Overlooked Fact:
Across every single time horizon, you technically have better odds of founding your own company than outperforming an index on 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 “buyside”.
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 during a bull market), 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 in your DCF or LBO model will likely 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/HF job.
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 sellside) 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 stock pitch. You're only crazy until it works. Thanks for reading.
Hmmm, I actually read the data a little differently. Seems like 65% ish of these funds lasted 10 years, which is double the new biz success rate.
If you're Chase Coleman and your LPs wanted to pay you $10 billion dollars to underperform NASDAQ because you went to Deerfield Academy with Julian Robertson's kid, would you say no?
Then you wake up
You know this deep down already, but once you get a bit older and your buyside network expands, you'll still be surprised by the amount of people getting by on pedigree plus luck
Ain't that just the aptest and most depressing summary of how the world of finance works?
" you technically have better odds of founding your own company than outperforming an index on a risk-adjusted basis" is apples to oranges. You're measuring the failure rate of startups agains mild underperformance in finance-- if you fail a startup, its bankruptcy. If you don't outperform an index in cushy finance job, it's expected and you still collect your thick management fee and maybe take away $500k instead of your normal 7 figures. And even if your startup doesn't go bankrupt, you're likely squeaking by on a 50k salary.
Getting paid $500k to serially not add any tangible value seems more like an inefficiency that would eventually be corrected in your career, either by your departure or the limited partners'
In 20 years, the compensation will almost certainly decline as well as the number of seats available. It may be cushy now but I don't see how you can wake up every morning and work all day on something that quite literally is a waste of your time (other than collecting a paycheck)
Obviously a startup has a different risk profile than a W2 job but it is interesting to see you have better odds building out a new business than actually making a difference in a buyside seat
But where do failed startup people actually go next. Certainly not personaly bankruptcy. If anything they come out uniquely qualified for some interesting roles as a result of what they learned trying to start a company.
Since when are VC-backed founders going bankrupt when their startup fails?
Not personal bankruptcy obviously if it’s an LLC (though some other business types have pass through losses or liability which could drive the founder to bankruptcy) but business bankruptcy. And in terms of opportunity cost of spending a few years drawing no salary for a fledgling startup, not good compared to advancing through finance role w healthy comp even during downturns.
Will comment given I'm an entrepreneur and work in finance.
The argument from prospect 1 above that a top seat at a HF is a greater call than starting your own business is silly (but makes sense coming from a student) - most people on this forum will never have a shot at those seats, and should set realistic expectations for their career.
Generally agree with all yours points, will add that:
amazing post
how often do you see failed entrepreneurs go back to finance/banking and is it doable/advised for those that fail?
It's usually doable but tougher. You might not easily get back to exactly where you were when you left, but getting back into finance and moving back into normal sequence should be relatively doable. Again though, nobody is saying you need to quit your job when you have a startup - you can do both and quit when/if your startup takes off and is de-risked enough for you to do so.
Usually the network you develop as an entrepreneur opens up and unique opportunities may arise that you wouldn't have gotten if you stayed in finance. I can think of a few personal anecdotes of people I know who got "cool roles" this way.
I want to emphasize the above regarding Bank OBA / FINRA disclosures. The regulators and your bank's compliance team have seen OBAs before and won't think less of you for having one. Their goal is to ensure you're absolutely compliant with the law and your bank's employee handbook. For example, you'll need to attest to the fact that your business' bank accounts do not invest in public securities. You must also recuse yourself from any investment decisions if investment accounts do exist. Painless. Failure to disclose, however, is grounds for FINRA sanctions / dismissal.
Also, note that at least during the MVP / development stage, you're the "MD." It doesn't matter if your associate is breathing down your neck in NYC. The developers and contractors you hire work on your schedule. If your team at work is on EST, then you can hire talent across the world on IST and meet with them over the weekends or on Friday nights or at 6:30am on weekdays. Sounds painful, but most of what you're doing is providing managerial direction and seeing your project come to life can be quite energizing. Jira/Slack/Github and the asynchronous work culture among developers makes it possible to manage from afar. In a way, you'll discover you're "multiplying" yourself. And you can always go back to sleep for an hour or two if you've had a late night at work and have received signoff.
As noted by OP, if you focus on working smarter, you can remain productive in your buyside/sellside role until scaling to a level when you can afford to focus entirely on your entrepreneurial work.
As noted by whatsapitchbook, you'll also enhance your understanding of oddball concepts like negotiations, people management, investor relations, stock purchase agreements, incorporation, employment law, sector specific knowledge, talent acquisition, KPI tracking, tech development processes, book and tax accounting rules, pitch narration, client relatability, etc.
