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The Case of Commitment
Should You Be Working On Your Startup Full-Time?
Ariella Chorn
April 22, 2024
Hello! Hide Sustle is a blog exploring the intersections of entrepreneurship, finance, and psychology. In today’s edition I explore what constitutes a sufficient decision-making framework for navigating and mitigating risk.
In this piece we will cover:
Should You Be Working On Your Startup Full-Time?
During my time building Koala, I had the opportunity to pitch to many early-stage investors. A common question for them to ask was “Are you working on this full-time?”
It is logical for an investor to assess how seriously a founder is taking their venture, and one unit of measurement is the amount of time the founder dedicates to said venture.
In fact, some early-stage investors provide capital to promising founders specifically to enable them to work on their venture full-time.
Y Combinator’s FAQ page addresses this in the statement; “In most cases, the first use of the funding should be for the founders to support themselves so they can work full-time on their company, typically by paying themselves a salary. If you have student loans, a mortgage, etc. you can use what you pay yourself from the YC investment to cover those.”
Additionally, The Thiel Fellowship provides a $100k grant to their fellows so they may “skip or stop out of college” and work on their venture full-time.
So, the question remains, should you be working on your startup full-time? I believe the first question to ask yourself is whether you can work on your startup full-time. Let’s dive in.
Who is this post for?
This piece will be most relevant for those individuals at the beginning phases of their startup journey. They have an idea in mind, perhaps they have started conducting customer discovery interviews - at a minimum, they know they want to “start something.” This person, or team, is thinking about the right moment to make the leap to full-time.
However, I would argue that this piece is relevant not only for those considering full-time startup commitment, but also for anyone contemplating a significant life change - quitting a job, traveling the world, or pursuing any other endeavor that entails a major shift in day-to-day living.
In this piece we are exploring the constituents of risk-taking. We will be going over the criteria for evaluating your personal risk-taking capabilities.
Let’s begin by assessing your personal financial situation.
What Is Your Runway?
When a startup raises capital, it achieves what is called a runway - this is the amount of time, in months, a business has before it runs out of cash. It is the countdown for your date with the grim reaper.
Whether you should work on your startup full-time is dependent upon whether you can afford to work on your startup full-time. Essentially, you have to self-diagnose your personal runway.
Founders come in all age ranges and financial situations. During my time at Techstars, I met with the classic college dropout living-off-of-energy-drinks-and-pizza founders, and founders in their late 30s and early 40s with a partner and kids. It is reasonable to assume they have different risk-taking capabilities. On a side note, my experience at Techstars was invaluable for a multitude of reasons I will get to in a later piece.
As part of the Techstars program, I was privy to previous cohort members’ founding stories. One founder expressed his gratitude for his wife who financially supported him for almost two years while he was getting his venture off the ground. Another told us how he and his co-founder decided to continue working full-time and treat their venture as a side hustle until they had enough traction to be confident enough to approach investors. Note: Both of these founders were in their 30s at the time of their venture’s inception, the latter already a father.
When considering whether you should work on your startup full-time, ask yourself these questions: What stage of life am I in? What is my current financial situation?
Cue le Side Note
For those people looking to start a venture, it can be hard to predict a realistic timeline for when you graduate from the ideation process.
Ideation = idea + validation
This encompasses everything a founder should do to ensure they are on the right track and not wasting precious time pursuing a potentially dead-end idea.
The Ideation Process (step-by-step)
Remember, the ideation process could take anywhere between 2 months to 1 year to complete (or more) - assuming you undergo the process in its entirety, it would include:
Finding a problem worth solving
Identifying an ideal customer profile who experiences the problem - this process involves conducting a healthy amount of customer discovery interviews to ensure you are pattern-matching the data and receiving the results necessary to proceed
Potentially scrapping the idea and starting from scratch (too small of a niche, not a painful enough problem) - placing you back at step 1
Building a minimal viable product (MVP) to test your assumptions of a feasible solution to the problem
Driving traffic to your MVP
Conducting customer development interviews on the entities who were exposed to the MVP to gauge their reactions (assessment and feedback) of the solution
Deciding whether to further flesh out the original MVP, or based on the preliminary feedback, whether iterations are in order
“But Ariella, I already have an idea for a solution to a problem I want to solve. I know this problem is prevalent in the market, and I believe my solution is a good candidate to solve it.”
That’s great, but everything you said is still in the assumption phase. In relation to building a Venture Capital-backable startup, I want to know:
Have you determined that the problem is worth solving?
Have you identified an ideal customer profile that experiences the problem?
Have you built an MVP and gathered data (depending on the product, this can be in the form of sign ups, app downloads, Letters of Intent (LOI)) that represents - even to a small degree - that this is the solution your ICP wants and is willing to pay for?
Point being, if you are in possession of assumptions that have not yet been proven or disproven, you are in the ideation process.
