Love of creation is what enables entrepreneurs to withstand the fear that comes with entrepreneurship

Startups are a young person’s game: Leasing a soul to build better companies

BY OPHIR TANZ 
ON AUGUST 28, 2013

Institutional investment in tech entrepreneurs dates back half a century, and during that period the average age of funded entrepreneurs has plummeted. The first Silicon Valley entrepreneurs were in their middle age. Today a typical early stage venture capital investment, $1 million or more, is pooled from pension funds, charities, endowments and sovereign wealth funds and entrusted to a 20-something with zero work experience, no real understanding of how to manage people or capital, no ability to command a room, garner press, or even put together decent financials.Yet there is more investment in unproven entrepreneurs now than ever before. Why? What insurance does an early stage investor have to hedge obvious risk? And, furthermore, is the current value exchange leading entrepreneurs to build the best possible companies?

I advise several first-time entrepreneurs and know many more. They all share a feverish appetite for raising that initial round of capital in the belief that everything will be okay if only they can get financing, pay themselves, and hire the talent they need. The desire for security and validation is natural.

Once funding is secured, high fives and champagne abound, a well-deserved celebration for a meaningful milestone in startup’s lifecycle. Then, soon after, reality hits: “Shit. If I failed before, nobody would think twice about it. Now there are expectations from investors, friends and family.” The scale of failure is far greater and likely to garner more attention. The stakes are higher — and so is the corresponding pressure that accompanies them. You have to produce the Kool-Aid you’ve been selling or else.

While liquidation preferences and other VC-weighted stipulations typical of a term sheet are meaningful, the real insurance for investors in early stage startups is rooted in one of our most powerful emotions: fear. For a VC, an entrepreneur’s fear of failure and desire to be loved the greatest motivators.

First, the fear…

Investing in young people works because a young entrepreneur will hand his mind, body and soul over to his new company, sacrificing mental and physical health, social life, vacation and sleep, almost anything to avoid the shame and heartache of failure. Indeed, these sacrifices, in part, enable us to overcome a lack of experience.

This is the exchange. You give me X millions and I’ll give you a lease on me, all of me, for several years, or as long as it takes.

All of this is not meant to demonize venture capital. There are, obviously, hugely successful companies today that could never have been built without it. But VC is, by nature, exploitative. Entrepreneurs perceive that they have everything to gain or lose: Success equals win equals happiness; failure equals loss equals sadness. Whether true or not, VC exploits that perception.

Our sense of glory and the shame of defeat is especially poignant when we’re young. This is, in part, why many early stage investments skew toward younger professionals. Sure, there are logistical reasons for avoiding investment in older entrepreneurs, who are more likely to be married and have kids, have higher salary requirements and lower risk tolerance. But it’s really the psychological forces at play in a young entrepreneur chasing victory, combating fear with all-nighters, working weekends, and pinching pennies, that give investors more bang for their buck.

Fear, assuming it’s more motivating than crippling, is good for investors. The problem is for many entrepreneurs, raising money has become an end in and of itself. But raising VC is not a victory; money only gets them into the game. Blind to the value exchange that will take place once they accept venture capital, many entrepreneurs fail to pursue ideas worthy of that exchange. Still they must fulfill their end of the bargain with the same all-nighters and ramen dinners, but in pursuit of an unworthy product.

Now the love…

An infusion of venture capital infusion can instill fear of failure in an entrepreneur, but it can’t make him love his creation. Love is what enables entrepreneurs to withstand the fear that comes with accepting someone else’s money and the world’s expectations. It can even make packaged ramen taste good.

So whether you’re thinking about starting a company trying to raise capital for one, ask yourself: “Is this idea something I am passionate enough about to give myself over to?” If entrepreneurs think more about the real tradeoff, without focusing too much on getting a “fundable” product out the door, it will lead not only to a stronger resolve but also to greater happiness and, therefore, improved chances of success.

Because the things you care passionately about matter more than the things you might deem fundable.