Silicon valley: start-up founders under pressure
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Weekdays at 5.30am or sometimes earlier, Ryan Hoover rolls out of bed in San Francisco and starts to worry. His start-up, Product Hunt, has become a cult hit in Silicon Valley, with two rounds of venture capital raised in less than a year of the company’s existence. Its website and iPhone app highlight other cool new gadgets and apps, which the small group of techies who post there are often the first to know about. Every day, Hoover sends out an email of highlights at around 7.30am – 8am if he’s running late.
“There are people using Product Hunt when I’m sleeping, and it freaks me out that I don’t know what’s happening,” says Hoover. He’s a softly spoken 27-year-old with a mop of brown hair who built his first company of sorts aged 12, a website for hosting jokes that turned a profit of about $10.
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Product Hunt launched last year as an email newsletter that Hoover sent to friends. Incorporated this May, it raised its second round of funding, $6.1m, at a rumoured valuation of more than $20m. To describe Product Hunt’s list of nearly 20 investors as a who’s who of the tech scene is an understatement. But with new investment comes new worries.
Hoover pulls out his iPhone and taps through to the app he uses to check traffic to the site. “I should probably not do this as much as I do,” he says. He looks at the screen. “See? Right now this stresses me out because we’re 10 per cent down from last week.” The site currently has more than 15,000 visitors on it. He wonders how he’ll react during the upcoming holidays, when traffic to the site will almost assuredly fall again. Logically, he knows he shouldn’t worry but he likely still will. Now, with funding, “It’s even more important that we keep it up.”
The tech industry is booming globally and nowhere more so than in San Francisco and its neighbour Silicon Valley. Amid the Bay Area’s open-plan offices and suburban corporate campuses, engineers and executives are inventing the future. Many are minting billion-dollar fortunes while they are at it. But many more put in hours that make investment bankers look underworked only to end up with no more, and sometimes less, than they started with.
“It’s the gold rush, isn’t it?” says Patsy Price, a software programmer who retrained as a coder aged 57 at one of the intensive coding schools now proliferating in San Francisco. The tech sector is luring workers from all over. At Harvard Business School, the percentage of graduates going into financial services is down from 42 per cent to 27 per cent between 2006 and 2013. The percentage going to tech more than doubled in that time, from 7 per cent to 18 per cent.
Figures from other top-flight schools show similar trends, not to mention the skyrocketing number of applications to Stanford, long seen as the main feeder school for Silicon Valley. Goldman Sachs last year encouraged young bankers to take more weekends off – a novelty on Wall Street – in an attempt to retain young workers, many of whom are heading westward.
But from the inside, the lustre is not always so bright. Most of the start-ups popping up in the Bay Area will likely fail. Many more will yield returns that are far less than hoped for by investors. Shikhar Ghosh, a Harvard Business School professor, estimates that up to 40 per cent of start-ups finish by liquidating their assets, while up to 80 per cent miss their projected return on investment. The odds of a company being as successful as Google or Facebook are so small that venture capitalists call those kinds of winning bets “unicorns”.
Even those that do succeed often go through what Paul Graham, a prominent backer of young start-ups, calls the “trough of sorrow”. This is the period when the excitement of founding gives way to slowing growth and doubts about the venture’s viability. Changes in how software is distributed to customers – downloaded immediately from the cloud, rather than sent out on CDs – also means the pace of development is faster, and more gruelling, than during the last tech boom.
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Toke Kruse and his co-founder came to San Francisco from Denmark two years ago with “just our suitcases” and have since been building Billy’s Billing, an accounting software start-up. Kruse works from his home, an apartment in one of the new condo buildings popping up in the hot start-up neighbourhood of SoMa. The place is sparsely decorated, with a glass coffee table and a large stuffed teddy bear on the sofa. He has been without salary, living off savings and proceeds from some side projects, while engineers build the product. Two years of this without any guarantee of success is “especially stressful for a person who is extroverted like myself”, he says.
This isn’t Kruse’s first company. He started a couple back home in Denmark. Some worked, most did not. Among the failures, a photosharing company he launched in 2005 – unfortunate timing, he explains, as it was before smartphones with cameras made digital photography ubiquitous.
That, founders say, is the norm. “In fact, there’s an acronym,” says Shaan Puri, chief executive of start-up incubator The Monkey Inferno, as he pulls out a red erasable marker to write on the glass top of his conference room table. “It’s WFIO – we’re f***ed, it’s over. That’s the moment when the team is actually honest with each other, you can’t bullshit yourself or your team or your investors, you have to really acknowledge what’s going on.”
Puri, 26, was drawn to the Valley after attending a university course called “Getting Rich”. The professor, he says, brought in entrepreneurs who spoke about their real-world experience in business. It was meant to be just an easy class after years spent preparing for medical school but it inspired him to abandon plans to become a doctor and be an entrepreneur instead. The Monkey Inferno is funded by Michael and Xochi Birch, British entrepreneurs who made millions with the 2008 sale of social network Bebo to AOL.
Under Puri’s leadership, The Inferno, housed in a lavish office with a chef, massage room and a full bar, churns out new products on six-week schedules, from idea to prototype in the market in a month and half. Most have fallen flat, or are at best what he calls “small wins”. The Inferno wants only a big win, and the others are just a distraction from that hunt. They are hoping their next product – a relaunch of Bebo as a playful messaging app – will be that big win.
“We don’t think it’s good to fail, we kinda just know that failure is the default for a start-up,” he says. After failure they pull themselves up and go on. “I’ve joked about it, like, ‘Do you guys want to print out the code, and we could burn it?’” They don’t actually burn the code for catharsis, he says, but discuss what went wrong and what was right.
