Don't start your own company because you want to be your own boss. There are
three ways in which a company can make more profit than an investment in a S&P 500
index fund:
1. You know how to do something that nobody else can do (the typical MIT tech spinoff
approach)
2. You have a lower cost of capital than anyone else (the "my dad was really rich"
approach taken by Bill Gates and others)
3. You have a better understanding of one kind of customer than anyone else.
The problem with Way #1, knowing how to do something that nobody else knows how
to do, is that there is no proven market for whatever it is you are doing.
Maybe nobody has bothered to learn how to do this because it isn't necessary to
do. A lot of things that look great in the lab and in a scientist's or engineer's
head don't look good to a customer for reasons that may be impossible to predict.
Having rich parents is great. In fact, it is the best and surest way to get
rich in these United States. Unfortunately, having a low cost of capital is
no guarantee of success because, as society has become ridiculously rich, capital
has become very cheap. Your competitors can probably get a home equity loan
at 6 percent on their McMansions. How much cheaper can your cost of capital
possibly be?
The most reliable source of supranormal profits is superior knowledge of one kind
of customer (Way #3). Ideally this will be the kind of customer that larger
companies are overlooking. The founders of SAP, for example, were employees
of IBM Germany for many years and got exposed to the accounting challenges of large
manufacturers. When they quit IBM, they were among the best situated programmers
in the world to build an accounting system for manufacturing companies. It
is not because these guys were the world's best programmers that SAP is today bringing
in $10 billion per year in revenue and has a market capitalization of $60 billion.
It is because these guys were the best programmers who understood the problems of
their customers.
If you don't understand customers, consider taking a customer-facing job (think
"sales engineer" or "product manager" rather than "cubicle-dwelling system internals
programmer") at a company that already has the kind of customers you think constitute
an attractive market. Once you've figured out what the customers needs, quit
and start your own company.
Don't Get Too Good at Raising Money
Suppose that you can raise $50 million in capital in four stages. Should you?
Maybe not. The skills that are required to impress venture capitalists are
to a large extent different from the skills that are required to acquire and keep
customers. If you distort your organization to be optimized for looking for
that next stock sale, you risk being left with an organization that doesn't know
how to sell product. Very early in the life of Hewlett-Packard, the founders
made the decision not to do government contracts. They decided that if they
built an organization that was good at getting government contracts, similar to
Raytheon, for example, it probably would be less good at getting commercial business.
HP was happy to sell packages of its standard products to the federal government,
but it never developed custom military systems, for example.
Another issue is that, if you raise a lot of money, the investors will eventually
come looking for a return on their investment. One of my flying buddies was
tapped to be CEO of a company that had raised $40 million to build an obscure scientific
instrument. After one year he told the investors that the market was limited
to a handful of military agencies and that they would likely never get a return
on their investment. The venture capitalists fired him in hopes of getting
a better answer from another manager. They never did and the company, while
it did not go bankrupt, never provided a return to the investors.