Can bankers make good entrepreneurs?
Whether or not they realize it, there are about to be a lot of bankers in London reevaluating their life choices. They’ll either be replaced by someone in Brussels or Frankfurt, get an offer to move to Singapore, or simply look around and decide that a post-Brexit banking position simply isn’t what they want to do.
And since it’s 2017, lots of them are going to think they should just launch their own startup. And that brings us to the title of this article: can bankers make good entrepreneurs?
Before we get into the details, a little story. A few Tuesdays ago at TheFamily’s office in London, I sat down with two entrepreneurs who had made the trip from Notting Hill where they live and work. They told me about their project — let’s say it was a community of amateur bowlers — and explained in very precise detail how they’ll make money through bookings and food/drink purchases. Their presentation laid it all out: clear market trends, high CAGR (compounded annual growth rate, for the lucky ones among you who have never encountered the term), other fancy metrics pointing to a multi-million dollar business.
But I wanted to understand how they came up with the idea. I should have seen the answer coming: “We met when we were both working at Goliath National Bank, we both like bowling. We got tired of our jobs and just kind of figured we should start our own thing.”
Ok, so I’ve adapted the story a little bit — but only a little bit. Today’s early-stage market is filled with new entrepreneurs coming from a background in banking, consulting or corporate law firms. Their motivations are usually very understandable: they need a change in lifestyle, they’re intellectually interested in the digital economy, they want to run their own business, they’re tired of hierarchies (hey, some of those are the same reasons that I left private equity!).
But the problem isn’t really the motivation behind the move. The main problem is that every time I meet with them, I have a hard time seeing if they’ll be able to make the mental switch and leap into becoming an entrepreneur. That is what this article is about.
(A few clarifications before diving into the topic.
With all love to my actual banker friends, here I’m using the term as a catchy way to refer to someone with a business background who has worked in a fast-paced, prestigious environment with a high salary and long hours. Banker, in this sense, is the archetypical business school graduate in one of the traditional industries that people head into after finishing such a degree.
“Entrepreneur” is a bit trickier. At The Family, the entrepreneurs we work with are building startups that, following Steve Blank’s definition, are “temporary organizations in search of a scalable, repeatable, [profitable] business model”. So even if that Managing Director who leaves the investment bank she works for to start her own boutique operation, leveraging her network, experience and skills, is certainly an entrepreneur in her own right, that’s not the type of person that we’re talking about. The focus here is on the entrepreneur that tries to build a startup.)
The Banker’s Curse(s)
There are several habits that a banker falls into while working in his field that are lethal to a startup. Ok, I didn’t get all the way up to 7, but without further ado, here are the 5 Deadly Sins of the banker-wannabe-entrepreneur:
Business plans
Bankers love business plans. I don’t know if it’s the false sense of security provided by putting your (theoretical) returns into predictable boundaries, the urge to showcase your modeling skills or some actual and misguided love for Excel, but there’s something mystical going on there.
I’ve literally had a banker-entrepreneur who still hadn’t built a product tell me that “in the very bearish case” I would have returns in excess of 35x. This is ridiculous for several reasons, but the most important is simply that the only rule that applies to startup business plans is that 100% of them are inaccurate. Nothing ever goes according to plan in a startup, because none of what happens follows a linear progression. You live or die by exponential growth, which is inherently impossible to predict.
Now, let’s be fair: the problem isn’t necessarily the business plan itself. It’s a decent way to rationalize your business model, like you see with the business model canvas. And if you know how to use it properly, a good plan can be a great guide. The real problem is elsewhere:
First, building a business plan takes serious time, and time is the entrepreneur’s most precious resource. Our job at TheFamily is to optimize entrepreneurs’ time, pushing them to only do things that accelerate their company’s (unavoidable) success or death. Working on a business plan in the early days of a company is a waste of time at a moment when entrepreneurs should be 100% focused on executing, building their product, reaching out to clients and iterating.
Second, in most cases it makes the entrepreneur confused as to what has value in her startup and what doesn’t. If the most valuable asset is the business plan, that’s a company with no intrinsic value. And, irony of ironies, this comes about when you concentrate on creating an overly precise business plan that calculates “enterprise value” (sic) down to the single digits, IRR, etc.
Risk mitigation
I find this one really funny. Most Wall Streeters will tell you they are risk-takers: they make very risky investments in products with high volatility in order to increase their potential returns. Yet where’s the real risk for them personally, when in the worst case scenario they go home at the end of the day with negative returns, meaning no bonus but still being paid a very high salary? (By the way, this is true of VCs running investment funds as well).
