Why and how to maximize the opportunity costs of starting a startup
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Why and how to maximize the opportunity costs of starting a startup
A framework for thinking about day jobs vs. side projects to make sure your next startup has high initial investment
Hi - I’m Mike Wilner, the writer of this post which is part of my weekly newsletter, Getting Shots Up. The newsletter includes essays, interviews, and more about building entrepreneurial careers. This isn’t startup advice – it’s a zoomed out view of how entrepreneurial people can think about constructing a career that results in a lot of high quality shots on goal. I’m a former startup founder, the co-author of a book on seed fundraising, and am on the Early Stage Startup team at AWS.
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Why and how to maximize the opportunity costs of starting a startup
If going all-in on a startup requires giving up something of high value, then you will have a high bar for what’s worth going all-in on. For example, if you love your job and the people you work with, then your conviction levels around a new startup would have to be extremely high in order to go full-time and give up that job.
Conversely, if you don’t value the things you would need to give up, then your standards for what is worth going all-in on will be low. If you hate your job, then it’s tempting to take the leap to going all-in on a startup even if it’s a bad idea.
This is one of the reasons that investors look at what founders were doing before starting their startup. The opportunity costs that a founder “pays” to start their startup is akin to the amount of skin they have in the game, and it can be a signal of how high their convictions are. If you look at two identical companies, if the founder of one of them left unvested stock options at a rocketship startup on the table to launch their startup, while the other left a dead end job to launch theirs, then the former has way more skin in the game.
In that sense, the opportunity costs that a founder has to “pay” to go full-time on their startup is an investable resource, much like funds that an investor has to deploy. The size of that resource means you can make a bigger “investment” into your startup, signaling to potential employees, investors, and customers that you have significant skin in the game and high convictions.
When not running a startup, you should maximize the value you are getting from your day job and side projects. Increasing the value you get from your day job increases the opportunity costs of starting your startup (and therefore the size of your “investment”). Working on side projects can further increase the opportunity costs of going “all-in” while mitigating the risk that a great job gives you golden handcuffs and prevents you from eventually taking the leap.
For the sake of this post, we’re going to define “value” as the financial resources (AKA income), personal fulfillment, skill development, and community/network that you get from your day job and side projects.
Set a high baseline with your day job
One mistake I see founders make (which I’ve made myself in the past) is assuming that if you intend to start a company, then it’s not important that you value your day job.
Unfortunately, if you don’t like your day job and get little value from it, then the opportunity costs for you leaving that job are low. If an investor were to ask why you started your new startup and your truth is that “I hated my old job and I was desperate to start a company,” then that’s not good. This is what I did when I started my first startup. I had become dissatisfied with my job, had made up my mind that I wanted to start a company, and Compass (Upwork for web design projects) was literally the second idea that I had. With just a little bit of validation, I said, “screw it let’s do it.”
Let’s look at two future founders working the same job with the same salary, as product managers at a late stage startup:
Person A: good salary, hates job
Person B: good salary, loves job
Because they love their job, Person B will get more fulfillment. They will also get slightly more out of skill development and the community/network, as they will be more engaged. Person A will still get some value out of skill development and community/network, but not as much. For the sake of this exercise, let’s assume that person B gets 1.5x the skill development and 2x the community/network of Person A from their day job since they’re more engaged, and let’s assume that person A gets no fulfillment.
Because they get more value out of their day job, Person B has more to lose by leaving to start a company, despite the jobs being identical on the surface.
It may sound counterintuitive, but if you plan to start a company in the future but you don’t like your current job, then switching to a job that you get a lot more out of will actually better position you to start the right company down the road (even though sticking it out at a job you hate may cause you to start a company sooner).
Grow within your day job to give your opportunity costs a growth rate
A lot of people will suggest that aspiring entrepreneurs should work on side projects in addition to their day job. This is true, but not the whole story. If the goal is to maximize your opportunity costs, then sticking to your core job and spending the rest of your time side-projecting could leave a lot on the table in terms of the value you could be getting from your day job.
It’s not only important to set a high baseline for the value you get out of your job today, but also to invest in growing within your day job so that the value you are getting from the day job compounds over time.
If you’re finding opportunities for growth within your day job, not only will this result in an increase in financial resources (AKA getting a raise), but it will grow the value you get from fulfillment, skill development, and community/network.
