I love the book Rich Dad Poor Dad. It was my fav growing up. Since then, I've founded several startups, was employee #3 at a $65m VC firm in SF, and realized that there is a similar phenomenon to what Robert Kiyosaki is talking about in Rich Dad Poor Dad currently occurring in Silicon Valley.
Let's tastefully call this phenomenon: Rich Founder Poor Founder.
The point of entrepreneurship is freedom. Yes it’s to build cool shit and innovate and all that, but at the end of the day the sort of person who becomes an entrepreneur is usually doing it because they want freedom to control their day and work on the things they care about.
A lot of people go out and start their first business and try to make it a venture backed startup. That’s the wrong move. That’s like going to the gym and trying to bench 250 lbs on day one. It’s not that you can’t build up to that, it’s just not the right move today. I think the right move is to start a business that can make you $100k+ per year in profit. It doesn’t matter if it can’t scale past that, it’s about building that foundation to give you the freedom to try new things. Fail at those new things and it doesn’t matter as you have that financial foundation. It could be something as simple as a consulting or a services business, or a digital product like a course, newsletter or subscription podcast. Anything that is high margin, simple and enabled by the internet.
VC’s may shit on lifestyle businesses but at the end of the day they collect a 2% yearly management fee regardless of their success and typically have a great lifestyle (once their fund size is above $100m AUM at least).
Ask yourself what’s an easier path to wealth and freedom?
Path 1: Venture backed startup
90% chance of $0.
Small personal income until scale, IPO or liquidity event.
Massive dilution. Most founders end up owning 5%-20%. $500m market cap = $25m-$100m for founder(s).
Path 2: Lifestyle business
50% - 75% chance of success.
Pay yourself whatever you want out of profits over time.
If you can bootstrap your way to $300k/yr in profit and invest half of that ($150k/yr) at 10%/yr for 20 years = $9.6m + $150k/yr salary to enjoy your life with your family and friends. After 20 years, you can choose to sell that business or automate it and let it ride but with $9.6m invested in a conservative portfolio paying out 5% annually = $480k/year in interest or $40k/mo for you to live off without ever touching the principal nor sacrificing quality of life.
The definition of rich is having passive income that’s greater than your burn. I’m pretty sure we can all comfortably live off $40k/mo without ever having to leave the house.
But wait this isn’t a fair analysis as venture backed startups typically reach scale or a liquidity event in 10 years and you did 20 years for the lifestyle business. Fair, I’m sure after 10 years most of us can comfortably live off $20k ish/mo without ever having to work or touch the principal investment.
Most entrepreneurs start with one goal in mind: freedom. If you value freedom, you should have one goal for your first company, and that’s to build a lifestyle business that can produce $100k+/yr of personal income. It can be boring and it doesn’t have to scale. It sets yourself up for the foreseeable future and then you can afford to take big swings. Forget startups. Forget venture capital. Build something that gets you in the game and makes you a living first.
I think VCs may underestimate the extent to which mainstream entrepreneurship is a key input to outliers and moonshots. So many successful billionaire founders had a “never worry about rent again” moment via an exit in a much more boring business before swinging for a home run.
Elon Musk — before sending rockets into space and revolutionizing the auto-industry, Elon Musk was broke building Zip2 (online city guides for newspapers) before he netted $22m on the sale. Source
Patrick & John Collison — built Auctimatic: auction management software for small Ebay sellers, and sold it for $5m before going on to found Stripe, valued at $36b. Source
Mark Cuban — Before building and selling Broadcast.com for $5.7b and buying the Dallas Mavericks, Mark Cuban built a services business called MicroSolutions and sold it for $6m. Source
Mike Bloomberg — now worth $60b, Mike Bloomberg had a nice “never think about rent again” exit at 39 when Salomon was acquired by Phibro in 1981; he received $10 million. Bloomberg said “The Salomon Brothers did me the two greatest favours in my life. They hired me and they fired me.” Source
Daniel Ek — Spotify isn’t Ek’s first success. Daniel Ek became a self-made millionaire at age 23, before even putting a single thought into Spotify. At 23, Daniel Ek “retired” after he sold his online marketing company Advertigo to Swedish digital marketing firm TradeDoubler in a deal worth $1.25 million.
Alex Tew — started the Million Dollar Homepage to raise money for his university education. He sold 1 million pixels on a 1000 x 1000 pixel grid on his website for $1 per pixel. He ended up making $1,037,100 USD before founding the billion dollar meditation app, Calm.
Austin Allred — co-authored the growth hacking textbook Secret Sauce, which became a best-seller and provided him the personal seed money to build Lambda School, valued over $150m.
And countless others: Ev Williams (Blogger), Pincus (freeloader, support .com, tribe), Travis Kalanick (Red Swoosh), Stewart Butterfield (Flickr), Jason Fried & DHH (37 Signals services business) etc.
All of these entrepreneurs built more of a lifestyle business or had a smaller liquidity event before they built a rocket (figuratively and literally for Elon). There is no greater security than knowing that no matter what risks you take, you have a business or enough cash in the bank to pay for your livelihood.
If you start by building a lifestyle business it will force you to build a product or offer a service that customers actually want. It forces you to create a monetization plan and it forces you to build a real business. By starting a lifestyle business it forces you to create something you’re passionate about and build an actual business that will actually help attract VC if that’s the path you choose to go down.
Renowned value investor and Warren Buffett mentor, Ben Graham, once said: “In the short-run, the stock market is a voting machine. But in the long-run, it is a weighing machine.”
AKA in the short term the market may value hype and narrative, but in the long term it always values real traction, revenue, earnings and margins.
We’re seeing this play out in the venture market today. In the last few years you may have heard startups raising at eyebrow lifting valuations and hiring large masses of employees. But behind the curtain their P&L is fucked! They have little to fuck all for revenue and huge expenses.
Founders often get attached to valuations and forget that when they sell the business, the weighing machine is the only thing that matters. The buyer has to have a way to pay themselves back, either via earnings, a future sale or strategic synergies.
Your venture valuation is irrelevant. Venture valuations aren’t backed by fundamentals and their funds have been compared to a ponzi scheme. Build a lifestyle business where results, traction, revenue, margins and earnings are the things that matter because at the end of the day, the numbers have to work with the weighing machine.
Pro tip: If you’re bootstrapping, you can still take advantage of venture capital by using all the VC subsidized software available on the market.
The internet is the greatest leveler of access to entrepreneurship society has ever seen. There is far too much focus on raising venture capital and creating 100–1000x outcomes and not nearly enough on leveraging the internet to empower entrepreneurs to build profitable and sustainable software-enabled lifestyle businesses.
TL;DR 'Rich Founder' is someone who creates a sustainable 'lifestyle business' with a high probability of success. 'Poor Founder' is someone who thinks they need to raise venture capital, a fancy office, big staff and a bunch of resources to succeed. Rich Founder has a probability of success and enjoys his/her life. Poor Founder is miserable and might as well go to a Casino and put it all down on Red 5.