Startups are high risk: As an employee, plan accordingly

If you’ve done a quick scroll down the list of TechCrunch’s most recent stories over the past few weeks, you’ve seen a wall of articles about layoffs. Even just our roundups (one, two, three, four) bring some sobering reading to the mix. Alex and Natasha remind us that tech layoffs don’t happen to companies; they happen to people — and as someone who just got off the phone with a close friend who had just received a layoff notice, I’m feeling that more acutely today.

And there’s a flip side to all of this. Tech startups are, by their nature, high risk. I’ve had to downsize companies myself — it’s excruciating — and I always advise that if you want to work at a startup, make sure you have 3 months worth of wages saved up, because you can lose your job at any time.

Over the past 5 years, we’ve seen an unprecedented amount of VC cash flow into ever-growing startups where the business fundamentals weren’t working yet. We’ve seen companies rise at incredible valuations and completely wild ARR multiples. In our exhilaration, as reporters following the industry, we celebrate monster rounds and we cheer on the startups as they bungee-cord on some rocket boosters, light the fuse, and hope for the best.

There’s a not-often-talked-about truth here: What goes up, must come down. A lot of tech workers are so easily lured in by the promise of extremely valuable stock options, high wages and the frothy hunt for top talent that’s been going on for years now. Smart engineers get poached out of established companies to take a walk on the wild side, and too many have not paused to think exactly why the salary graph has been pointing sharply up and to the right.

Alex asks a great question:

At early-stage companies, you may not get a straight answer for exactly how much money there is in the bank, or what the company’s burn rate is. At later-stage companies, you’ll probably never get a straight answer. But it isn’t unreasonable to ask about what the runway is — that’s the amount of time (typically weeks or months) that the company can keep going without getting in trouble in the current financial climate and the current financial parameters. You may not get an answer, but it can’t hurt to ask what happens if something changes in the business dynamics, if there’s a recession, if the company loses its biggest customer and so on.

When I’ve run my own companies, I’ve been asked questions like this. They are hard because they shine a light on an aspect of startups that a lot of people don’t truly want to consider: that a lot of startups fail. What people get wrong, though, is that that is a bad thing. Startups are meant to stop being startups — either because they didn’t find a repeatable business model that was sustainable or because they turned into “real” companies, where growth can be sustained from cash flow and business operations.

As a startup employee, you are taking less of a risk than if you are a founder, but you’re definitely taking a greater risk than if you take a job in a more traditional, more established company. Don’t let that dissuade you; startups can be fun, lucrative and challenging. But it’s also possible that you end up working for a billionaire who wants to spend $44 billion to buy a bird sanctuary while cutting 10% of the workforce at his other project.

Before you get fantasies about how great it would be to work at a startup, make sure to think about what the downside could be, too. “High risk, high reward,” they say, but all too often, as humans, we are focusing only on the latter, not the former. Especially against a backdrop of a rapidly shifting economy and the VC firms thinking just that tiny bit harder about plowing wheelbarrows of cash into the next big hope and dream, do the math and ensure that you know what you’re getting yourself into.