The truth is that bankers learn to mitigate risk and hedge against adverse conditions. Perfectly rational behavior, even for an entrepreneur — if you remove the time that you lose in trying to moderate your risk from the equation. Losing time kills early-stage companies, so entrepreneurs need to be very bold and take a lot of risks very quickly.
Remember this: an early-stage company’s future is binary — it will either die or be successful. In order to create success, doing radical things will create the conditions for the infamous switch from 0 to 1.
Fundraising
This one is really painful. Bankers are REALLY fundraising-driven. I don’t think I’ve ever seen a banker pitch his company without mentioning that they were fundraising, even if it made no sense for the company at that stage.
Don’t get me wrong. Successful companies have to raise funds and I’m not criticizing companies’ needs in that area. But fundraising should be done when it’s needed: namely, when the company is running out of money and will otherwise die or (ideally) when it is experiencing traction and has to accelerate growth to conquer the market. Raising funds isn’t the problem, it’s the universal importance that bankers attach to it that’s the problem. And from that mindset problem there develop operational problems that can kill your company:
First, fundraising is a full-time job. It unfocuses founders from their core business and makes them do a lot of fake work, like creating presentations and going to pitching competitions and events.
Second, having funds without any real need for them creates a natural tendency to rely on outsourcing. You have a problem, you throw cash at it. But that doesn’t necessarily solve the problem, and it doesn’t create value within your company. Having all the external providers in the world doesn’t create a business. If your company has no assets, it has no value.
Third, and this is perhaps the worst thing, fundraising creates a false belief that the quality of a startup is linked to its valuation: the higher your valuation, the better your company. This is absolutely not true. Valuation has many objectives (including, of course, sending the signal that the company is doing well) but many bootstrapped companies that didn’t fundraise until they were really ready to move to the next step are way better than companies that raised seed rounds at a 7-figure valuation, because the founders were actually working on building something real. For an easy example, just look at GitHub’s $100M Series A at a $750M valuation in 2012.
There’s an extra trap in all of this for bankers. Let’s face it, it’s really easy for bankers to raise funds early. Bankers usually have banker friends, many of whom earn big year-end bonuses. Now, the fun kind of bankers obviously throw lavish parties with coke and hookers with that money, but the serious ones try to invest it. And one of the only asset classes that you can invest in as a banker while (1) remaining compliant with your organization’s rules and (2) having enough leverage with a relatively small ticket ($10–100k) is early-stage venture capital. The “friends & family” round is thus usually pretty easy for bankers to close — really all it takes is a nice business plan and some risk mitigation measures ;) And so, the vicious circle is complete.
Creativity
When you apply at McKinsey or Goldman Sachs, your resume or cover letter must include the phrase “I am a creative, out-of-the-box thinker that loves to solve problems.” Yet interestingly enough, organizations like that crave creative people whom they can then standardize, making them all take the same approach to every problem they face.
Essentially, finding the things that will make your company successful as an entrepreneur require a non-standardized approach, the hacker’s mindset instead of the framework mindset.
Management
Depending on how high you climbed in the banking hierarchy before leaving, this one may be more or less true for you. In any case, working as a banker teaches you a great deal about organizational politics, but not much about management.
As a banker, a large portion of the world’s best and brightest apply to join your organization. You just have to pick which ones you want to work with from that pool of talented people and then apply the same standardized management methods that were applied to you a few years before. Everyone’s just another known piece of the hierarchical puzzle.
But none of that is true for an entrepreneur. Nobody applies to your company, because nobody knows it. Making the first employees happy is very complicated, since you have very little money with which to pay them and yet they’ll have a huge impact on your business. It takes real managerial skills to align them with the mission of your company and get them to work at 100%. As an entrepreneur, you can’t just ask someone to put in 90+ hours per week because they’re being paid to do just that. If you want to achieve that kind of dedication, it takes the right kind of management to make sure your employees are happy.
The Banker’s Blessings (Finally)
Fortunately, if bankers have these curses to deal with when they try to create new businesses, there are also resources in their toolbox that are very precious to an entrepreneur.
