The Drag Coefficient Scoring System. How to decide what size startup is right for you.


"You can titrate the amount of startupness you get in your job
by the size of the company you join."

 

 
 
I had an MBA contact talk to me today about his interest in working for a startup.  He's studied entrepreneurship in school and interned with a VC last summer.  I asked him what size startup he wanted to work for.  He said,  "I'm up for anything--the smaller the better."
 
Really, I thought, up for anything?  You can go a year without a salary?  You're okay with the stress of a startup that is always on the verge of death and will most likely, based purely on odds, find its way there?  
 
So I asked him a few quick questions-- Are you married?  How old are you? How much debt are you bringing with you from school?  For this guy, there was no way he was joining a small pre-funding startup.   He has a wife and 2 kids to support, a mortgage, and load of loans to pay for.  Why bother looking for a company pre-Series A when it's clear you need something less risky.
 
People that are interested in entrepreneurship and not already wealthy need to be realistic about their drag coefficients: the factors in their life that prevent them from accepting too much financial risk.  
 
 
 
Start-up Drag Coefficients
 
1 point: Mortgage

1 point: Undergraduate loans

1 point: Graduate school loans

1 point: For every 5 years after the age of 20

1 point: Ring, fiance or spouse

1 point: Each kid

_______________

Total:

The Drag Coefficient Scoring System

For each point total, I've defined what I think is most likely the earliest possible startup entry point.
 
 
1-3 Points: Startup Founder
The vast majority of start-up founders I know fit into this category--or at least did when they first started their company.  They generally don't have as much opportunity cost in terms of career yet.  They're generally young and can live very, very cheaply.  A lot Y Combinator companies are filled with young college drop-outs or recent grads that can survive on virtually no income.  Paul Graham nailed the micro-seed funding model by realizing that $15000 could keep 2 young founders going for a long time.
 
For example...
You recently graduated college or dropped-out.  You get to be a full founder with all the equity, upside, and pain that goes along with it.  Good luck.
 
4-6 Points: Early Employee at a Seed-Funded Startup
The tough reality for many aspiring entrepreneurs is that once you accumulate more than 3 drag coefficient points, it becomes very difficult to start a company and last through the ups and downs.  Most companies don't raise enough money for sustainable salaries or become profitable for at least 6-9 months and often longer.   
 
For example...
You just finished a master's program.  You're 29 years old with 2 sets of loans and fiance.  You can join a company with some initial funding and momentum.  You're a product-oriented person that can contribute directly from day one.  You'll start with healthcare and a salary.  Being a first employee and taking a small salary willalready be a significant amount of risk in your life.  You'll probably get at the very most 5% of a startup but probably closer to 1% depending on whether you're a first employee and what specific skill set you bring to the table.  

7+ Points: Later Employee at a Series A or Later Startup
Funding and/or revenue is stability.  A company doing well towards the end of its Series A funding most likely already has solid revenue coming in.  If you do your homework, you can get a good idea of how much money is in the bank, how likely the company is to get follow-on funding, etc.
 
For example...
You've been in startups for several years and founded a company when you were younger (it was a 'learning experience').  Now you're 32 with a family started.  You have the skills to be a founder, but you simply can't take the financial risk anymore.  You're not ready to work for BigCo because you love the startup environment.  You can expect a decent salary that is some discount below your market salary, but still decent money to live on.  You'll get a fraction of a point of equity, which may some day give you a nice bonus but will almost certainly never make you rich.
 
 
 
 
 
I first heard about drag coefficients from Steve Hafner, the founder of Kayak and Orbitz.  He was at dinner at Dartmouth telling us about the time he quit his job to start Orbitz.  He had realized that the older he got, the more unlikely he would be to take a huge risk.  I hear a lot of people talk about how they are getting this degree or taking that job in order to prepare to someday do a startup.  What they seem to underestimate is the powerful effect these drag coefficients have on their ability to endure risk.  If you're still young and interested in being a startup founder, the most precious commodity you have is time.  And it's perishable.
 