The Inferno, he says, is built around the idea that few products will be the big hit. All its team members are employees and entirely funded by the Birches, so they stay together and keep the lessons learnt in-house, rather than seeing the team scatter to new projects elsewhere.
That unusual arrangement also means far less pressure than the average venture-backed entrepreneur faces, and far more support than a lone entrepreneur working off his or her savings or credit card. Most entrepreneurs find themselves the only “first responder” when something goes wrong, says Meg Hirshberg, who runs a class on entrepreneurship at the Kauffman Foundation. “Entrepreneurs feel, often very legitimately, that they can’t be cut off from their company for a minute,” she says. “There’s no real work-life balance in the usual sense.”
The struggle of founders has been the subject of more public discussion in Silicon Valley than usual recently. But it is not always an open conversation in an industry that celebrates success and often casts failure as a necessary stepping stone. An unwillingness to discuss the unglamorous stresses that founders face, even among those who will ultimately succeed, isn’t just the machismo one might expect in a male-dominated industry, says Hirshberg. Entrepreneurs are often right to fear that employees, investors and customers will leave if they sense a company might be in trouble.
Sam Altman, head of prominent start-up incubator Y Combinator, recently penned a widely read blog post entitled “Founder Depression” and encouraged the founders Y Combinator works with to talk about their problems rather than tough them out alone. The post got hundreds of comments on Y Combinator’s associated online forum, Hacker News, and more than a thousand shares on Facebook and Twitter. “For whatever it’s worth, you’re not alone,” Altman wrote. “You shouldn’t be ashamed.”
Rand Fishkin, founder of the marketing software company Moz, also went viral after he wrote a frank blog post on a bout of depression that started with a late product launch and ended with his stepping aside as the company’s chief executive. Going $500,000 into credit card debt and dodging collectors while building the company during the financial crisis was not what shook him. Instead it was the responsibilities for a “poorly done” development of a new product and the feeling that the company needed change he could not bring that proved too much.
His post ended up on Hacker News and the comments poured in. “The vast majority of the email I’ve gotten was, ‘I’ve had this in the past too, I’ve struggled with it,’” says Fishkin, whose company is based in Seattle, itself a growing tech hub. “There’s a lot of pressure on founders and CEOs to always be showing if not numbers at least confidence and an attitude of moving up and to the right.”
The pressure that comes with venture capital funding, says Fishkin, was part of his challenge, even though his investors and board were more “empathetic” than most. Winning venture capital is often seen as a success in itself but it also means the company will be under pressure to win, and win big, with growth rates unheard of anywhere but at a start-up.
“Growth isn’t just expected but demanded, and hypergrowth is expected,” says Fishkin. His company took substantial venture capital in 2012, at which point it was growing comfortably but wanted to expand its product offering so it could reach potentially many millions of customers.
Moz sold about 17 per cent of itself for some $18m in venture funding. Standard investors would expect to see up to a 10 times return on that capital, “which means we have to figure out how this company can become, in a small number of years, valued in the hundreds of millions of dollars, and those numbers are insane,” says Fishkin.
Part of the stress many face, says Hoover of Product Hunt, comes from the fact that Silicon Valley so values entrepreneurs that talented people feel pressure to start something of their own, sometimes before they are fully ready. “If you don’t, you’re ‘less than’ in some ways.”
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Entrepreneur Dana Severson spent a week in tears after the failure of his previous company, a crowdfunding start-up named Wahooly.
A native of Minnesota, he came to San Francisco to try his luck and take Wahooly through a start-up incubator run by an ex-Google employee. But the site did not find a developer until about a month before the launch date he had publicly committed to, and it did not work out.
The tears, however, led to an idea that has proven far more successful than Wahooly. Severson launched Startups Anonymous, now a popular site for founders’ anonymous gripes, worries, stresses and, as he says, the dumb questions they should know the answer to but don’t. Since January, it has gathered more than 700 confessions, questions and stories.
It’s funded, he says, by a profitable side project of his, a beef jerky ecommerce company that sends a box of jerky a month to subscribers. He runs the two out of the same office in his native Minnesota, where he returned after his stint in San Francisco. (The office, he says, does smell a bit like jerky.)
Since launching Startups Anonymous, Severson has realised he wasn’t alone in his stress, or the fact that he did not know everything he was supposed to, such as what happens to the debt of a shuttered start-up. “The overlying theme is a lot of imposter syndrome issues. It makes sense, there are a lot of young founders and sometimes this is their first go at the professional world,” says Severson, himself in his thirties. “They don’t have hiring experience, they don’t have management experience and they have to learn on the fly, so of course you have to fake it until you make it.”
A confluence of identity with work can exacerbate the grief that founders feel when ventures struggle, says Dean Shepherd, a business school professor at Indiana University. Chief executives at larger companies also get stressed out, he says, but their stress is less existential – they may be fired but they did not start the company with their savings, and their companies are unlikely to vanish entirely.
Entrepreneurs, says Shepherd, also often push themselves too hard, and persist when they should maybe fold. “If you only study entrepreneurs who are successful, you’re always going to think if they’re over-optimistic and overconfident then they’re more likely to be successful, but you’re not capturing the ones who failed and lost their life savings.”
So far, founders say, that is not a message that resonates throughout the Valley. The commonly heard maxim “fail fast” – meaning admit defeat quickly and move on – exists uncomfortably with the praise given to stubborn executives who overcame setbacks. Failure might be the known default for start-ups but no one wants that to mean their start-up.
“You’re spending these godforsaken hours building products, you’re always on the clock, you’re always hustling, and everything is always going great,” says Severson. “Especially in start-ups, there’s this need to really show that you’re quote-unquote ‘killing it’ all the time.”
Sarah Mishkin is an FT San Francisco correspondent
Photographs: Jamie Kingham
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