Evaluating a startup as a prospective employee is tough, especially when you compare to VCs. Venture capitalists have an information advantage – startups are required to be fully transparent about everything before a VC invests in it during weeks if not months of diligence, but prospective employees are limited to just a few questions they ask during a series of interviews with only a few people at the company. Plus, VCs often will have met the Founder/CEOs of many of a particular startup’s competitors, so they’ll have an even richer understand of the market landscape. With all of that information advantage, venture capitalists additionally have the luxury of building a portfolio to spread their bets and are still wrong more often than right… but you only get to choose one employer every few years!
There are two sides of the coin in evaluating choices of selecting amongst a number of startup roles you’ve hopefully surfaced after reading my first two posts in this four-part series about strategy and uncovering startup opportunities. On one hand, of course, you’re joining a startup for the upside. Not just financial upside, but also the upside of making an impact in an organization, working in small teams with other exceptional people, involvement with cutting-edge technology, and working with other motivated people. So most of your calculus in selecting the right startup role should involve understanding the company’s market and business plan in executing toward a grand vision. Is it shooting for a big market? Does it have a truly transformative innovation? Are there exceedingly inspirational leaders in the company? When there are unique and strong external & internal tailwinds which can push a startup forward, there is more opportunity and overall upside for all employees.
The other side of the coin in evaluating a startup opportunity is to assess risk and mitigate downside. This approach is similar to that of a venture capitalist’s, but unfortunately you likely don’t have all of the access and information that a VC does. So what is a prospective employee to do? The only way to truly beat the unfair advantage is to join a startup with people and/or industry you know prior. Then you have information knowledge that the “market” does not. So any situation which plays into your own background knowledge of a market or people you’ve worked with in the past gives you a leg up to understanding their chances for success.
But if your connection into a company didn’t illuminate you with unique insight into the startup’s business risk, you can still be discerning in your selection process even if the startup isn’t going to open up the whole kimono on their business / financials. There are a handful of questions which you can legitimately (and should) ask a startup during the interview process which serve as useful indicators of financial health, opportunity, and promise for the company:
- How many employees did/does/will the company have six month ago, now, six months from now, a year from now? Employee count is the strongest (but not a perfect) proxy for management’s and investors’ outlook on the business. Start-ups hire ahead of growth (or at least predicted growth), which translate into a viable company, a healthy work environment, and future internal opportunities. Financial figures and projections are helpful indicators, certainly, but are often a distortion of the full picture (especially early on in a company’s cycle). And depending on what level of position you’re applying for, the company may not be that forthcoming with detailed financial information. The growth in employee count (or lack thereof) directly signals how much work needs to be accomplished how rosy the expectations are.
- Which VC firm provided the most recent funding round and when was it? VC brand name matters, but only as a general guide as an indicator of promise, not reality. If a brand-name VC is an investor, it means that at one time one single partner at the firm saw enough promise in the venture to make a bet on it – it doesn’t mean that a company is doing well now. And there are many reasons why a not-as-blue-chip investor would be in a company with real promise: prior relationships he has with the entrepreneur, specific domain expertise/understanding of a sector, capital requirements for the business, or other dynamics around the round (price, hustle). The timing of the last round is also important – the closer you are to joining a company in conjunction with a financing event, the more recently validated it is by a professional investor – but also the value of your financial upside is less.
- What is the burn rate and how much cash is in the bank now? Even if a start-up is successfully executing, it could still face a cash crunch if it is not yet profitable. Employees should ask to find out how much longer the company will ride without the infusion of another round capital. While the actual answer to this question won’t necessarily provide a definitive answer about the ability for the company to access both cash and additional capital, it will open up a discussion about it.
- Has there ever been a down round, inside round, a flat round, or a CEO change? Any of these three events are an indicator that the startup has faced some difficulties in the past and may not be on track moving forward. If one of them has occurred, prospective employees should seek out as much information as they can the context of the situation. After all, there are exceptions to the blind assumption that these are a black mark (e.g. a founding CEO stepping aside to make room for professional management could be an indicator of successful growth). However, if any of these issues have arisen, it is a signal to dig deeper into the health of the business.
Of course, any prospective employee should evaluate a startup job opportunity just like any other, evaluating both the role itself and the business to the best degree possible. The answers to the above four questions help uncover the issues that are unique to joining a startup which are critical in reading the tea leaves about what’s really going on underneath the covers. The next and final post in this series will deal with how to negotiate a startup offer once you’ve received one.