To Search or Not to Search, an entrepreneurs perspective

I enjoyed Tom Matlack’s blog post on weighing the idea of searching vs starting from the perspective of the investor. I want to talk about what I thought was so compelling about doing search from my entrepreneur/operator’s perspective. As I consider my next steps into the world of search, I have put together four questions that provide a framework to guide me through the decision making process. 

I started a venture-backed company in 2003 in the robotics field and exited in###-###-#### We raised multiple rounds of venture funding and had some commercial success, but were never able to cross the chasm. As the founder and CEO, I enjoyed what I did and developed good relationships with my board and investors, and since moving on from that experience, I now recognize that startups have some significant hurdles caused by attempting to grow rapidly. These hurdles put immense strain on both the entrepreneur and the company, which contributes to the failure rate. This brings me to my first question.

What is your risk tolerance vs your desired reward?

If you aren’t already an entrepreneur, either of these options “search or start” are going to sound insanely risky. If you are stuck there, if you are getting hot flashes as you contemplate what your life would be like, then neither path is the one for you. When you marinate in the idea for a little bit, you quickly realize that startups give you a chance at a great reward at an extremely low probability of success. Everyone talks about a one in ten success rate for startups. I think that of those startups that make that first cut, less than 10% of these “successful” startups actually deliver a successful exit to the entrepreneurs. Which means that you have about a 1% chance of having a successful exit as an entrepreneur doing a startup.  The key to reducing risk in a startup is to have enough capital to allow it to be creative and to iterate. The more capital, the larger the capital stack at exit. Search, on the other hand, seems to deliver approximately a 56% chance of the entrepreneur having a positive exit. While the magnitude of the exit may not be what you can achieve with a startup, even if you buy a business for $10M and sell it for $12M, $4M (at a 25% earned equity position) is a fantastic exit.   

How do you want to balance creativity vs. discipline?

Startups allow you a broader level of creativity because they normally require a good deal of iteration to hit on the right thing. Search, on the other hand, seems to be successful when you are able to rigorously apply the model to the selection process. While I believe that there is always an opportunity to put your mark on the things that you manage, it requires balance. It really is all about knowing yourself. 

Assuming that you selected the right business, it is effectively executing the core functions of the business that most contributes to its success. In year one, it will be new and exciting. In year two, you will be starting to get the hang of it. Year three is where it may become apparent that the fit isn’t right. 

How much sizzle factor do you seek?

Sizzle factor is really about romance. Startups can often be idealized as romantic endeavors. You are either changing the world, doing something “big”, or you just made the next Twitter for Cats. How do you view the work that you are going to do? Does your personality allow you to engage repeatedly with something that might be considered a little more mundane than your "earth-changing" startup idea? Personally, I have had enough of the crazy and the exciting. I am looking for something that I can really get into, get to know the depth of, and see if I can make it better.

What are your next best alternatives?

What are your alternatives to making this decision? With my startup, my wife and I would often joke (sometimes it wasn’t so funny) that I could always go get a job. If you take that job what are your probable outcomes and are you ok with those outcomes versus doing the search. Timing is also a dimension of your alternatives to this decision. There is no right or wrong time to do either a startup or a search fund. The decision is personal and there is no wrong decision. It just has to fit with you.