The cold hard truth of running a start-up

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Harvard dropout, tech start-up founder, billion-dollar valuation and possible IPO filing: Does that sound familiar?

The romantisation of tech start-up was started from Bill Gates and Microsoft. Gates is a Harvard dropout. So is Mark Zuckerberg. Zuckerberg’s story is even adapted to motion picture. Among the plethora of university-dropout-turned-billionaire, there are Zara founder Amancio Ortega and Apple co-founder Steve Jobs.

An overachiever who doesn’t need a university degree to build a billion-dollar empire makes a sensational headline. The odds are in their favour, so to speak. The story usually includes quitting nine-to-five job, sleeping at the office and betting on life savings.

Here’s the thing though. If founders can afford to sleep at their office and quit their nine-to-five job, it means their start-ups have been funded.

Angel investors, venture capital and incubator programmes are the most common types of funding for start-ups. Angel investor is basically a wealthy individual that takes interest in a company and decides to inject their own cash.

Venture capital (VC) or venture builder is a private financing company that invests a hefty amount of funds into start-ups. The funds come from investors who invest their money with the VC. In short, VC manages the portfolio of investors who seek stakes in start-ups.

Incubator programme is a mentorship programme that coaches start-ups in exchange for small portion of ownership. The programmes offer funding to the start-ups they mentor.

Those three are completely different investment methods, but they bear one similarity: access.

Getting in touch with investors is easier if you have access to them. If you are an investor, investing a large sum of money into a stranger’s company is scary, isn’t it? Referral from friends is a confirmation that the business is not bogus.

The next thing investors will assess is credentials - where the founders study, who’s backing them and where they work before founding the start-up.

Most of the founders of tech start-ups in Indonesia are overseas graduate. Go-jek co-founder Nadiem Makarim, who’s currently serving as education and culture minister, graduated from Harvard. Traveloka founders are Ivy League graduates.

That is not a coincidence. The majority of tech start-ups founders are either Ivy League graduates or dropouts. Education doesn’t guarantee success, but going to a prestigious school gives people the opportunity to build network that could be beneficial for their careers.

Take education as a stepping stone instead. A lot of great ideas were born when the founders were at university. Snapchat is one of them. Snapchat was hatched when Evan Spiegel was studying at Stanford University. He brought along his classmates, Bobby Murphy and Reggie Brown, to help him build Snapchat.

Having an idea is just the tip of the iceberg. A great idea means nothing without great execution. Starting up is the easiest step. The hardest part is running a company and maintaining a healthy cash flow.

This is where work experience comes in handy. During the early years of a company, the founder has to tackle every role from creative to finance, administration and paperwork. Hence, the term ‘chief everything officer’ was coined.

Then, as the start-up grows, the founder needs to put proper procedure and regulation in place. Founder’s capability as a leader will be put to the test at this stage.

Sure, it is cool to jump straight to the CEO position post-university, but understanding how it feels to be an employee and work in a team is a valuable lesson for founders.

Workplace is also a good start to find promising talent. A start-up cannot move forward without the right team steering the wheel.

In addition, income from full-time job can be allocated to product development. The reality is, not every idea gets funded straight away and not every founder wants to give up a big chunk of their stake to investors.

In the fashion and beauty industry, brand owners should have at least a prototype to present to investors. It is even better for a brand if it can provide a proven track record of sales.

Glossier founder Emily Weiss ran her blog Into The Gloss while working as a fashion assistant at Vogue in 2010. The idea to create a beauty brand came to light in 2014. At that stage, Weiss can leverage her blog’s readership to land an investment and sell Glossier products.

The ‘quit your full-time job to focus on your start-up’ notion is only applicable to start-ups with funding or founders with safety net from their parents or spouses.

For founders who have a family to feed, quitting full-time job and betting entire life savings on their new ventures are irrational decisions. No matter how confident the founder is, there is always a possibility that a start-up might fail. Referring to the basic rule of investment, big return comes with big risk.

In this case, hold on to full-time jobs until the start-up has steady streams of income. That way, the founder has a bargaining power when negotiating ownership with investors.

Another cold hard truth that is rarely discussed in the start-up scene is the privilege and entitlement. At this rate, even start-ups with bonkers ideas get funding. Yo, an application that does nothing but sends the word ‘Yo!’ to users’ contacts, received $1 million funding in 2014. TechCrunch had a quiz called ‘App or Crap’ where people guessed whether ridiculous app ideas are real or fake.

Disruptive and game changer are overused terms in the start-up world. They became more prevalent after Facebook acquired WhatsApp for $19 billion despite having zero revenue. Since then, investors have been on the hunt for the next Facebook and WhatsApp. It prompted a new wave of insensible ideas and valuations.

Often times, the idea is recycled from conventional business with a (small) touch of technology. Adding tech into business gets higher valuation for some reason. WeWork and its questionable ethics can attest to this.

Co-working space WeWork founder Adam Neumann sold the promise of changing the world to SoftBank and other investors, going as far as pitching the company as a tech firm while it is undoubtedly a property firm. The only tech involved is the online bookings via website and application.

Alas, Neumann still got away with it. He walked away with $1.7 billion exit package - though SoftBank pulled out from the deal last month - and convinced his board of directors to buy the trademark ‘We’ from him.

Privilege, if used properly, can definitely change the world. Founders can make a better world through their start-ups only if they are invested in long-term growth, social responsibility and well-being. The time it takes to change the world needs to be emphasised here.