A US venture capital investor has suggested Australian startups pay themselves inflated salaries, and that this is likely to turn potential investors off.
Laurel Touby, who runs New York VC firm Supernode Ventures, was speaking on The Venture Podcast with Lambros Photios, chief executive of Sydney software company Station Five.
“I find the Australians to be extremely smart but also coddled, meaning they’re so used to their high salaries and their nice lives that they couldn’t imagine making a commitment to something that isn’t going to pay off in the short run,” Touby said.
Startup founders “pay themselves very high salaries compared to the US and other places, and they seem to be looking for income replacement”, she added.
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“That is not in the interest of the investor.”
A founder herself, Touby sold her startup Mediabistro for $23 million in 2007. Before that, she had been living in New York, paying herself $US80,000 ($113,700) a year (although when she started out, she said she took no wage at all).
Touby always had employees earning more than her.
“I wanted them to work for me, and I couldn’t afford to pay myself after paying them,” she said.
“I didn’t make money until we sold, and I was really happy then.”
For Touby, it’s important that startup founders are prepared to suffer.
“The investor wants to see hustle and aggression and drive and confidence and passion, but also, discomfort. I want to see that you’re giving something up.”
In the US, investors are looking for a great company, founder and product, she said, “but also that you’re hungry — and hungry meaning literally hungry”, she joked.
“Okay, not that bad. You don’t have to be starving, but you definitely have to be that uncomfortable that the only way you’re going to be happy is when the company exits.”
While the dream may be to have a high salary and a “cushy job”, while also calling your own shots, “that’s not the kind of thing that any VC in the US is looking for”, Touby said.
A reality of startup life
Speaking to StartupSmart, Partner of M8 Ventures and Aussie investment guru Alan Jones says he doesn’t think startups paying themselves a salary is a problem at all.
The cost of living is high in Australia, he says, and the average age of founders is relatively high, with many coming out of careers in other industries.
“Australia doesn’t have very many startups founded by a couple of 25-year-old guys who met doing a software engineering degree,” Jones says.
“They’re more likely to have a mortgage in one of the world’s most expensive cities, and more likely to have a spouse and children in school.”
While some founders take a year or two off to live on the cheap and work on their startups, “those differences need to be made up at some point”, Jones says.
Founders taking a salary also has the potential to allow for more diversity in the ecosystem.
“A shared apartment in a crappy part of town and living off instant ramen noodles only really works between the ages of 18 and 30,” Jones says.
“After that point, the startup founder life needs to be different, otherwise we’re not going to attract the most valuable talent in the Australian market.”
Samantha Wong, partner at Aussie VC Blackbird Ventures, says when deciding whether to invest, although salaries should not be a deal breaker, she would consider them “a heavily weighted factor in assessing whether this is a highly motivated team making sound decisions”.
Salary decisions are about allocating scarce resources to the right places, she says.
“Founders should pay themselves just enough to be productive in order to extend their runway for as long as possible. You’re postponing short-term gratification for a bigger payday further out into the future.”
That said, Wong notes “earning low to no income for a period excludes many people at different periods of their life”.
However, she adds this a reality of startup life.
“The whole family makes sacrifices to make the company a success, not just the founder. For this reason, many can’t and shouldn’t leave their day job until their startup idea has been properly validated and the company is well on its way to product-market fit,” she says.
“Ultimately, risk and reward are correlated and extraordinary outcomes rarely come from ordinary levels of sacrifice,” she adds.
Who’s earning what?
Whether Touby’s opinions of startup founders in Australia are right or wrong, it’s unclear whether they’re even rooted in fact.
A SmartCompany investigation into the salaries of Australian startup founders and small-business owners in August last year found almost everyone asked paid themselves nothing at all when they first started out.
However, once they did start taking a salary, those pay packets varied from $50 per week to $150,000 plus dividends.
In October last year, The Australian Startup Salary Guide 2018, from Think & Grow and StartupAus, analysed data from more than 2,500 individuals and 47 VC-backed firms to try to shed some light on this murky issue.
For startups that have raised $5 million or less, the average founder salary was just over $104,000 (remarkably similar to Touby’s own pre-exit salary). However, the figures varied wildly, with salaries ranging from $35,000 to $290,000.
Speaking to StartupSmart at the time, StartupAus chief operating officer Alex Gruszka explained many founders are focused entirely on getting their ideas off the ground and growing the business.
If they’re successful, they “stand to be very well rewarded”, he said, and so “they’re prepared to essentially operate at a basic minimum salary”.
While some founders might pay themselves the going market rate for their own skills (hence the six-figure salaries even at early stages), for many it’s a passion project, and a long game.
That said, the salary guide suggested there was much less discrepancy in employee wages. Once startups started hiring, those employees were typically paid market rates.
This means there were likely founders earning less than their employees.
Blackbird conducts research of its startup portfolio and “typically, founders in pre-Series A stage companies are some of the worst paid employees of the company, earning around the same salary as a junior or mid-level engineer”, Wong says.
This means, for founders “increasing the value of their equity and achieving the mission is the main motivator to work hard,” she adds.
“This seems constant wherever in the world you go.”
Jones agrees with this, saying in his experience, while salaries are a “significant component” of a startup’s running costs, that’s total team salary, not founder salaries.
“In every case, the founder is the fourth or fifth most expensive employee in the business,” Jones says.
“They’re looking at hiring senior full-stack developers and machine learning specialists and great growth marketers,” he adds.
Jones notes investors are free to take whatever factors they like into consideration when investing. But for him, going unpaid isn’t a requirement.
“An investor is free to choose whatever they see fit to invest in on whatever balance they want,” he says.
“But I like to invest in relatively viable startups, and allowing a founder to maintain some quality of life is essential to long-term viability.”