Effects of Entrepreneurship of Savings (Graph)

Posted on January 13, 2010. Filed under: startups, venture capital | Tags: , , |

I’d like to appologize in advance of this post to my parents, and especially my mother, who is going to freak out when she sees this graph… sorry mom.

In March of 2008 I left the posh world of venture capital to become an entrepreneur.  I told myself at that moment that I didn’t care about my personal comfort or the luxuries to which I had become accustomed…in fact, in some perverse way I actually hungered to “go to $0.”  I remember thinking that in order to truly understand mainstream America and the masses of our population, I needed to experience some sort of financial struggle. Turns out I was right.  A huge part of JumpPost is about increasing consumer liquidity and putting a little extra cash in people’s pockets. Doubt I would have arrived at this concept while making gobs of money. Anyway, below is a graph of what entrepreneurship does to your bank account. If you’re not prepared to ski down this run, you might think twice about getting on the lift…

Sorry about resolution: image is clickable, so you can expand to see the gory details:

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13 Responses to “Effects of Entrepreneurship of Savings (Graph)”

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When I dropped out of college with one semester left to run my startup, I felt that same perverse hunger to stay a “college dropout”. Eventually I went back to finish albeit reluctantly. You won’t feel reluctant when this chart spikes up!

it’s not going to spike up for 3-5 years…the nature of these things is that your are building long term enterprise value at the expense of near term value (compensation)

Yes, I’m well aware of the 3-5 year wait. The thing is though, savings from salary don’t grow all that quickly. If you want to seriously maximize your wealth, it needs to be through capital growth.

The basic formula I use is: 1-year no salary, 2-4 years half salary, then a potential big hit. That’s not so bad if you feel confident – and I think you have it in you.

mmm…lot’s of people reading this post…can’t resist: JumpPost is hiring…email jordan.cooper@gmail.com, product/tech minds welcome…

A lot of good dialog going on in the comments on Hacker News re: this post…I got a little defensive against the guy telling me that this graph is not indicative of “lean startup” mentality (which i regret), but in general interest stuff. Pasted discussion below:

4 points by NyxWulf 3 hours ago | link

It’s interesting to see that, but not being a follower or a reader of his it’s difficult to put that into context.
Are his savings dwindling because his business is struggling and he is not making a profit, forcing him to live on his savings? Or are they dwindling because he’s pumping more money into his business to make it grow faster?
On what basis is he extrapolating his experience to all entrepreneurship in general? Entrepreneurship is a complex and difficult field, being a VC doesn’t make you qualified to be an entrepreneur any more than being a programmer, engineer or manager does.
Seems like he’s having a rough day, and I sympathize having been through a very similar process of watching my savings dwindle to zero. However I believe it’s important to realize that effect happens primarily due to a lack of understanding of the process of starting a business and is generally not representative of a good startup.
If you are really interested in entrepreneurship, I highly recommend taking a look at the lean startup concepts – they are specifically geared toward helping people to avoid exactly this cycle.
Entrepreneurship is not about taking the plunge, living on your savings, and hoping you become profitable before you run out of money. That’s just a wing and a prayer.
Anyway, sorry for the longish rant, but I get tired of these types of posts.
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7 points by jordancooper 3 hours ago | link

I am now on my second business, and I am a student of lean startup…which by the way perpetuates this graph, not prohibits it. lean startup would argue that you find product/market fit before capitalizing a company and paying yourself a salary. this graph is a result of bootstrapping my first business, taking a half salary after capitalizing it with VC/Angel money, failing at that business, and now bootstrapping my new business until we can prove product/market fit and raise at a 3-4x step up in valuation (as well as prove to ourselves that this is worth replicating/scaling)…
I’m not having a bad day at all…I’m having a great day and time in life in general…I think you missed the point of the post…I sort of laugh when I look at this graph…money is just money my friend…
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2 points by NyxWulf 24 minutes ago | link

One of my favorite quotes comes from the movie Quiz Show, where Charles Van Doren says “You’ll forgive me, but anyone who thinks money is ever “just money” couldn’t have much of it.” I agree with the gist of that statement but in a more general sense. I would suggest that anyone who thinks money is just money doesn’t understand it’s nature. Money is imho, always, far more than just money.
Anyway, that personal note aside. The whole point behind Lean Startups is to avoid or minimize that type of burn rate. I couldn’t disagree more that the graph is a “result” of being a lean startup. That graph is a result of living on your savings before the company is generating enough money to support you. I’m not passing any judgment on whether that is a good idea or not, just suggesting that the decline in your savings is independent of the startup type. For instance, some of us choose to work a day job while building our startups so we don’t have to burn through our savings – but that is a fairly personal choice.
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1 point by jordancooper 0 minutes ago | link | edit | delete

link to Steve Blank attached: http://bit.ly/2Sd87e
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1 point by jordancooper 2 minutes ago | link | edit | delete