Note: This ideation process framework is one I have denoted as a helpful outline of the stages necessary to understand whether you are running in the right direction. There are numerous cases of founders building extremely successful products without religiously following these steps, but I believe it is helpful to keep this framework in mind - because it is a framework of time.
A Framework of Time
What do I mean by this?
To provide a clarifying example, let’s say your current cost of living is $75,000 a year - you have a nice apartment you share with one roommate, can afford to eat out at least once a week, and enjoy the amenities that come with your current position.
You are living comfortably, but you know you want more. You want to be an entrepreneur and build a startup - you want to bring an innovative product to market that will positively impact the customers it serves.
Let’s say you save up a cash cushion that affords you six months of living (runway) in place of income. Let’s say you already have a problem in mind that you want to solve. Now it is time to test this hypothesis. You quit your day job and go full force into the ideation process.
Before I write an entire novel, I’ll get to the point.
What would happen if you sorely underestimated the factor of time it took to graduate the ideation process? What would you do if you weren’t successful in raising preliminary funds to sustain you following the six month mark?
Determining Your Financial Situation
Questions to ask yourself to understand your present financial situation:
Do you currently have a secure source of income / cash flow?
What is your current cost of living?
Are you willing to make substantial lifestyle changes to accomodate a more modest mode of living (for example, if your current cost of living is $75K/yr, are you willing and able to live within the means of $45K/yr if it provided you more time to work on your venture)?
[In relation to the example above; would you be willing to leave your current apartment, live with a higher number of roommates, and potentially dwindle your eating-out habit to once a month instead of once a week?]
Examples of the different persona buckets you might fall into:
A teenager or young adult (early 20s) who is able to live at home with their parents rent-free
An adult not keen on living with their parents who is able to hunker down, pay for a crummy apartment with six roommates, and photosynthesize for the unforeseeable future
An adult who is fully financially supported by their significant other
An adult who is the sole breadwinner in their family and therefore requires a massive cash cushion before they can even think of leaving their current job
Your financial situation determines your current threshold for working diligently with no income for the untold future. Your personal runway determines how long you will be able to do that.
Relevant for all founders at all times (but perhaps particularly for those in the beginning phases of their startup journey in the current market) it is imperative to take the economic climate into account as part of your strategic decision-making process.
The 2021 market saw startup valuations driven up by the combination of cheap capital and a flood of funding from nontraditional and crossover investors. In this environment, founders had the upper hand, enabling them to raise more capital at higher valuations than they otherwise might have, often under highly favorable conditions. This was a founder-friendly market.
Taking a look at the market today, the availability of capital has significantly decreased. In consequence, startup valuations have declined, and term sheets are now riddled with investor-protective terms such as liquidation multiples, cumulative dividends, and other structural clauses. This is facilitated by reduced investor competition, as nontraditional investors exit the market.
These terms are more dilutive for founders and existing investors, reflecting a shift towards cautious investment practices in lieu of the slackened due diligence processes and inflated valuations of the 2021 market.
Essentially, if a founder is strapped for cash and needs to raise or die, they are at a serious disadvantage in terms of their leverage power (which is close to zero) in today’s current market.
For founders seeking to raise initial funding, it is essential to engage in serious self-reflection to assess the necessity of seeking outside capital in the current environment. Independent of the current market conditions, raising capital does not happen overnight, and requires a significant buffer period set aside for the founder to go into fundraising-mode.
During fundraising-mode, all of the founder’s resources (time, energy, and attention) will go toward the fundraising process - leveraging their current network, sending out cold messages, setting up initial meetings, working through the ranks of the investment firm, and (if you make it far enough in the process) negotiating term sheets.
This was true enough in the market of 2021, albeit with perhaps a shorter timeline between the activation of fundraising-mode and receiving a term sheet.
In today’s market, deciding to fundraise can take a founder out of the building game for months. As such, it is imperative that the founder or founding team understand the pros and cons of relying on outside capital to keep the company afloat.
Note: Funding for a venture (perhaps especially the first check) is provided at the discretion of the investor. You might be able to raise a preliminary FFF round (capital you raise from Friends, Family, and Fools) to sustain you. Alternatively, you might have a serendipitous interaction with an investor that takes a liking to you and believes in your inherent potential and capabilities.
Returning to our main point, the current economic climate not only affects how long you can sustain yourself while working full-time on your startup, it also impacts how quickly you can secure initial funding to maintain this effort.
For individuals, businesses, and investors alike, economic downturns necessitate risk-mitigation strategies including budget tightening and heightened scrutiny toward new solutions entering a market. The first two entities represent potential customers, the last entity represents your runway-provider - it is essential to understand how each of these units behaves in different economic climates.
The Case of Commitment
I believe the worst situation for an early-stage founder is when strategic business decisions are made on the basis of the founder’s personal financial situation.
So, as someone looking to start a venture, should you work on your startup full-time? Ask yourself this; do you currently have the financial capability to do so?
Fin!
‘Entrepreneur’ is just French for ‘unemployed.’
- Ariella
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