Founding a tech startups is not a good way to maximize your own wellbeing

Why do people start a business? Two reasons:

  • Meaning
  • Money

Let’s focus only on money for now.

If you start a tech startup, you should expect to fail and make no money. Even if you think you’re super special, have an amazing idea and generally have all the signs of a successful business, including funding from a major firm in your seed round, you should still assume you’ll fail. The reality is that 99%+ of tech startups fail and even for the 1% that do succeed, most value is captured by a very small proportion of firms. The distribution of income among startup founders is a fairly extreme power one.

TLDR: If you start a tech startup, you’ll probably make no money and have a tiny chance of making lots of money.

One could take the money you could make in tech startup land and do an expected value calculation at this point. That’s what some people do who then say "You’ll probably make no money but the extreme payoffs in the marginal cases still push the expected value high enough that it’s worth doing.". That’s mistaken because money does not convert to utility at a constant rate.

If you go from having $0 income to having $600, there’s a huge utility gain. You get to not starve to death. If you go from $80’000 to $100’000’000, there’s not that much of a gain in utility. You can buy nicer things. That’s about it. You can’t buy a longer life, a happy family, meaningful friends, IQ points or anything else that would make a difference once your basic needs are met.

TLDR: Money converts to utility at a steeply declining rate.

If you’re a highly paid professional, you already make a lot of money. Probably enough to save 50% of your income and still live a fairly luxurious life. Winning the startup lottery and getting rich will make your life a bit better but not much. Loosing the lottery will mean years of stress, burn-out, potentially low income and other bad stuff. The utility calculus is less one of a small chance of extreme payoffs and more one of a large chance of halving your life quality and a very small chance of increasing it by 10 – 20%.

TLDR: If you want to start a startup because you want to be rich, you’re probably making a mistake.

Cases where this doesn’t apply:

  • You want to start a startup for other, non monetary reasons. (A good litmus test for this is whether you would do it even if you had to forgo any personal profit from it.)
  • You money/utils conversion does not suffer from diminishing marginal returns. (e.g: you donate money to AMF and want to maximize lives saved. A thousand times more money = a thousand times more lives saved.)
  • Your entry/exit costs are low. (Note that this is unlikely. Starting a firm is unforgiving. It will likely require late nights and weekends for a prolonged period of time. It takes at least half a year to know if you’re on track for success of some kind or for it to be clear that your a failure. Even if you don’t loose career capital/a cush job, you will loose time and your relationships will suffer.)

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