I would suggest that any junior banker who is passionate about an entrepreneurial idea and does not plan to actually code the core product do the following:
1. Avoid viewing this tradeoff as mutually exclusive in the near-to-medium term. Hot take: If you're interviewing for buyside roles, take the interviews, because who knows maybe (i) your interviewer will see entrepreneurial experience as a value add (read the room, ofc) or (ii) your startup could fail, remain in stealth, or achieve positive CFs without requiring more than 20 hours of your attention / week, meaning you'll have plenty of time to perform well on the buyside. If you're asked about the startup, be concise but truthful in your response.
2. Don't be afraid to disclose an OBA. Be absolutely honest in your disclosures. You protect yourself and your bank by doing so.
3. Take the OBA as a chip on your shoulder (your group's manager will likely be aware of it) and remain focused on top bucket performance. You can do this if you step into the mindset that what you're learning during your scarce time in banking is going to help you down the line as an entrepreneur (or investor or investor-entrepreneur).
4. Consider the fact that the longer you avoid paying yourself, the less funds you have to raise. You can tell investors that all their funds are going to capitalizable software development costs, not your salary. They tend to like this, and you avoid diluting yourself unnecessarily.
5. Learn how to use Figma and Jira. Figma will save you money because you won't have to hire a designer. The visual attention to detail you pay to pitch decks / discussion materials will actually apply well to designing software. Jira will save you time because you can easily organize your team's workstreams.
6. Hire in a time zone opposite your typical working hours. (Even though you're on call constantly in banking and "typical working hours" may feel like a foreign concept). You'd be surprised at the talent and passion you can find for a price affordable to startups without institutional backers. I'd budget $8-$10k per strong, English-fluent developer in India, especially if you're hiring contractors via local talent placement agencies and not US-based agencies.
7. Avoid discussing your OBAs with coworkers. There's no upside.
8. Find a co-founder in tech who has more scheduling flexibility when fire drills do arise. Be fair to your cofounder, honest about what you can commit, and decide on a commensurate equity split.
My words pertain to my own experience building a software product that doesn't require much outward facing responsibility. My advice may not apply to your vision. Either way, I hope a few of these points help to alleviate some of the stress associated with OBAs and professional success.
Great post.
Great points!
All for entrepreneurship, but sick and tired of "gurus" on Linkedin preaching as if it's the route for every single person. Business is risky in that you can lose a lot more than you have (debt is personally guaranteed, uncovered liabilities, opportunity cost, etc.). Buck stops with the owner on all the issues. You want to "work for yourself"? Please. As an entrepreneur, ALL your customers are your BOSSES. Hours and stress are the same as a standard job, best case scenario. There is no free lunch.
My job right now earns me $500K, all cash. No investment (except maybe education) was required. There's still potential for me to earn more. Hybrid setting and 65 hours a week. Don't have to worry about other business functions such as HR, accounting and IT. If I get let go? Well, I have nice personal balance sheet. And people get laid off/fired all the time, you just deal with it. Not the end of the world. There's usually severance and unemployment benefits to soften the blow. It's also a "two way" street in that I can change companies, jobs or industry on a whim as an "at will" employee. Bored of your business? Not so easy to exit. Starting a business that will make that kind of money in a stable fashion would take at least a decade and tremendous risk and luck. Oh, and to acquire a business that will net me around the same as what I currently make? $3 million+ and it would likely be a "blue collar" business. Doubt my job will become obsolete, but in case it does, I've gained multiple other skills as a byproduct of my career where I can pivot (or retrain if neccessary). If I'm this successful, anyone can be, because let me tell you, there's nothing special about me. Didn't even go to an ivy and I don't have my MBA.
Many successful entrepreneurs are by luck. Someone who doesn't have the potential to earn hundreds of thousands of dollars may start a business, because why not? Less to lose and more upside. That's why so many immigrants are business owners. Of those, some make it big, but most are average or below. Large firms have economies of scale, which means they can weather economic downturns more efficiently than a small business can.
Ironically, if everyone was serious about entrepreneurship, our economy would malfunction, because guess what... entrepreneurs need employees to work for them. But this will never happen because it's human nature to be risk-averse, seek certainty and take the path of least resistance, etc.
Then again, every Apple, Amazon, Tesla, JP Morgan, you name it, are the result of entrepreneurship and didn't start out massive.
What % of VPs making $500k today can reliably say they'll be making that level on a run-rate basis?. Most will leave before up for MD. Many of those will say it was a lifestyle decision but in reality I think they would've gladly suffered the hours & travel to make upper six or lower seven figures. Truth is there's very few of those seats, and landing one has its share of luck involved as well.
So just wondering how does a risk-averse VP go about setting that future run-rate for the purpose of comparing to a business that will net you an amount you consider worthwhile.
Oh well, like I said, I'll find something else in finance that's not IB. IB/PE/HF are not the be all, end all. My wife earns $275k working in internal finance for a F500. She's been there for a decade and there's never been layoffs in her department. Her company feels like working for the government. She works 30-45 hours, 95% remote (must travel to HQ once a quarter).
