Myth: Startups are risky

As part of the continuing series on startups myth, let me address the view that startups are risky.

Looking at the numbers

Look at the numbers of startups created. Now look at the unemployment numbers. Look at the numbers of startup that fail. Now look at the size of corporate layoffs in large corporation.

Yes, startups are risky and most startups do fail. The question you have to ask yourself should not be whether a startup is risky but whether working for a startup is riskier than working for a large corporation.

I spent a decade on Wall Street and, during that decade, was witness to countless waves of layoffs. People with five, ten, twenty, thirty years with the same companies found themselves unemployed as a result of those layoffs. When looking a startups in that context, I would venture that they are less risky than large corporations for people who are willing to work.

In startups, individual success is often a result of individual output. As an individual, you work hard and, as a result, have an impact on the company. There are, of course, external elements but I’ve seen startups thrive during both recessions and economic booms. Often-times, startup fail because they are not properly managed and the team is not working together to deal with external market forces: for example, when I was at, a lot of the focus of the senior management was on getting more marketing out. However, there was little interest in solving some of the logistics and technological challenges we needed to address in order to succeed. The senior management (myself included) was unable to clearly address how essential those challenges were to the survival of the company and the imbalance of marketing goals vs. technical know-how was a large part of the company’s failure.

By contrast, I’ve seen large corporations where, as a friend of mine in a large media organization once put it about his own firm, “there’s enough dead wood that it causes a fire hazard.” In large corporate environment, firing individual low performers is often difficult as the fear of legal retribution ends up with requiring substantial amounts of documentation if you’re going to let an individual go. In a lot of ways, it’s easier to lay-off tens, hundreds, or thousands, than it is to fire a low performer. As a result, lay-offs are common and often push decent to good performers out along with poor performers.

In startups, there is little room to hide, which is why small organization seem to move substantially faster than larger ones. An added advantage is that along with the little room to hide comes substantial room for growth. In my experience, the big difference between small and large organizations might have to do with resource surplus. In startups, there is almost always more work than there are people to do it. In large corporations, I’ve often found the inverse to be true (and I suspect that many head offices look at things in a similar way, thus justifying mass layoffs in times of uncertainty).

The fact that there is more work than hands in a startup means that there is ample opportunities to learn new skills, skills that then can be reapplied in the marketplace if one finds himself/herself unemployed.

So are startups more risky than large corporations? My answer is no, but it’s a qualified no and the qualification has largely to do with whether you want to work or not. If you’re part of the former group (wanting to work), then startups are no more risky than large organizations and may provide you with more room for growth.

Note: this is part of a 5-parts series about startup myths. You may want to read all the parts: ideaspathrisk, money, capital.

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