The Best Startup Advice: Start Rich

The most important thing is to choose your parents

From an interview with Sam Altman, Chairman of Y Combinator

As Sam Altman says, “The most important thing you can get to be a founder is to pick your parents well. That’s a really sad statement about the world.”

A lot of what makes a founder is set before they’re old enough to drop out of college. It starts with nutrition and security and, as much as possible, love. And then it’s just money. Were you sent to a good school? Were there books around the house, a computer you could take apart and break?

Then it gets down to brass tacks. Can you get grandfathered into an elite school, or pay for the extra-curriculars to get in? Can your parents loan you that first $30,000 to get started or, like Jeff Bezos, that first $250,000? Can you afford to fail, over and over again? It gets down to money.

If you’re looking at what makes an entrepreneur with a hard, data-driven eye what you’ll see is that three traits are correlated more than any other. Wealth, gender and race.

Perseverance, grit, and intelligence all matter, but statistically these are all marginal gains. They’re barely measurable. What is measurable is that 80% of businesses start with personal or family money. Only 18% of businesses ever access a bank loan, and those are often secured by personal or family assets.

Finally, only 0.6% of businesses are venture-funded, and this is the Mount Everest of privilege — white and remote. 98% of funds go to men, 99% to whites and Asians, and 78% to just three states — California, New York, and Massachusetts.

Thus, statistically, the best startup advice is to be a rich, white, coastal male. This is also completely useless advice, which makes you wonder. If the answer isn’t improving myself, what if it’s improving society? If I can’t self-help my way out of this, maybe I can help others?

And thus you get to the actual advice. If we change startups from a rich white man’s game (like polo) to a global game (like football) then we can unlock opportunities for billions of people, and value that will dwarf anything we’ve seen so far.

But first, we have to demolish the illusion that startups are merit-based, and look the current inequity right in the eye. So here it is. See for yourself.

Throughout this piece, I’ll refer to an American data set, via the Kauffman Foundation, and add some international comments at the end.

Starting Up Means Paying Up

I’ll start at the very beginning. The first hump in creating a startup is being able to quit your job and raise about $30,000. If startups are a game, this is the ante. These are table stakes.

If you don’t have this money you’re going to be wasting time going to pointless hackathons and accelerators and pitching rather than producing. If you do have this money then you’re in the game. So how do most people get it?

1 | Cash

The best way is to just pull it out of your pocket or call the BOM, Bank Of Mom. For rich people, $30,000 isn’t a lot of money. It’s a semester’s tuition, or a watch. Facebook started with two rounds of $1,000 and $20,000 each from Mark Zuckerberg and Eduardo Saverin. They just had that on hand. Amazon started with much more — $250,000 from Jeff Bezos’s parents. He could just ask.

For most people, however, $30,000 is a crazy amount of money. 40% of American’s can’t cover an unexpected $400 expense. These are the door stakes to the startup game, and most people can’t get in.

2 | Assets

If you don’t have cash, the logical thing is to ask a bank. But banks don’t just loan money to poor people, they ask for collateral. They say we live in an age of ‘cheap capital’, but it’s still pretty damn expensive being poor. If you want money, you need assets to borrow against. This is also wealth.

If you’re doing a manufacturing business then the banks can repossess your property and plant, but you can’t repossess an AWS account. This makes software and services startups institutionally unfundable. If these companies want to borrow, their shareholders have to put up personal guarantees. So we’re back again to the founders being rich.

3 | Connections

But what about angels? VC funding is the most common idea of startup funding, but in reality, only 0.6% of businesses raise VC.

VCs are rich white men and it’s not just that they fund people they’re connected to, they literally fund places near their offices. 78% of all funding in the US goes to California, New York, and Massachusetts. Only 2% goes to women and only 1% to black or Latino founders.

These are rich zip codes, fed into by rich schools and the result is a significant advantage for the already rich.

There’s a statement here that’s just bad about the world, but I think if you look at most successful founders, they are pretty smart, upper-middle-class people. They are very rarely the children of super successful people. They are very rarely born in real poverty. They are very rarely the absolute smartest people who otherwise would win a Fields Medal… There’s a whole bunch of reasons why that’s a sad statement about the world, but there it is. (Sam Altman)

So what does this mean for startups in general? It means we get limited ideas from a limited pool of brains. Many modern consumer startups can be boiled down to what does my mother no longer do for me? Look at the SoftBank portfolio, it’ll drive you around, bring you food, even — until recently — walk the dog. They’ve deployed over $100 billion in capital to reproducing a suburban mom.

These have been growing propositions, but who knows what companies we’re missing out on by excluding people with different problems? People, who are women, who are of color, who don’t live on the coasts? There are problems we haven’t even imagined solving yet because rich white people don’t have them.

And this is the ultimate argument for more equity in startups. It’s not just the right thing to do, it’s a better business. In America, 25% of new entrepreneurs are Latino, but they get less than 1% of VC funding. Women-owned startups get better ROI and could unlock $2.5–5 trillion in global value, but only get 2% of funding. We’re obviously missing the boat there as well.

The fact is that we can’t choose our parents, but we can, sorta, choose our governments. And we can, sorta, choose the sort of society we live in. So that’s the best startup advice you can get. If we want more world-changing ideas, we need to change the world.