho perhaps not for the VC. in fact, an entrepreneur could have a “life-changing economic event” for perhaps as little as $3M post-tax, or $5M pre-tax. if only 1 founder, maybe even a $15-25M exit achieves that goal.
    looking at the gap between the VC aiming for $100-250M+ and an entrepreneur who might be happy with only $25-50M, i think it’s very possible VCs could be asking their entrepreneurs to swing for the fences in order to achieve a bigger win than is necessary for the founders’ best interests… particularly if/when the larger exit target might have a lower probability.
    anyway, it’s an interesting discussion.
    - dave mc

  • http://www.whygosolo.com Ann Bernard

    I giggled at Brad’s answer because he nailed it…if I met an entrepreneur (guessing wannabe) who only thought about his pay out…and a 1 million dollar payout at that I would asked them “Why even bother?” A question or statement like that is more likely to come from someone who has never started a start-up or been passionate about an idea.
    No way on this green earth I’m going through what I’m going through for a 1M or even 5M pay off. Why do anything unless you plan on making it big. Let me put it another way…I rather make $0 then make it small. I want the world to take part in what I create…might not happen (I’ll take one percent of it, haha) but that’s what every entrepreneur best be dreaming about.
    You get into this game to make an impact and leave your mark…and that is naturally attached to a financially high value. (i.e. Oprah is doing some amazing things and she’s also a billionaire)

  • http://spanningsync.com Charlie Wood

    Brad, thanks for the candid answer. Ann, I hope you get what you want. Dave, you and I are in total agreement.
    -c