Why You Should Launch a Startup Instead of Going to the Buyside
Across every single time horizon, you technically have better odds of founding your own company than outperforming anon a risk-adjusted basis. Let's take a deeper look:
- Over 10 years, 65% of all new businesses will fail in aggregate, meaning 35% of new businesses will succeed
- Failure varies by industry from 55% (lowest: agriculture) to 75% (highest: mining/oil & gas)
- Failure rate for 1 year is 18% and 5 years is 50%
- If you're interested, the data also show geography success rate, reasons for failure, and motivations of the founding partners
- Source: Lending Tree
- Over 10 years, 93% of actively managed funds underperform their benchmarks, meaning 7% of funds outperform (before fees)
- Long-term failure rate remains relatively constant across asset class (equity, credit), investing style (macro, L/S, public v private), and benchmarked index (S&P 500, Russell 2000, Nasdaq, micro)
- Failure rate for 1 year is 80% (in 2021) and 5 years is 81%; although in single a given year, 10% - 65% of funds can outperform their benchmark
- The data have also been restored for survivorship bias (funds that blew up), apples-to-apples comparison, and weightings
- Source: SPIVA (or literally any other active performance tracker will do):
Why Does This Matter?
Bear with me as I make this hot take. We currently sit in an environment where there is far more opportunity (~500% greater chance) to start your own successful business than having a career as a "value-adding" investor. Period. This means that many of the most talented and hardworking people starting their careers today would greatly benefit by more closely considering a career in entrepreneurship before blindly herding into the oversaturated industry we call the "".
Working Smarter, Not Harder
The amount of career grind required to keep an alpha-generating buyside seat is essentially the same as starting your own business (assuming you wish to be more than an asset gatherer delivering commoditized factor beta). As you climb the ranks, your responsibility rises as well as the need (stress) for you to perform. Except you have to perform in a overly competitive and saturated market where factor-adjusted alpha is as real as el dorado (given the success rate is essentially random). Variables such as risk mandates, artificial calendar / quarter investing timelines, and untimely LP demands make it borderline impossible to make a career out of consistently profiting off price inefficiencies at a fund. This is partially why the median employee tenure for most funds is less than 3 years. And if you happen to find yourself on the buyside longer (as an employed investor; not founder), it's likely either because of your relentless/obsessive work ethic or empirical "luck" of your portfolio being exposed to positive risk factors (leveraged small cap value), or a combination of both.
Not to go off on a tangent but even commonly thought "exceptions to the rule" apply here like Warren Buffet, who made his career by beating the market. Little do many know the personal toll it took on his life (he worked an excessive amount to the point where his wife left him and distanced relationship with his kids). Also, Buffet hasn't outperformed in over a decade and 90% of his returns can be explained by small cap + value factors -- so still likely a combination of both sacrifice-everything skill and five factor risk exposure.
All this to say: your countless hours spent tweaking the assumptions inor never add any true value. Your time as a financial expert is valuable. Using your learned skillset to generate a new business idea is empirically a much greater use of your time than generating a new investment idea.
Weighing Risk for Freedom
Though money is an influential factor, the #1 reason for starting a company is passion / personal freedom; the #1 reason holding people back is fear/anxiety of failure. What I've generally learned is that the more you're getting paid in your corporate job, the more likely lifestyle creep and risk aversion will dissuade you from jumping ship. Psychologically, you may believe you "will have more to lose" by leaving the six-figure PE/IB/.
But I find this way of thinking to be non-sense for 2 reasons: (1) people underestimate the amount of risk they are taking on Wall Street (especially as they get more senior) and (2) people heavily undervalue autonomy in their lives.
- Despite what "incoming summer analysts" may believe, the overwhelming majority of top seats on the buyside (or ) are not cushy. For the reasons mentioned above, you will not be adding true value at a fund unless you are a statistical anomaly. And on the sellside, senior tenure adjusted for survivorship bias isn't anything attractive either as meeting revenue quotas / winning mandates on commoditized financial advice is no easy effort.
- And even if you are successful in these seats, do you think you'll be happy? At the end of the day, you are still a successful, yet dependent W2 employee. At some point, you reach a threshold where you are quite literally getting paid to not experience your life. The checks get bigger to compensate you for traveling / grinding every week and not spending any time with your family. Nobody is clearing a lot of money to have free time. Most people are not willing to perform this tradeoff for their entire careers and will leave for a more reasonably paced job. And those who stay in their "coveted seats" usually have significant lifestyle creep and still feel they are being underpaid -- which makes sense since its hard to quantify the sacrifices needed to keep the seat + the fact that the tax structure of W2 employees will eliminate 50% of their actual wealth. In either way, the stability of receiving these cash flows throughout your career is lower than you'd imagine.
- To be a successful entrepreneur or investor you need passion. Eventually you'll adapt to the size of your paychecks. Therefore, the biggest assumption I will make in this entire post is that people who have passion for investing would also be passionate for creating a new business. Assuming this is true (along with hedonic adaptation of getting paid), you can isolate the tradeoff of entrepreneurship to be autonomy for added risk: so if you are passionate and want to add value in your work, would you take a volatile pay discount to be have significantly more autonomy? Science shows most entrepreneurs are generally happier than employees primarily for this reason, even if they work similar or more hours. So for many, regardless of hours worked, it would appear the risk of foregoing short-term cash flows from their W2 paycheck is more than offset by a greater feeling of purpose and potential for lifechanging upside potential, of which there's a 35% chance the money will follow.
Closing Remarks: Investing in Your Own Business is the Ultimate Active Investment
Given that the buyside has become the default option for many talented people in finance, it appears that we have reached a state where there is a lot of wasted potential that could shine doing their own thing. I am not advocating anyone to leave their job or become an entrepreneur but wanted to illicit a further discussion on the topic.
Of course the decision may not be as black and white between taking a 7% chance to outperform your benchmark as a W2 employee or a 35% chance to launch a new business, but if you learn anything as an active/contrarian investor, you know that successfully going against the crowd is what can define your career. The more people who dismiss entrepreneurship positively correlates to the amount of opportunities available for aspiring new businesses (Grossman-Stiglitz applied to entrepreneurship). I can't help but think the skillset and work ethic you get on the Street can provide you with excellent chances to make things work if you choose to run a small business, etc.
Life is short, we are all going to die. Looking forward, my active bet is that you will derive far more value launching your own enterprise than working your corporate job to clear that higher bonus. And the greatest part about all of this is that its never too early to start (doesn't mean quit your job) and any idea, however large or small, is fair game. Even small businesses have appealing tax advantages to place you in the top 1% of your area. So maybe start brainstorming some business ideas in your free time instead of prepping that blue-chip. You're only crazy until it works. Thanks for reading.