Let’s say Person A, who hates their job, doesn’t invest in growing within their day job. We can be generous and say that the value they get out of their job will still increase 20% annually.
But Person B, who loves their job and is seeking opportunities for growth within that job, will have a 40% annual increase in the value they get from their job. How do things look a year later?
Fast-forward one year, and Person B has almost 2x as much opportunity cost for leaving their job as person A. If they were to leave their job to start a startup, they would be giving up a lot. They would say, “I loved my job and was growing, but this new venture was so important that I couldn’t not take the leap”, whereas Person A would only be able to say, “I had a good job, but it was time for something new.” This becomes important when trying to attract potential employees, investors, and customers. Having to give up more to start your company means you have more skin in the game, and a founder with more skin in the game is able to more easily convince potential employees, investors, and customers to take a leap of faith.
However, sometimes there are parts of our jobs outside of our control. We don’t always have opportunities for growth, and we may hit a ceiling of the value we can get out of a day job. If we hit these points of diminishing returns, it’s not worth it to try to exert even more energy to get blood from a stone. That’s where side projects come in.
Side projects as antidotes for growth ceilings
Let’s introduce Person C. They have the same job as Person A and Person B. They love their job just as much as Person B, but there just aren’t the same opportunities for growth. While Person B can seek growth areas and grow the value they get from their day job 40% annually, no matter what Person C does, that annual growth is capped at 10%. If Person C continues to invest their energy into growing within their day job rather than diversifying their energy into side projects, then they’re exerting the same energy as Person B, but getting less value from their day job over time. While they start out getting the same value, one year later, it looks like this:
But what if instead of investing more energy into a job where there are limited opportunities for growth, Person C started working on side projects? Side projects may provide very little value at first, but the value you get from them can grow quickly. Let’s say Person C started a local meetup for Product Managers and started working on an app on the side with an engineer they work with. While these side projects may not provide a financial return, they provide more value to fulfillment, skill development, and community/network.
Side projects can also have faster growth – they start smaller but have higher upside. Let’s say the value Person C gets from side projects grows 100% annually. While Person B has gotten more growth in value from their day job, after a year, they end up with similar overall value.
Both Person B and Person C are getting a lot of value from a combination of their day jobs and side projects. Going all-in on a new startup would require that they both give up a lot. But Person C has one big advantage: by giving up their day job to start a startup, Person B would have to give up everything. Person C, on the other hand, has the opportunity to give up their day job (which has a lot of value) but retain the value they get from the side projects. In some cases, some of the side projects may actually be the new startup.
Person B has high opportunity costs for starting a startup, which is great, but because they haven’t diversified the value they get from their work, then these high opportunity costs can become a barrier to starting something. High opportunity costs with no diversification become the entrepreneur’s version of golden handcuffs.
This is why even if you have a great job where you’re growing, it’s especially important to start diversifying with side projects. If you don’t then the growing opportunity costs will make it harder and harder to remain entrepreneurial.
Let’s introduce Person D. Person D has the same situation as Person B – they love their job and they are growing within it. The only difference is that Person D starts some side projects even though they’re already growing a lot within their day job. After a year, Person D not only has more value from their day job, they also have value from side projects.
Side Projects continue to grow at a faster rate than day-job growth. Even if we suppose that Person D is not able to devote as much energy to side projects as Person C, resulting in a 50% annual growth rate in their side projects compared to Person C’s 100% growth rate, here’s how things shake out for our four friends:
Person B and Person D have the same amount to lose by quitting their day jobs and focusing on their startup, but Person D has 35% of their value coming from side projects. Rather than the prospect of quitting a job to focus on a startup equating to giving up everything, they’d be giving up 65% of the value they get from their work. Therefore, it’s more likely that Person D will take the leap to starting their own venture, while Person B is more likely to succumb to the golden handcuffs.
If you want to start a company, don’t simply default to side projecting and think that’s enough. Make sure you like your day job and find opportunities to grow within it. If you’re hitting points of diminishing returns on day-job growth, then invest that energy into side projects. And even if you’re growing and getting a lot of value from your day job, it’s even more important that you diversify into side projects so you don’t fall victim to golden handcuffs.