We started FlightCaster only weeks after my previous startup went under.  I was only a few months away from 30, and I knew the clock was ticking.  Having just failed at a startup, any reasonable person would take some time to earn money again.  But I knew that I had 3 drag coefficient points and would soon have 4.  All my friends were getting married and buying houses.  Waiting even 6 months might take me out of the founder bucket.  I quit the job I just gotten, and we started FlightCaster.  Best decision I ever made.
 
 
 
 
 
 
 
 
Find discussion of this post on Hacker News.
 
 
 
******************
I'm Jason Freedman.  I co-founded FlightCaster  

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15 responses
Good post, I like simple math. I agree that as I age and accumulate points I've become more risk-adverse. When I did my first startup I was fearless, not so much now.
A mortgage is at least 2X typical student loans. Kids cost half as much as a mortgage, max. You need to adjust the numbers.
Totally Ivan--your financial insights are right. But people aren't economically rationale--the emotional pulls of each item factor in as well. A kid may cost less than a mortgage, but the sense of responsibility creates a powerful risk aversion.
I have two points already. Gotta get going!
The scoring system needs to be adjusted. You can walk away from a mortgage but you can't walk away from a kid. Also age is overrated. People mature at different rate. Being an entrepreneur demands certain level of maturity. In my view, as long as you don't have spouse or kids, you can be a startup founder. Once you need to be responsible for another human being, it's a different story. Here is my scoring system:

1 point: Mortgage
0.5 point: Undergraduate loans
1 point: Graduate school loans
0.5 point: For every 5 years after the age of 20
1 point: Ring, fiance or spouse
2 point: Each kid

How about 5 points with $80K cash-equivalent in hand (with no debt)?
While I agree with your advice to the newly graduated MBA I worry you are completely mis-assessing older entrepreneurs who bring domain expertise and rich social networks from their work experience. Spouses can also be supportive and actually provide ongoing financial and emotional support. It would be a shame if this was used as an excuse for age discrimination, you should consider re-configuring it to more directly assess risk tolerance and strengths someone might bring as a co-founder or early employee.
Wensington has it right that the scale needs adjustment. I would add that money - debit and credit - goes both ways. -1 for every 100k in the bank, +1 for every 50k of debit. It doesn't matter whether it's school loans or car loans.
I think this is very true. I was at 4 points on your system when I left my job to start my company. I think the last point is negated by the fact that my fiancee is younger than I am, and willing to live with the extra risk I am taking on (Thank God).

All the modifications people are bringing up make sense, except that they all make the equation more complex. I like it simple, we can all make adjustments for why we think certain things have more impact or less impact in each certain circumstance. If you have a 4 rating and the right circumstances you can be a founder. There are plenty of people with 2 ratings that shouldn't be founders.

Hey Jason. I was also at that dinner, but my memory was not as good as yours! Thanks for articulating this in such detail. Whenever my friends go back and forth about whether to join a startup I will refer them to this post.

Henry

Love the blog, Jason. I was disappointed, however, that you didn't use me as an exhibit - wife, 2 kids, $130,000 in loans, plus a mortgage. The only thing I could do to add more drag would be to dress like you, in drag. (yeah! I've still got it!). Hope you're well
The drag coefficient works both ways IMO. Here is my take.

The higher the score, the more driven and thought out the venture is likely to be ie an older experienced entrepreneur is likely to minimize most risk points by putting sufficient thought to the business plan ie market opportunity, early customers, product roadmap etc.
And the smaller the score, the more casual the approach ie dropout just doing it and thinking through the issues and market as they present themselves.

I too can see Ring, fiance or spouse as a benefit rather than drag. And for me age has had the reverse effect - I'm getting less and less risk averse as I get older.
@Ali: it depends on whether a person has entrepreneurial experience. I know a couple of people who had a big drag, but being older didn't help them much, because the only experience they had was from working in corporations.
Agree with Dan and Sean..the drag weights cannot be uniform for all factors..I would say apply higher weights for mortgages, loans etc since these could be "real" showstoppers. The other factors, IMHO, are mostly psychological barriers and could work either way.
I'd also imagine that many of the senior (30+) first-time founders typically start from a position of strength..they may typically have a full-time position somewhere when they're bitten by the entrepreneurial bug..they quit these jobs when they find real potential in the startup..they could be wrong, no doubt, but the perceived risk is far lower