When gambling on high-risk startups, the more bets you place the better, right? Maybe not.
There is an unspoken discussion going on in Silicon Valley now about the value of “Portfolio” versus “Persistence,” especially among people who have never started a company. The claim is that you can improve the odds of a Facebook-like outcome by jumping from company to company until one hits, building a portfolio of startups (and stock options). I’ve even heard people scheme to switch startups every one or two years, ready to abandon the ship the moment the rain starts.
The alternative is to stick it out and persist through the seeming insurmountable difficulties of building any young company. I think persistence cannot be overrated. But it doesn’t seem to be in vogue.
In the last month, I have been part of discussions with venture capitalists about two super hot startups where the founders are looking to leave. One of them eventually announced a sale for way under capital invested. In both cases the founders wanted to go because they feared missing something big by sticking around another two years or more.
In a more extreme case, an entrepreneur well known in valley circles gave up eight weeks after cashing the final $50K check of a $300K seed round, announcing his decision to take a new job in a text message and burning a number of angels in the process.
I have fallen into the portfolio view, too, though my combination of obsessive tendencies, loyalty and curiosity leads to me to do things like stay on the Spoke board almost 10 years after I co-founded the company. I’ve adopted a portfolio model through a little bit of investing and an agreement to help a few companies.
But it is clear to me you have to be willing to sit through the rain if you want to catch a fish. The value of this kind of founder persistence has been well dissected by a number of successful investors, from Vinod Kholsa to Mark Suster, many a lot smarter than me. In the end, the common theme is that the one solution to bad timing is persistence. Bad timing is the most frequent reason great teams with great ideas fail. The solution is to persist your way through to the point of good timing.
The most important example of this is Steve Jobs. He had a vision for the role of technology in our lives and that vision could not be delivered in the early 80’s. He didn’t give up. Instead, he persevered through getting fired and many trying years at NeXT Software to deliver the technology of his dreams. I wish more of us had that persistence. Actually I wish I had 10% of it, and I look for it in teams I fund. Good exit timing is important. But so is the drive that keeps an entrepreneur trying to solve the same problem again and again and forever feeling like he or she gave up too early.
This became clear to me a decade ago when I spent nine months cleaning up Casbah after it hit a funding wall and its founders had parted ways. I was an investor and stepped in as interim CEO and the effort extended for many months, even after I returned to my day job. This was more persistence than I wanted. But it built loyalty with investors and board members I still work with today, along with teaching me a bit about persistence.
For startup teams, here are a few things about persistence to consider:
I have been amazed when team members leave how often they don’t exercise their stock. I have even seen this happen when an exit was possible. When you leave a start up, you have to “buy” your vested stock. If you leave multiple companies you are building a portfolio, but you are doing it at a real dollar expense.
The stock you get early has a pretty low exercise price. You can choose to go to another company, but until you turn that stake to cash, you will be leaving behind a significant portion of the value of the non-vested options that’s built up while you were working at the company.
The stock you got early may have a lot of value, but without you it may be worth nothing. Startups are built on team efforts. You are more important that you think.
The people who are there are going to get more stock. You walk away from your current and future ownership when you leave. On my teams, great people, especially up-and-comers, can end up owning 3x to 6x the percentage of the company they had on day one.
What’s more, there is an enormous psychological benefit to being there all the way. I remember thinking the day we sold MerchantCircle that it would have been a lot more fun if some of those who left had stayed around. I think we would have had a better exit, and they would have, too. Buyers often structure deals to incent the teams they will work with, not those people who left.
Of course with 10-year exits persistence can be tough. But sticking with it is the way to build great companies, and it can be better for employees, too. Just look at Angie’s List and the successful IPO it launched 16 years after its founding.
Until I see another Facebook-like “sure thing,” I think I will persist.
(Ben T. Smith IV is a serial entrepreneur and investor and the co-founder of MerchantCircle and Spoke. He is available on Twitter @bentsmithfour)