PE > Startup > ?

h3dgehog's picture
h3dgehog - Certified Professional
Rank: Gorilla | banana points 547

Some of those on this forum may recall my "how I got to the buyside" post, but for those who haven't, I am an associate at a private equity firm focused on a very niche industry.

While life at my firm has been great, I have been dabbling in the startup world by cofounding an early stage startup while maintaining my day-job. In recent months, the startup has gotten tremendous traction and my partner and I will be raising seed capital for a 12 month runway (<$1MM). Successfully raising the capital will then imply that my partner and I will have to quit our day jobs. In short, I'll wave goodbye to them chunky paychecks and a clear path up the totem pole.

My role at this startup will be as a business development guy who is focused on actually building the marketing, sales and generally the operations of the business while my partner will be focus on the technical aspects of R&D and product development. This makes sense our 2-man team since he is an engineer and I am more of an execution guy.

Given that I have naturally built a buy-side mentality, I am always assessing the downside risk and finding ways to mitigate it. In my situation of jumping to an early startup for 12 months, I would like to know if there is a set of conventional exits after a startup fails. I am approaching this pragmatically and would like to see if a product manager at another tech company or joining a VC firm is possible after 1) raising seed capital for a startup and 2) failing to move beyond the 12 month of runway.

If someone has already gone through this, please shed light on this matter.

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Comments (15)

Best Response
Mar 8, 2017

To be perfectly blunt, I think you should have thought about this topic before raising a round for your start up. On the other hand, and talking with my VC/start up friends, you just have to learn to drop the LBO PE risk/return mentality because start up is a totally different ball game.

Your life now depends on this start up to be successful, so think of it as your only chance for survival and you have no back up plan available to you - I think this is the mentality and reality of many of the greats...

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Mar 8, 2017

I do agree that having the same PE risk/return mentality would lead people to shy away from startups to begin with. All I am asking if what the conventional next steps would be for someone with private equity + startup operating experience. Given that most startups fail, I would imagine there is a few very "common" next steps in these founders' career.

Mar 8, 2017

There is no defined exit opportunity after working at a startup. For your and your startup's benefit, please lose the mentality of an exit opportunity if you decide to pursue the startup.

Now if your startup fails, your exits will highly depend on the transferable skills and relationships you built. Broadly speaking, based on the role you described, I imagine anyone at a very early-stage VC fund would be drawn to your resume. Sales / bus dev positions at other startups are viable options as well. Your options become much more diverse, lucrative and interesting if your startup is successful (f500, startups, product management, investor, retiree)

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Mar 8, 2017

So it sounds like staying within the bus dev / buyside is still an option.

For avoidance of doubt, I am not trying to use this startup as a stepping stone as I am highly convinced of its success (hence why I am okay taking the pay cut and making the move). I just want to be completely transparent and honest with myself so I know what it is that I'm actually getting into.

I'd rather go into this 150% knowing what the varied outcomes may be than to go into without much thought and be surprised later of the outcome.

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Mar 8, 2017
h3dgehog:

So it sounds like staying within the bus dev / buyside is still an option.

For avoidance of doubt, I am not trying to use this startup as a stepping stone as I am highly convinced of its success (hence why I am okay taking the pay cut and making the move). I just want to be completely transparent and honest with myself so I know what it is that I'm actually getting into.

I'd rather go into this 150% knowing what the varied outcomes may be than to go into without much thought and be surprised later of the outcome.


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"I'd rather go into this 150% knowing what the varied outcomes may be than to go into without much thought and be surprised later of the outcome." - PE thinking, 150%. ;)

I think it takes a lot of balls and character to exit PE and pursue a start up. I'm not sure I'd be able to walk away from PE if presented with the opportunity. Congrats on the round and good luck with it!

    • 4
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Mar 8, 2017

Thanks and to be quite frank, there is some truth to what you said haha.

As my MD at my PE fund told me: "if you really understood risk, you would never go into an early startup. That said, a fool's gamble can make him a rich man."

Mar 9, 2017

I have a startup friend who took $2M out of his business last year (profit). That's after capital investments and some retained earnings. The startup is 4 years old.

Mar 8, 2017

I left banking 5 years ago to co-found a startup. At the time I left my former firm said I'd always have a spot to come back to, but who knows if that would be the case if the rubber ever met the road. That said, going back to a similar role is always an option, either at your former employer or another.

My view on starting a company was that I always wanted to build a tangible product from scratch, and I was reaching an age where it was becoming now or never. Once you have a family, starting a company becomes much less feasible. I believe that I would have always regretted never taking a shot, if I hadn't. I still believe that to be the case. Risk wasn't really a factor in my decision. It was about proving myself.

About 2.5 year in, things were looking dicey. We'd raised some money and got a product to market with some solid initial proof points. We were working towards our first big contract, but it was dragging out. The next round of angel investors were interested, but they wouldn't fund until the deal closed so we were rapidly running out of cash and had already invested all of our personal savings into the company. Fortunately, the deal closed just in time, we closed the round, and we've been able to grow from there.

During that valley of death period, I was very much afraid of what would come next if it didn't work out. Ultimately, the easiest path forward from my perspective at that time would be to offer the potential client our IP for some small amount of cash up-front and jobs to continue building the product in-house for them. This is only possible for enterprise-focused businesses for obvious reasons. Our early investors would have gotten their money back (which was much less than $1M), and the team could say we exited our first company. The total cost to do that would have actually been less than the value of the entire first contract so we might have negotiated some upside as well. No idea if they would have actually bit on the idea, but there was a compelling case. I'm glad I didn't have to find out.

