Join a startup- A friend of mine was thinking about joining a startup and asked me,
How stable are startups?
Well…not as stable as a huge corporations…which nowadays isn’t very stable either. Eric Ries‘ definition is apt:
A startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty.
So…if you’re looking for a steady paycheck, probably not the best way to go. However, we can caveat this by looking at a typical funding model for a startup. The injection of funds provides some promise of the companies continued existence and the ongoing supply of pay stubs.
The reason for this is simple…most entrepreneurs, who will still have majority control of the company, are loath to give up. Even if the business model is obviously not working, it’s more likely that they’ll try something else with the funds remaining rather than refund the money back to investors. There are notable exceptions like Odeo, but let’s leave that aside.
So give X amount of funding, you can generally predict the minimum amount of time the company is going to be around.
The incubators I’m familiar with deal with very small sums of money, often not enough to pay salaries but rather just enough for office space and maybe a biscuit. If you’re being offered a paycheck, it’s not from a company in incubation stage. They would much more likely be offering you equity to join a startup.
In a seed round, a tech startup will take anywhere from 20k to 1 million USD on the extreme high side. More likely between 250k and 500k USD. Depending on how the company is run, this will probably last up to a year.
Now we’re talking serious cash of at least $1 million and potentially much much more. This will last at least a year. Maybe more, but don’t bet on it.
That’s because the more money the company asks for, the more they plan to spend on a rapid burn rate to hire dozens of employees (like you) and “prepare to scale.” So even if the company pulls in a $10 million round, chances are they’ll be pounding the pavement again in a year, or at most two.
Again, there are many exceptions and smart entrepreneurs will pull back from increasing fixed costs if they see issues ahead. But frankly, at this point most entrepreneurs have an overwhelming amount of confidence and a few VCs egging them on to “get big fast.”
Beyond the A round it’s a real company. It’s pretty much as stable (in terms of employing you) as a real company. So much money has been invested that the illusion of sunk costs will keep some money pouring in and the inherent value of the organization, staff, and brand will make a complete dissolution less likely. They is something there to sell, even if at a loss, to a larger company who needs the talent, tech, or just likes buying things to then shut them down (cough cough…google.)
So if you want to know how stable a company is because you’ve got a mortgage to pay and want to join a startup, find out how much funding they have and, more importantly, how much they have left. That’ll tell you how long you can count on that paycheck.
If the company hasn’t raised any funds yet, it’s more likely to implode from founder issues within the next 3 months than become a serious business.
If the company is “about to close a round” then there is absolutely no guarantee of anything.
So why are you joining a startup? If you don’t mind the risk…start your own.
If you’re seriously concerned about financial obligations, that’s not a mark against you. Do what makes sense for you, not a charismatic 10 year old with a business plan and a dream.