March 17th, 2021 | By: Wil Schroter | Tags: Strategy
Most Founders get rich without ever exiting their business. Yes, you read that right. We don't have to build a rocket ship that takes on gobs of funding for an IPO in order to have everything we want.
We just need to keep making money (and not even that much!)
While to most people this may sound obvious, in the startup world we tend to forget how this simple fact works. We keep thinking in terms of this big liquidity event where we get handed a giant check like we just won the Powerball. We picture ringing the bell on NASDAQ wearing the only nice outfit we own shaking hands with bankers and smiling for the camera.
And in the end, we picture having enough money to just do whatever the eff we want.
I spend a ridiculous amount of time with Founders at every stage of growth and I can tell you this — there are far more Founders that got rich from running a profitable startup than those that sold. And incidentally, many who had the best exits were, not surprisingly, those that ran profitable startups!
Now, the folks I'm talking about weren't all insanely profitable — they were just consistently profitable. What's amazing about those Founders is that every year they got to enjoy the fruits of their labor. They didn't have to wallow in "Capital Raising Hell" in hopes they might somehow get back the next 10 years of their life.
What the profitable Founders felt was what I call the "Stacking Effect" where every year's profits (well in excess of what they would have made with a salary) just stack, and stack, and stack. $100,000 of additional profit doesn't sound like much, but when it increases by even 20% each year and then stacks in the bank — it matters. Now imagine what that looks like for Founders generating $500k, $1 million, or more in profit per year.
What's most important about those initial profits is that they quickly buy down our biggest ticket early items — a house, car, and educational expenses. But here's where Founders sort of mess this up — they think that those items can only be had for "millions of dollars", which just isn't true.
Most reasonable Founders can buy a house, car, and pay off their education for somewhere around $500k — $1 million dollars, with an obvious exception if you live in a few major cities. Now, if that's the case, imagine how quickly and reliably a Founder can get over the hump versus gambling it all, draining their bank account, and hoping for some exponential outcome to do basically the same thing?
The funny thing is that many Founders who do get to a big exit wind up spending roughly the same amount of money on those items as the profitable Founders. If all we need are 3 to 5 years of decent profits to generate the same outcome, no matter what size our startup, don't we sort of get to the same place?
What's more, when we do get to a place where we've finally paid off some of those items, we start becoming exponentially wealthy anyway. This actually follows 3 coinciding factors.
First, we've covered the big items. So when we no longer need to shell out 20% down on a home, there really aren't any big-ticket items that come close, unless we're hell-bent on flying private. Second, we start to get the compounding benefit of having that extra cash working for us in the market, so our expenses essentially come down (pro-rata) based on passive income. And last, our business itself continues to grow (ideally) which means those checks just keep getting bigger.
Even a small startup generating $3 million of gross income on $1 million of net income can make the Founder insanely wealthy just based on time and the stacking effect. And yet, our startup culture seems wildly focused on risking everything for a tiny window of hope.
Why not place our bets where we're most likely to win? Seems obvious to me — how about you?
Let's Define Success By What We Don't Have To Do Anymore Why do we measure startup success by money? Is it the money we're truly talking about or the freedoms that money buys? If it's freedom, then how much of that freedom comes from money, and how much of it comes down to choice?
How Much Should I Be Working? (podcast) Wil and Ryan take a deep dive into the benefits of thinking quality and not quantity when it comes to your weekly punch card.
We Need a Strict Definition of Personal Success Every moment we spend pursuing an undefined goal is a complete waste of time — especially personal goals.
Wil Schroter is the Founder + CEO @ Startups.com, a startup platform that includes Bizplan, Clarity, Fundable, Launchrock, and Zirtual. He started his first company at age 19 which grew to over $700 million in billings within 5 years (despite his involvement). After that he launched 8 more companies, the last 3 venture backed, to refine his learning of what not to do. He's a seasoned expert at starting companies and a total amateur at everything else.