The other thought I had would be to seek out similar companies to our customer who wanted to adopt new innovations (I'm in healthcare technology so everyone is seeking that) and become an innovation/strategy expert.

Mar 8, 2017

I know that a question wasn't what you were looking for, but do you mind giving more color on how you started the company and how you maintain balance between your associate job and the startup? I would very much like to be able to do both at once, though wonder how to accomplish it.

Mar 9, 2017

My partner and I did grad level "cutting edge" quant research in undergrad together. After a series of life events, I decided that I wanted to be more finance/business focus. My partner continued to refine his technical skills. We reconnected after we went our separate ways and decided to combine our skill sets to build out a tech company.

My partner would build out the basics of the offering, I'd go out and engage clients/customers. We'd get beta testers, my partner would implement our offering with clients (companies) and receive feedback regarding product refinement. I would start building out our business plan/strategy, meet with investors, attorneys, etc to position us to where we are now - getting ready to launch a formal fund raise, which may or may not be successful.

I balanced my PE day job with the startup by working hours that most IB guys endure and then some. I also racked up some vacation days over my tenure with my firm, which I used opportunistically to meet with customers, investors, etc. I also later made my intentions clear with the head of our group (my additional commitments outside of work were of no concern to him because I have proven myself as the most productive people in the firm). It also helps that this same guy is also a prospective investor in our early capital raise.

Balancing the two is difficult but completely do-able.

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Mar 8, 2017

Disagree with @Whiskey5 - your entire future isn't at risk here. I'm always surprised by how risk averse ppl like you (us?) who have all the downside protection in the world are.

While there is no set of "conventional" exit opps, there will be plenty of options for someone that has already proven themselves as smart/capable (i.e. by doing all the stuff up to now that got you into PE) and entrepreneurial as yourself. I think it will be good (and immensely educational) for you to get out of the finance 'stair-climbing' mentality and go take a risk

Your exit opps will depend on how well the startup does, but lets say it flows in a year or two without having gotten too much traction. Options will include:

  • A whole variety of other startup opportunities, depending on skills/ connections you made. This could include positions at 'not-really-startups' anymore large cos (e.g. Uber) that are relatively stable/predictable
  • Sounds like you're not, but if you were on the engineering/ coding side every big tech company (GOOG, FB, AMZN, MSFT) will want to interview you and take the startup failure as a badge of honor
  • If you happen to be on the product development side, all the above big tech cos will want to interview you for product management jobs and you can play up that #badgeofhonor
  • Sounds like you're on the biz dev side - there are fewer positions here, but all the big tech cos will still want to interview you. You will also get a lot more traction with non-tech firms based on your prior PE (and banking i assume?) background. Someone that's succeeded climbing that ladder, has the financial skillset, but had the entrepreneurial drive to start a business stands out
  • If you want to go back to hard-core finance it might be difficult to step back onto the very regimented PE treadmill, but you'd get opportunities elsewhere (e.g. hedge funds). You could also do:
  • Business school: Whether you fail or succeed at the startup, as long as you have good recs it will actually make you stand out relative to the increasing numbers of 2+2 candidates. If you take this path then every option is re-opened, and you can end up essentially anywhere in finance you want
  • There is the possibility of failing in many ways that turn out completely okay -> wonderful for the team (though this typically requires you last more than the 6 month - a year). They include acquihires, mergers with stronger teams, etc... Honestly, some of the best Silicon valley careers have seen are a series of startup failures that turned out just fine (ended up making more money than PE, had a lot of time off, and got to do it over again)

Honestly, your downside is pretty limited. If you end up burning through your savings and it doesn't work that sucks, but its more of a temporary issue than a life-altering one .

If the startup turns out to be a failure the process of failing (or rather, trying to make it work) will be a lot more painful than the outcome

Mar 9, 2017

This was extremely helpful to read. Thank you.

Sep 29, 2018

Did you do it? I'm thinking of leaving PE for a startup so any insight!

Jan 10, 2019

Wow, it truly has been a while since I've visited this site!

To your question, yes I made the jump. My co-founder and I were able to raise capital, I moved to a better city and ran the startup for 12 months before running into market fit issues and had to shutter the business down.

Now I'm working at a more established tech company working in the strategy/operations capacity looking to build my network of smart people so I can tap their shoulder when I have a new great idea. Also, contemplating a move to VC as I have the finance, build your own startup, and now tech operations/strategy experience.

Overall, I would say my venture (pun intended) into the more ambiguous startup world has been a great move. My startup failure after raising capital is indeed seen as a badge of honor. In every interview I've gone into thereafter, I always got people curious about my AI startup.

Since then, I moved to a very prominent tech company growing to the likes of Google, Amazon, Microsoft, etc. There was a big slash in compensation since this was my first forray into tech outside of my own failed startup. That said, 4 months in, I'm in a completely different role in the same tech company as a promotion.

I can't complain. I don't make nearly as much as I use to as a PE professional, but my days are more balanced, every project I work on has an end unlike all the deals I worked on that fell through, and I'm generally happier.

For all those who are a few years into ibanking, PE, HF, etc, don't be scared to jump into the world of ambiguity and startups. What I learned is that if you've made it this far in life, you will go even further no matter the venture you decide to go with.

    • 1
Jan 10, 2019