If you want to start a startup, go work for someone else

When you look online for advice about entrepreneurship, you will see a lot of "just do it":
The best way to get experience... is to start a startup. So, paradoxically, if you're too inexperienced to start a startup, what you should do is start one. That's a way more efficient cure for inexperience than a normal job. - Paul Graham, Why to Not Not Start a Startup
There is very little you will learn in your current job as a {consultant, lawyer, business person, economist, programmer} that will make you better at starting your own startup. Even if you work at someone else’s startup right now, the rate at which you are learning useful things is way lower than if you were just starting your own. -  David Albert, When should you start a startup?
This advice almost never comes with citations to research or quantitative data, from which I have concluded:
The sort of person who jumps in and gives advice to the masses without doing a lot of research first generally believes that you should jump in and do things without doing a lot of research first. 
As readers of this blog know, I don't believe in doing anything without doing a ton of research first, and have therefore come to the surprising conclusion that the best way to start a startup is by doing a lot of background research first.

Specifically, I would make two claims:
  1. It's unclear whether the average person learns anything from a startup.
  2. It is clear that the average person learns something working in direct employment, and that they almost certainly will make more money working in direct employment (which can fund their later ventures).
I think these two theoretical claims lead to one empirical one:
If you want to start a successful startup, you should work in direct employment first.

Evidence

Rather than boring you with a narrative, I will just present some choice quotes:

Even a stopped clock is right twice a day

It's interesting to think about what exactly the "people don't learn anything from a startup" hypothesis would look like. If we take the above cited numbers of everyone having a 20% chance of succeeding in a given startup, then even if each success is independent most people will have succeeded at least once by their fourth venture.

So the underlying message that many in the startup community say of "if you keep at it long enough, eventually you will succeed" is still completely true. I just think you could succeed quicker if you go work for someone else first.

But… Anecdata!

I am sure that there are a lot of people who sucked on their first startup, learned a ton, and then crushed it on their second startup. But those people probably also would've sucked at their first year of direct employment, learned a ton, and then crushed it even more when they did start a company.

There are probably people who learn better in a startup environment and you may be one of them, but the odds are against it.

Attribution errors

So if entrepreneurs don't learn anything in their startups, why do very smart people with a ton of experience like Paul Graham think they do? One explanation which has been advanced is the "Fundamental Attribution Error", which refers to "people's tendency to place an undue emphasis on internal characteristics to explain someone else's behavior in a given situation, rather than considering external factors." Wikipedia gives this example:
Subjects read essays for and against Fidel Castro, and were asked to rate the pro-Castro attitudes of the writers. When the subjects believed that the writers freely chose the positions they took (for or against Castro), they naturally rated the people who spoke in favor of Castro as having a more positive attitude towards Castro. However, contradicting Jones and Harris' initial hypothesis, when the subjects were told that the writer's positions were determined by a coin toss, they still rated writers who spoke in favor of Castro as having, on average, a more positive attitude towards Castro than those who spoke against him. In other words, the subjects were unable to properly see the influence of the situational constraints placed upon the writers; they could not refrain from attributing sincere belief to the writers.
Even in the extreme circumstance where people are explicitly told that an actor's performance is solely due to luck, they still believe that there must've been some internal characteristic involved. In the noisy world of startups where great ideas fail and bad ideas succeed it's no surprise that people greatly overestimate the effect of "skill". Baum and Silverman found that:
VCs... appear to make a common attribution error overemphasizing startups’ human capital when making their investment decisions. - Picking winners or building them? Alliance, intellectual, and human capital as selection criteria in venture financing and performance of biotechnology startups
And if venture capitalists, who sole job consists of figuring out which startups will succeed, regularly make these errors then imagine how much worse it must be for the rest of us.

(It also doesn't bode well for this essay – I'm sure that even after reading all the evidence I cited most readers will still attribute their startup heros' success to said heroes' skill, intelligence and perseverance.)

Conclusion

I wrote this because I've become annoyed with the "just do it" mentality of so many entrepreneurs who spout some perversion of Lean Startup methods at me. Yes, doing experiments is awesome but learning from people who have already done those experiments is usually far more efficient. (Academics joke that "a month in the lab can save you an hour in the library.")

If you just think a startup will be fun then by all means go ahead and start something from your dorm room. But if you really want to be successful then consider apprenticing yourself to someone else for a couple years first.

(NB: I am the founder of a company which I started after eight years of direct employment.)

Works cited 

  • Baum, Joel AC, and Brian S. Silverman. "Picking winners or building them? Alliance, intellectual, and human capital as selection criteria in venture financing and performance of biotechnology startups." Journal of business venturing 19.3 (2004): 411-436.
  • Gompers, Paul, et al. Skill vs. luck in entrepreneurship and venture capital: Evidence from serial entrepreneurs. No. w12592. National Bureau of Economic Research, 2006.
  • Kaiser, Ulrich, and Nikolaj Malchow-Møller. "Is self-employment really a bad experience?: The effects of previous self-employment on subsequent wage-employment wages." Journal of Business Venturing 26.5 (2011): 572-588.
  • Song, M., Podoynitsyna, K., Van Der Bij, H. and Halman, J. I. M. (2008), Success Factors in New Ventures: A Meta-analysis. Journal of Product Innovation Management, 25: 7–27. doi: 10.1111/j.1540-5885.2007.00280.x
  • Also see Pablo's comment below