I’ll refer you to this post by Steve Blank entitled “Raising Money Using Customer Development” and then you can tell me how that graph is not the result of lean startup thinking…as for your desire to keep burn low by maintaining a day job while building your company, I’ll go ahead and say your aversion to risk and lack of devotion the the mission of your company is uninspiring…enjoy your flat screen tv and 3:00 latte’s while the enterprise value in your company grows at 1/10 what it would if you sacked up and worked full time on the startup…i’ll check in with you next year when you are still an “entrepreneur on the side…” way to go man…you’re a model for us all…way to keep that graph going up and to the right
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0 points by volida 3 hours ago | link

It’s called bootstrapping. I am sure you already know it.
http://en.wikipedia.org/wiki/Entrepreneurship#Financial_boot
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3 points by CytokineStorm 3 hours ago | link

This post might have some merit if the graph included another 10 years of data showing the return on his investment.
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2 points by johnohara 2 hours ago | link

Hmmm, looks like a lot of graphs in 2008-2009.
Home values, savings, wages, employment, manufacturing jobs, consumer confidence.
On the bright side, processor energy consumption, cost of entry into software development.
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2 points by aresant 3 hours ago | link

The part that this graph is missing is the effects of entrepreneurship on savings when you get traction.
Many entrepreneurs I know have a graph like that for a year or two and then what we call “hockey stick” growth in the opposite direction.
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As someone who knows Jordan, and has watched him as a VC, first time entrepreneur, and now at his second venture, I can vouch for the fact that he is both a student & practitioner of the lean startup model and knows the importance of being highly capital efficient when bootstrapping a business. There certainly is a choice between running a startup on the side, and leaving a job to become a full time entrepreneur, and let’s be honest, no risk, no reward. I think the point of the post is that before you get to the point where you achieve product/market fit, acquire customers, start generating revenue and then capitalize the business, your personal wealth heads towards zero. This is an unavoidable reality which can be both scary and exhilarating at the same time. Enjoy the ride, but be aware that the roller coaster has to go down first before it goes up.

I would also add opportunity costs as you leave other offers on the table that are more lucrative etc.

Finally, would add the negative points you get from

— your spouse, who needs to shift jobs to higher paying ones to support you

— your parents / in-laws who can’t see you anymore as you can’t afford to pay the airfare etc

— your kids who can’t figure out why they can’t to do the things they used to do now that you are an entrepreneur, and that nobody forced you to do take a cut in salary etc

this is a little bleak for my taste…i guess there are some negatives…but generally speaking, i love this job and recommend that anyone who is considering it understand the risks and then get after it

I’d like to see a follow up post, with a pie chart showing where these saving have dwindled to.

Stay lean coop, as Notorious BIG once put it “More money, more problems.”

He also said “We be tight like frogs ass.” so, yea…

I was going to say that I can’t cut the data that way…BUT…between Mint and Amex analytics…might actually be doable..will investigate…where’s blippy when I need it?

Jordan, great post, sometimes I feel like you can some how read my mind as I was just doing the same calculations myself. I too left the (then) lucrative Wall Street world, going from earning a hefty sum to fighting for scraps. Anyone making a similar career shift will have a few “oh sh*t” moments where you feel the stresses of having to watch your bank account and shun thoughts of jumping back into a secure, steady income producing job. However, like you, I wouldn’t do it differently if I could go back in time even if I had a Delorean capable of such a feat.

A Few things I’d like to add: yes, your savings are downward sloping, but overlay a graph of “experience”, “business bad-ass-ness”, or whatever else and the financial losses become vastly out-weighted (and should be looked as an investment, rather than a loss). Secondly, I whole heartedly take issue with anyone giving you a hard time for going through ~$55k in a year (which includes living and business expenses). You live in NYC for heavens sake, arguably one of the most expensive cities in the world! It ain’t cheap people! NYC is an up and coming start-up area and you must be close to the epicenter in order to find possible team additions, network with future advisors, and pitch investors. Moving to a place that isn’t in the middle of the fray to decrease your personal burn rate will lower your probability of achieving success for sure.

$55k in almost 2 years my man..the burn is not THAT bad here in NYC

I apologize, the graph’s res isn’t great on my machine and it looked like the date-axis went from 2/12/2008 to 1/12/2009, when it is 1*1*/12/2009 (I get an A for effort, F for “pays attention to detail” haha) … even more impressive!


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    About

    I’m a NYC based investor and entrepreneur. I think there is one metric that can be used to measure the value of a human life and that’s impact. How did you change things? How many people did you touch? How different is the world because you lived in it and how positive was the change that you affected? (p.s. i don’t use spell check…deal with it) You can email me at Jordan.Cooper@gmail.com

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