“Blessings on blessings on blessings, look at my life, man, that’s lessons on lessons on lessons.” Big Sean
Work ethic
Being an entrepreneur is a job that takes real dedication. Your excitement curve will go all the way up when you sign your first contract or close a round of funding but it will often also hit serious lows when you’re facing difficult situations (which is the default everyday life of an entrepreneur).
Bankers have experience in putting in long hours and staying calm and efficient in delicate situations. This is definitely a plus when launching a company.
Business analytics
Lots of entrepreneurs are missing knowledge on the importance of financial analysis and management control when their company takes off and starts growing (and you can read Hugues de Braucourt’s great collection of articles on Empire Building for more on that topic).
Horror stories of successful start-ups going bankrupt because they were unable to regulate their growth are common. When scaling, it is really important to look at costs and to look at cash. Bankers know that, because Lesson #1 in any finance class is “Cash is king,” and they spend their time finding ways to optimize costs for their clients. That type of business analytics is essential for a founder.
Additionally, having a sharp and highly developed business sense makes it easy to iterate on the business model, approach the sales process and understand the value chain of your industry, finding those weak points that you can tackle.
Making the Switch
Ok, you’ve gotten all the way down here: bankers CAN make good entrepreneurs. But they absolutely must flick the switch from a corporate environment to an entrepreneurial one, become conscious of the various flaws that their years of experience created and fight against them.
Mindset
The biggest change is simply a general change in mindset. To be a successful entrepreneur takes dedication, resilience and a very hands-on approach to business.
When I talk to people who want to launch a startup and join TheFamily, one question that I love to ask is: “Imagine you’re running an on-demand local moving business. One afternoon, all your drivers are busy and one of your oldest clients asks for a couch to be moved right then. What do you do?” If you start listing all the typical problem-solving solutions you can think of, but you never mention “I just go there myself and do it”, then you probably don’t have the right kind of mindset.
Being an entrepreneur often means rolling up one’s sleeves and getting shit done. You can be the smartest competitor on the market with the best strategy and the most funding, but if you never actually DO something, you won’t prevail in the end.
Constant Learning
Anyone trying to go from banker to entrepreneur has to learn new skills. Entrepreneurs learn new things everyday, because running a business cannot happen with frozen skills. Along with finance and strategy, there are many elements involved in a business: coding, HR, admin, legal, accounting, marketing, operations, growth hacking, product development, design, UI / UX… A founder has to have at least a basic understanding of all of those in order to make rational decisions and manage the people in charge of those segments — and to take care of things herself when no one else is available.
Attitude
Understandably, the entrepreneurial lifestyle looks very appealing to a banker. But that lifestyle is not just a facade, it is tied to entrepreneurs’ real-life obligations. It’s not that entrepreneurs are too lazy to shave, it’s just that they have better things to do with their time and nobody actually cares if they shave or not. So drop the act, stop looking serious, start being earnest.
“Sit down, be humble” Kendrick Lamar
The Leap of Faith
The biggest thing that’s needed to switch environments is the willingness to take a leap of faith, to take a real risk both professionally and personally.
Students often ask me if it’s not too risky to start a company upon graduating. The opposite is actually true, they couldn’t be in a better position to start: they have no career and probably no personal situation to worry about anyway. The same is not true for a banker or anyone else who has built up their career and their life. Still, two things can help you to evaluate the risk and realize that it’s relatively controlled.
First, bankers are usually well-paid and can relatively easily save up enough money to cover their living expenses for a few months when starting a company. Those savings act as a lifeline until the moment the company is ready to raise funds (for the right reasons).
Second, today’s career paths are not nearly as linear as those of our parents’ generations. I know more people working for several years who have changed companies at least once than those who haven’t, and you probably do too. With career changes becoming the norm, the overall resume impact of a “break” to launch a business is relatively low — one could even argue that it brings more maturity and exposure to more business issues, and is therefore something positive.
The final thing I want to mention is that once bankers are ready to change their mindset, to learn new skills and to take the leap of faith, there are several routes into the startup world.
Creating a company is obviously one option. And while creating a fintech looks like the easiest way (because of previous skills and industry knowledge), your best bet is to do something you’re passionate about. Having real passion will lead to mindset change, because the urge to build something that lives up to your ambition will drive you as a founder.
Another route, often overlooked, is to join a startup that already exists. At every stage in their early life (say, creation to Series A), startups need talented, smart people who are able to navigate various issues and who are eager to learn and make the company thrive. And bankers have those skills. If you want to switch and don’t know how to go for it, we at TheFamily created Lion for you.
