Vivek Wadhwa is exactly the kind of academic I would expect to be well meaning but disconnected from reality. He’s clearly very very smart, a visiting scholar at UC Berkeley, as well as a Senior Research Associate at Harvard Law School and a Director of Research at Duke University. But the reality is that this guy knows his stuff. His research is insightful, applicable and I really wish more policy makers paid attention to what he said.
While I enjoyed his direct (and very accurate) description of RTP and its shortcomings, the more thought provoking article was a discussion on Techcrunch about entrepreneurial exits. He digs in to whether entrepreneurs should be chasing billion dollar exits or cash out “small” with a paltry $50MM exit or so.
For those of you who are unfamiliar with the world of Venture Capital, the quick summary is that a small exit doesn’t really work for traditional VC investors. They have to push for a big exit to offset losses from the investments that fail.
One part of the article particularly caught my attention:
“If you’re a founder and own 50% of your startup, a $30 million acquisition can be life-changing. With a $15 million payout, you go from poverty to riches. You’re set for life: you can afford to send the kids to the best schools, buy a multi-million dollar house on the hills, live a great lifestyle, and personally fund your next startup (or you can become a “super angel”). The difference to you between $15 million and $150 million (if you go for the billion-dollar exit) is small—the extra millions really won’t change your world that much more.”
I imagine that quite a few people find that absurd. How can $150MM not be dramatically more life changing than $15MM?
The answer stems from the many levels of what is most easily called F**K You Money (FYM).
FYM is shorthand for a lot of things. It implies being able to buy what you want, when you want, living the lifestyle you want and doing as you please. It’s a goal of many entrepreneurs, at least in terms of the perceived freedom it brings. But what qualifies as FYM is very dependent on circumstances, and that is definitely something worth thinking about.
My first brush with FYM was when I was 17 or so and was headhunted to work at Radioshack. Okay, headhunted is a little strong. I had a buddy who worked there who was leaving. His boss had met me a couple of times, asked for an intro and offered me the job on the spot. For a kid in High School, Radioshack was the big time. They paid more than any other nerd-oriented retail outlet for part time staff. As I recall I was making $4 or $5 an hour. Within a few months I had banked a few thousand dollars. I bought a bunch of music gear (including something similar to one of these) and had enough money left over to fund my first year beer tab at University. I had FYM and it was good.
Now of course, when you are 17, your expenses are pretty low (thanks Mum & Dad) and so are your expectations for what constitutes living the proverbial high life. But to this day, I’m not sure I’ve ever felt I had as much disposable income as I seemed to have back then.
My second brush with FYM happened when a company I worked for was sold. I was a senior executive, owned a tiny bit of the company and got a payout. It certainly wasn’t a million dollar payout (not even close), but for a young-ish single guy, it was a good chunk of change. It was also a couple of hundred times more money than my previous FYM experience. I had no debt, a shiny new car and was paying almost no rent. I could eat out any time I liked and there was always a large amount of my paycheck left over at the end of the month. I went to a four star hotel in Hawaii for a couple of weeks just because I could. Life was good.
Now that I have kids, debt and a generally more complicated life (not a complaint – I wouldn’t give up being a husband to my awesome wife or a Dad to my kids for any amount of money), the threshold for FYM is a whole lot higher. I’m guessing it would need to be 20-30 times higher than my previous FYM experience to be sustainable.
And that’s exactly what Vivek was getting at.
If you made $15MM from the sale of your company, you could buy a nice house for cash, get a pretty nice car, pay off all your debts and live comfortably off the interest from fairly low-risk investments.
Compared to life before $15MM, this will be a radically different experience. If your lifestyle is based on a more or less normal salary and more or less normal level of expenses, a whole new world will open up. Sounds like FYM to me.
But what if you went from normal to $150MM? Well, expenses always manage to somehow stay in line with available income. So you’d probably buy an even bigger house, maybe get a splendid but silly car or two and so on. But your life would not be materially different from the $15MM scenario.
Now consider a third case. Imagine you’re already in the $15MM lifestyle bracket. Does a $15MM exit make a material difference in your life? Probably not. If your expenses have expanded to fill the $15MM lifestyle, you’ll need a 10x bump to see a significant difference.
At the end of the day, I suppose it is really very similar to company revenue versus size. If you are a startup with revenues of $2-3MM, a $15MM deal is huge. If you’re a $150MM company, $15MM is nice, but not world changing. If you’re a $1B company, $15MM is almost irrelevant. It’s all about moving that corporate needle.
So when you’re daydreaming of your fantastic entrepreneurial exit and joining the cult of FYM, remember that just enough is often more than enough. And enjoy it when you get there…