Career and Money Advice At The Intersection Of Business And Technology

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Are you missing the money from Zynga IPO?

July 3rd, 2011 · No Comments

By now you probably have heard that Zynga, the creator of massively popular social games like Farmville and CityVille, is planning its Initial Public Offering. It’s widely believe that Zynga will push for (and probably will receive) a valuation as high as $20 billion.

As a result, Zynga founder Mark Pincus will finally join the billionaire club.

We don’t know Zynga’s “cap table” – how many shares are owned by employees? How many millionaires will come out of Zynga’s IPO? Unless an insider reveals the details, it’s going to be hard for us to find out.

For an average silicon valley worker (software developer, QA engineer, product manager, customer support, sales, etc.), hitting the IPO homerun is the “Silicon Valley Dream”.

Things have changed in the past 6 to 12 months. The IPO market suddenly becomes more active. The successful LinkedIn IPO brought back hope – IPO can still happen and one can still make some money from the start-up game in the Silicon Valley. The Zynga IPO will only fuel the burning “IPO fire”.

Are you envious of folks who work at LinkedIn, Zynga, Facebook, or other "hot start-ups”? Are you anxious to leave your big company job and find a hot start-up to join?

Maybe I’m a little bit older (and hopefully a little bit wiser) as I went thought the last great bubble in the Silicon Valley during the mid-to-late 1990’s. I want to share with you my perspective on this.

First, the number one reason for people who become rich in start-up is luck. For a start-up to have a home run like LinkedIn, it doesn’t matter how smart and hard-working the entrepreneur and his team are, they need a lot of luck for all of the stars to align and create a successful start-up.

Second, timing is everything. To have a huge exit, the capital market has to be ready to support such an IPO. For a low-to-middle level employee to make a lot of money from the IPO with fairly small number of stock options, the company needs to have million of dollars of market cap after the IPO. And the employee’s strike price should be low enough for him to reap the benefit. Timings for aforementioned events must align.

Third, statistically there are not many exits over $100mm. On his  blog, famed venture capitalist Fred Wilson stated

“There are on average 1,000 early state financings every year. I suppose a few of those 1,000 financings are for the same company, but I doubt that many are. So we can use 1,000 as an approximation of the number of companies that get funded in a given year.

And somewhere around 50 and 100 of them exit for more than $100mm every year. So 5-10% of the companies financed by VCs end up existing for more than $100mm”

Why am I telling you these? Because I think if you’re an entry-level or middle-level worker in the high tech industry, it is virtually impossible for you to pick the winner of the start-up game.

You’re at a very disadvantaged position – venture capitalist needs one home run out of ten investments to make a lot of money. Entrepreneurs and senior management can make good money even though the company’s exit is moderate because of the higher number of stock options they own.

But, you, as a hard-working worker bee, are risking your career and money (you probably will take a pay cut) while working your tail off for a tiny chance to make it.

Do I sound too negative and discouraging? – I’m not telling you not to join start-up. I want you to understand your odd in the start-up casino – you are just like many people who are visiting Las Vegas casinos – the house has an upper hand over you although you might get lucky once a while.

So, instead of chasing the money, make sure you’re really interested and passionate about the product the start-up is making. Joining the start-up should help accelerate your career, make you more fulfilled professionally, and set you up for next stage of your career.

Please don’t join a start-up with the high expectation of hitting a home run because it’s highly likely that you’ll be disappointed.

On the other hand, if you join the start-up for your passion and the opportunity to learn and grow, you might get lucky to have a base hit, or even hit the home run.

Tags: Career Fast Track · Start-up Success

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