Startups are glamorized into overnight successes that roll over obstacles like a runaway freight train. This is the myth that every real startup founder hates and fights. Yet, the irony of the situation is that a founder needs this myth in order to secure funding and an eventual exit through either an initial public offering (“IPO”) or acquisition. Unfortunately, in order to get funded, sometimes a founder needs to create this myth. No one knows the real number of successes or failures, but everyone knows that their chances are bleak. On average, 50% of small businesses in general fail within their first year according to the Small Business Administration’s statistics. It’s safe to assume that a startup has an even lower rate of survival. Assuming that you successfully execute a sexy multi-million dollar exit, you need to realize that your portion of that “exit” is going to be less than 10% of the advertised sale. You need to ask yourself, do I want to work 3 to 5 years for the bleak chance to maybe earn $500,000 on average in salary and risk my entire future career? Can you accept the risk of waking up tomorrow with poor health, a failed startup and a failed career? That’s a risk I accepted a long time ago for the right to my own freedom without having to listen to anyone. I’ve never regretted the decision, but that doesn’t mean that I sleep well at night either.
GroupMe and Groupie are two startups that started in New York City (“NYC”) working in the same tech space and mobile platforms with two very different futures. Both companies created a group text messaging system, where groups of friends could send SMS text messages to each other as if they were in a chatroom. GroupMe was provided investment funding and eventually acquired by Skype. Groupie was self-funded and bootstrapped, but has yet to have the same opportunities. This is a story of how 2 amazing companies with almost identical backgrounds can have such different conclusions. Genius and hardwork are the basic requirements for success, but sometimes it justcomes down to a bit of luck and serendipity. Are you willing to roll the dice?
How much equity did GroupMe give up?
But, the industry norm is the following:
Assumption: GroupMe gave away at a minimum 65.5% of their company for $11,468,000 dollars based on standard market practices. Each round GroupMe went through was an amount above the standard model, so they likely gave up a substantially larger amount of equity in exchange. Exit: GroupMe was acquired by Skype in August 25, 2010 for an undisclosed amount, but it was assumed to be about $43 million dollars by insiders. GroupMe’s Summary: Based on the assumption above, the founders of GroupMe received an exit worth about $7.4 million dollars for about 2 years work. Realistically, the average founder had 10% or less equity left in their company by the time they’ve exited. The real amount earned is closer to $1.5 million dollars per founder or $750,000 dollars per year in the company. That’s enough for a small apartment in NYC and a vacation from the last 2 years of backbreaking work. GroupMe is considered by everyone as a success for the founders and their investors. But, you need to consider the risk that the founders of GroupMe took to start their company. A founder is considered unemployed until their company has a successful exit. If the founders of GroupMe failed to exit, then they would’ve had a 2 year black hole in their resume. The chances of them getting a job in this market would’ve been zero. Their entire future careers would’ve been stalled irrevocably. GroupMe’s founding team was previously employees of 2 successful startups (Tumbler and Gilt Groupe). Their prior experience definitely helped gain credibility from investors for their initial investment round. GroupMe’s founders smartly capitalized on their relationships. But, this isn’t an advantage an average founder will have and is particularly unique to GroupMe. _________________________________________________________________________________________________________________________________________________________________
Groupie was founded in 2009 by 2 smart and capable founders that bootstrapped their company. They’ve spent well over $50,000 dollars to develop their initial product and have spent an amount in excess of 6 figures to continue the development and maintain the service. Their business has been entirely self-sufficient through their own efforts and funding. Their product has had consistent viral growth since its founding to the point where they’ve gotten over 100,000 users and millions of messages per month. Their company has definitively been successful in the market, yet they still weren’t able to find investment funding. Unlike GroupMe, Groupie’s founders didn’t have established relationships prior to their startup. Their limited funding makes it hard to grow at the same scale as GroupMe. Things might’ve been different had Groupie luckily closed an investment round. A small change could’ve meant all the difference. Maybe Groupie would’ve been the company that was eventually acquired instead of GroupMe. Conclusion You’ve got two equally talented companies with founders that are all equally tenacious and capable with 2 entirely different outcomes. The comparison is undeniable because they’re both in the same space, city and started around the same time. No matter how great a company’s product is, it doesn’t guarantee success. Even successful apps with growth don’t guarantee success! Successful Exit Model The model is based on the $43 million dollar exit above by GroupMe and industry standard practices:
Numbers
Do a startup because you love it. The road is painful, slow and depressing. If you’re in it just for the money, then it’s a hard journey ahead. Don’t assume that having a successful exit is going to set you for the rest of your life. This essay is definitely skewed toward the negatives. If this article can shake your determination, then you’re probably not meant to do a startup. I’ll be a lifelong entrepreneur because the gasps of freedom and accomplishment between the bouts of depression is more meaningful than a wage. I wish you the best of luck and I hope that this has in some way prepared you for the long road ahead and the consequences you may face.
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