How do entrepreneurs live without a salary to sustain their families and pay bills?

I worked in VC to support myself while getting a small cashflow business going. I had this very question for a long time and found several answers.

First, we need to sub-define “entrepreneur” into two types: the startup founders, and the cashflow business builders.

The startup founders

A “startup” is actually not what you call a new business you are building. It’s a specific type of funding vehicle for a specific type of business, as any honest VC will tell you.

Startups NEED and JUSTIFY venture (risky) funding because 1) the product is expensive to develop (need), and 2) once developed, it can scale rapidly to a large market, recovering all those development and marketing costs quickly (justify). The job of a VC is to verify that #2 will happen, in which case they will fund #1.

A big thing that surprised me when I first started the VC job was how much salary these startup founders are paid as early as Seed Round. A bit better than most MBA graduate jobs, in fact—comparable to VC, or consulting, or even banking and PE. And these salaries go up very fast with each new round every 18 months or so (if you hit your milestones). Not only this, but the equity payoff on an exit puts all these other career paths to shame. I had to reframe my entire perspective on startup founders — founding a startup is now a valid “salary maximizer” career path, EVEN IF THE STARTUP FAILS, along the lines of investment banking and management consulting. Granted, you have to hit a lot of key milestones on the startup path, but you have to do that in consulting and banking, too, just as a personal achievement rather than a company achievement. If you didn’t have an MBA but wanted to get paid an MBA level salary, just throw together a good idea and a good team and start pitching.

A second thing I noticed is a LOT of startup founders come from fairly well to do families. It’s not advertised, but if you read between the lines you’ll hear things like “If this didn’t work I would have to move back in with my parents” (in Malibu) or “We have an early angel investor” (Uncle Bill) or “I come from a long family of entrepreneurs” or my personal favorite, “My parents were immigrants to this country” (to get their advanced degrees from MIT and Harvard after paying the very high tuition in lump cash from THEIR parents who owned a factory around the time the US off-shored its manufacturing and IT services). The family doesn’t have to actually invest — often it’s enough risk mitigation just knowing they’ll be there for you. Or maybe the parents (or their socialist government) paid the founder’s college tuition, bought them their first house, car, or helped them get a job in finance at a young age through their family banker / lawyer / accountant. These early jobs and financial head starts make it a lot easier for these startup founders to take their banker bonus, move to Silicon Valley, and live off the interest for a while (all other debts paid off and parents happy to let them work out of the basement). It’s enough “shadow fundingto gain significant traction and position the startup well for VC investment. I don’t say this to discredit advantaged founders — in fact, society gains far more from them doing this than if they went and took a prestigious job from someone less advantaged than them but equally qualified. Ideally it wasn’t just advantaged families bearing the brunt of shadow funding until VCs kick in. I suppose PhD programs are like the public version of this.

There are still a lot of passion founders out there who lack all the advantages above. They often find it very difficult to get even angel funding, and their day job salaries leave very little excess time and money to spend on product development or team support. These are startups, too, but seem perpetually “pre-revenue,” discouraging the bulk of VC interest, and the IRS would probably consider it closer to a hobby than a business. I consider these the real risk takers, but because of #1 and often a missing #2, it’s a risk that is closer to a noble sacrifice.

The remaining startup founders who don’t have these advantages are usually holding a full time job or doing freelance consulting to pay the bills, and are a little later in their career. These are the “nights and weekends” startup efforts. This is probably only possible if the product development is very lean and a relatively simple prototype, and their current employer is often a ready and willing customer. Once investor-funded, they can now pull a founder salary and can work on the business full time (and the VC’s will expect them to quit their full-time job as a condition of funding).

Cashflow business builders

Sometimes these are called “lifestyle businesses” because the purpose of building a business like this is to have a better lifestyle: more income, more control of your time, more satisfaction in your work. This doesn’t necessarily mean working LESS (but it could).

These businesses are fundamentally different from startups. Using the same framework above, you have 1) product development is not that expensive. You could probably fund it from a day job or a small-time freelancer or even doing dishes at a local restaurant. Or maybe you’re a technical whiz and so the cost of production is just the cost of feeding you. Maybe it’s a skill you already have, or a product that’s already developed, and you’re just helping it find a market. 2) Because #1 isn’t that expensive, rapid scale to a large market is NOT REQUIRED. It can scale fast or slow, large or small. A slowly growing niche market is more than enough to make you far more wealthy than most day jobs and even many startups. But you won’t find VCs investing in these kinds of businesses because if product development is not expensive, why would you need VC?

Takeaway

It is helpful to keep these two sub-definitions of entrepreneurship in mind as you consider your own circumstances and goals for starting a business and how to keep your family fed.

If you are born to average middle class means or lower, have student debt and don’t have a parent to fall back on, you may want to consider a cashflow-style business, at least for the first one, or be very deliberate in choosing a startup idea and team that can get funding without requiring significant out of pocket spending from you.

If you have that banker bonus in your bank account, live debt free and your parents have a room for you at their place if you ever want it, you have a little more leeway to move to San Francisco and build something really sexy, or follow a true passion, and essentially keep building your startup until the VC’s have no excuse to consider it a risky investment anymore and start paying you a founder salary.

Most importantly, don’t use anything the media says about founders, or what founders say about themselves , as a prescription for what will work for you. There is almost always a story behind the story, but that story isn’t what people want to hear.

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