The fantasy goes something like this:
- come up with an idea
- take venture money
- align with the VCs to grow the business as best you can with the firm target of an exit
- hold on to enough equity so that when the exit comes you and the VCs both get rich
- maybe some of your employees hang on to enough equity that they get rich too
- retire on your boat
It’s a reasonable fantasy. I get it. In a recent post we discussed the difficulty for founders in holding on to equity and control in their own companies once they involve venture capitalists. And as you can imagine, if it’s hard for founders to hang on to equity, then employees have an even slimmer chance. But what about the money?
I tend to not factor in the money that you get from the mythical huge exit because they’re so rare. But what kind of money can you expect to earn in terms of profit?
|Company||Employees||Revenue per employee||Profit per employee|
Now I’m not saying making 200k in profit per year per employee is an easy feat. And frankly, even making the 12k that Sun has made is an accomplishment in my opinion. But I do know this, making 200k in profit per employee is a lot easier when you five or ten employees than when you have 20,164 like Google does in the chart. Even getting to 100k per profit per FTE will help you kick Oracle, Amazon, and Dell’s asses.
Now, critics will point out that that profit per that many FTEs ends up being quite a bit of money. And that’s fair. Except for one small problem. How much of that profit ends up in the hands of the hands of founders? Well, it depends. It’s often a surprisingly small amount. Remember, these founders often (not always) end up without huge percentages of their businesses.
I believe that profit per FTE is one of the single most important metrics there can be in a business. And I hope someday to get our number to very high. The main difference is that I hope to make that number high not only by earning lots of revenue, but by aggressively keeping the number of employees it has to be divided by as small as possible. And since there will be no investors, there are only two remaining constituencies to split the money between: employee-owners and employees. If I can pull 500k a year out of my business, it’s like I have 10 million dollars in the bank.
The astute (and even not so astute) may point out that for my 10 mil equivalent I have to keep working. Fair enough. I don’t get it in one lump sum. However, so many entrepreneurs tell me how they love working and will be doing it the rest of their lives. So why not do it the rest of your life, pull the cash out of your business with lots of profit and very few employees, and ultimately retain significant control over your own destiny?
I could have done better at math, but I need some help designing an equation that includes all these factors:
- chance of your idea taking off
- chance of you retaining control while your idea takes off
- chance of you retaining enough ownership to make money when your idea takes off
- chance of your company getting to a liquidity event
- chance of your business becoming profitable year-over-year
- amount of profit your business generates
- number of people who have the right to some of that profit
- likely amount of money you’ll get in such a liquidity event
- likely amount of money you’ll be able to pull out of the business each year
- number of years it will take for the money you pull out of the business to equal the amount you’d get in a liquidity event
- likely number of years you’ll have to work to create a business that reaches a liquidity event
You get the point. I think I need to hire Umair Haque to figure out how to turn this into an apples to apples comparison.
To me, taking that longshot at a venture backed liquidity event that leaves you with enough money to be rich is akin to playing the lottery. But building your own business that you control feels a lot more like the ideal of entrepreneurship that many people claim to espouse. And I claim, that in the latter case, not only can your odds of succeeding be higher, but when you do succeed, instead of having won the lottery, you’ve created your own personal cash printing press. Cash that you can use as if it were dividends from some big payout, or that you can reinvest in new projects to scratch your entrepreneurial itch. And in our future, hopefully, both!
As usual, I have no problem with the VC –> “liquidity event” standard path. But I am fascinated by people who think that it’s the only path to creating a “real” business or “real” wealth. I am always genuinely surprised by how many people take the VC path, especially for businesses that don’t seem to require it. It feels to me like they’re choosing to take the low percentage shot. But maybe I’m missing something.