If that's the other side of the coin, I'll take it all day long. Would say my labor's fair market value will never go below $250K at this point in my career. If I can't live a fulfilling life with that kind of income, then shame on me. But conservatively, my wife and I can retire in the next 10 years or less. We would be in our early to mid 40s. Why should we bother with entrepreneurship at this point? Risk is too high given what we've achieved already. Just POTENTIAL to double our net worth, risk-reward ratio doesn't pencil out. House? Paid off. Kids' 529s? Fully funded. Liquidity? Enough for the next 36 months. Liabilities? $15K for a car loan at 0%. You get the picture.
Lovely how you imply that every business is richly profitable with no ups or downs, ever. Just rainbows and sunshine, right?
Admittedly its's a bit different for you since you have a wife and kids, but I can speak to my reasoning of why entrepreneurship is so attractive (as a college student)
I don't just want to make 2, 3, 5, or 600k a year. I want to have a 20 million net worth, which in IB would take like 20-30 years to amass, while working 60-80 hours. Or, you create a successful startup and make 20 mil or more within a far shorter time period. The true way to amass wealth isn't just to keep working for someone - it's to create your own business.
I don't want to live life with regrets and constantly go with the safe route and just keep working a corporate job. I know the chances of failure are high, but why not try for a few years? If no one took risks society wouldn't be as advanced as it is today, and if no one took risks we wouldn't have Amazon, Tesla, and all these companies you see today.
If you get VC funding and have a decent track record (but the startup fails) you can easily go into VC. Or you can always go back into IB, get an MBA, etc. I also vastly, vastly prefer working for myself than working for someone.
This makes a lot of sense to me. Sounds like 'level up' logic i.e. the sort of life you get making mid six figures isn't enough of a level up to justify sacrificing the chance to make $20m and really live at the next level. No opinion personally on where those breakpoints are. Just like the concept of needing order-of-magnitude jumps to be worth your time and energy.
You're gonna be working 80+ hours without significant pay if you're a serious entrepreneur at least for a couple of years....
+1 well said
Or just invest in passive mutual funds, coast at at your job and have fun in you’re free time lol. Starting a new business sucks and is a lot of hard work. You seem to gloss over all the hard work needed.
It's fun until you get into YC, have demo day coming up and don't have anything to demo as you get stuck in endless pivot hell...ultimately getting acquihired (aka no returns on equity) after years of taking ramen wages...
I don’t give a fuck about outperforming the market. I get paid to hedge risk and deliver uncorrelated returns. That is what I tell myself anyway.
Nothing that a 60/40 equity/bond or real estate portfolio can't mimic…
Even if you return nominally less than the market to "manage risk", you're still underperforming on a risk-adjusted basis (i.e., sharpe less than 1 = negative alpha)
I have realized a long time ago that entrepreneurs are born, not made. If you have to convince yourself to strike out on your own, you are not cut out for it and will be better served and happier working for someone else in a stable environment.
interesting since I swear there's always some harvard business review article study about how entrepreneurs are made or whatever
It's apples to oranges to say that "you technically have greater odds of creating your own company than outperforming an index on a risk-adjusted basis." You compare the startup failure rate to minor financial underperformance; if a startup fails, it goes bankrupt. In a comfortable finance position, underperformance of an index is expected; you still receive your sizable management fee and may take home $500k instead of your usual seven figures. And even if your startup doesn't fail, you're probably barely getting by on a salary of $50,000.
Woah what this guy copied my earlier comment exactly but just rephrased the words that’s legit creepy, why? To farm monkey bananas? Guys scroll up to my earlier comment and compare
Cry
Easy +SB. Anyone who gave you MS is a finance hardo. Your points are valid.
Why you should do it is it’s actually meaningful and you don’t need that much money to survive.
genuine question: why do people care about selling their souls for comp so much?
back in the day it was surely a need to provide/survive, now you can live with a relatively low budget and work on something you actually enjoy, which should still bring you wealth if you shift your ambition to that cause.
for those who come from family money which can seed them and tide them over pre revenue… probably. Reminder that 80% of startup funding comes from family/friends.
for those who came from blue collar families and need to earn to live… absolutely not
Like elsewhere in life money unlocks more money
I also have a great article of why you should launch an onlyfans instead of going into banking at all. Would you like to read it?
yes send link pls
Jokes on you LOL. Glad you can take the joke tho.
https://www.unilad.com/life/onlyfans-model-who-quit-investment-banking-…
Work in PE. Do 100’s of management calls, take really good notes on what’s working and what’s not. Then start a company.
And that's how you get rid of competition in Finance! :-D
Less talent supply = more Money
Convince them to go elsewhere...
Think you’re underestimating the population of India who will gladly replace our jobs if we decide to leave…
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