33 comments:

  1. I think generalizations like these are always problematic. It all depends on what you're doing. What causes me to roll my eyes is how many people lack common sense (not popular opinion which is very often the antithesis of common sense). Good or common sense (which entails a fallibilism and straightforward honesty about one's own knowledge) will tell you whether you ought to do research, how much research, which research, what kind of research, etc. But that's not all. Frankly, anyone lacking common sense (again, not popular opinion) should NOT be running a company because that's exactly the kind of person who will fail to have a sensible and sound view of reality which cannot be substituted by anything else (and since we're talking research, all good research begins from common sense without which it would be vacuous). "Do a ton of research" is equally poor advise as any other maxim. I once worked for a startup where the cofounder was utterly lacking i common sense and spend much of his time trying to compensate for it by reading all of the startup guides and other worthless literature which he took as dogma (he thought agile methodology absolved the engineer of having to do design work and research shows that kind of attitude isn't uncommon). Needless to say, the company tanked.

    Common sense gives us a sense of value, tells us what solution is the right one in a given situation, given all of the relevant factors that make up the situation. Without common sense, you're a computer and computers are stupid.

    And w.r.t. apprenticeship, certainly can't hurt the man of common sense, but likely the downfall of the idiot looking for a "recipe for success." It's enough to browse the startup literature written by the (accidentally) rich startup founders who give terrible advice because either they over generalize the particulars of their situation or really don't know why their company was successful. The value of the advice of one man with limited experience is very small.

    Again, back to common sense. If you need an explanation, then you'll never succeed expect through luck and common sense cannot be communicated.

    So frankly, stop giving your own variation of senseless advice. Successful people are too busy being successful to idle around in their armchairs, spouting nonsense. It's not magical, not a mystery. It's not special. There's a need, you provide it. There's no grand gnostic philosophy or some secret club you need to be inducted into. If you can't perceive the needs, don't start a business. You'll suck at it.

    Only in Murika.

    ReplyDelete
    Replies
    1. "Frankly, anyone lacking common sense (again, not popular opinion) should NOT be running a company because that's exactly the kind of person who will fail to have a sensible and sound view of reality which cannot be substituted by anything else"

      Startups are engendered by the shortcomings of reality.

      Delete
  2. This analysis sounds just dandy: do plenty of research: what could go wrong with that? Get plenty of experience first: what could go wrong with that? Only take advice from those that recommend research and experience? What could go wrong with that? There's only one problem: this is the advice consistent with established 'best practice'. Innovation, by contrast, is all about 'significant deviation from best practice'. Research will (if you are lucky) tell you what has worked and not worked before. Experience gained working for someone else will usually tell you how someone who can afford to pay you does things that work well enough for them to be able to afford to pay you. If you're very lucky, your research or experience will mislead you in some way that will make you believe that something that has not been tried before is something you can successfully turn into a sustainable startup. In practice, most such inspirations come to nothing. In reality, what determines whether you will start a successful startup is whether you have what it takes to keep starting again after each of your dreams fall apart. The comforting reassurances of research and experience are fickle chimeras in the face of that dragon that every innovator must strive to vanquish: the great unknown. Stoicism and sheer dogged determination, combined with a nose for the subtlest whiff of important but unrecognised unmet needs are the only things that qualify the innovator.

    ReplyDelete
  3. In support of the post's thesis, note that Ross & Levine (2013) found that entrepreneurs tend to be successful in direct employment before starting their own companies:

    "this is the first paper to show that entrepreneurs tend (1) to be successful salaried workers before becoming incorporated self-employed and (2) to enjoy an additional boost in earnings when they become entrepreneurs. It is a small group of successful salaried workers with a particular constellation of cognitive, noncognitive, and family traits that become incorporated self-employed.

    "The results are very different for the unincorporated self-employed. People that become unincorporated self-employed during their careers tend to earn less as salaried workers than comparable salaried workers that never become self-employed. While there is positive sorting on salaried earnings into incorporated self-employment, it is the comparably unsuccessful salaried workers that sort into unincorporated self-employment."

    ReplyDelete
    Replies
    1. That's an awesome paper – thanks for the reference!

      Delete
  4. Also annoyed by the "just do it" mentality, I was just reading Billy Murphy's article telling us how we should use the mathematical expected value to make the choice to stay with our day job or begin a startup. Sure, we will usually have a greater expected value in our own startup, but that does not mean it's logical. http://www.brianbien.com/the-fallacy-of-entrepreneurships-expected-value/ This is one of the domains where intuition trumps calculation.

    ReplyDelete
    Replies
    1. Thanks Brian. I agree that maximizing expected income is usually not what people want (unless they, like me, are altruistic) but I don't agree that intuition is better than calculation here. The Hall and Woodward paper I cited above calculates indifference points for varying levels of risk aversion (i.e. varying rates of diminishing marginal returns to income) and finds that entrepreneurship is usually a bad idea, except for people with high assets and low income.

      Delete
    2. Altruism changes the marginal returns. Clever. I agree that this would be a good case for calculation.

      Delete
  5. Taking that one big step is the main problem with all the people who are aspiring to start their own startup. The fact that they don't realize is that one big step would change their life forever for good. But after starting your startup, it's very important to not focus on only making money. As quoted by Varun Manian "Entrepreneurship is not only about making profits"

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