Joining a startup?
My friend Sarah sent me this link to a post written by Guy Kawasaki on 10 questions to ask before joining a startup. Now, Guy knows a thing or two about startups, so I was interested to read his thoughts. I had also seriously considered joining an IT startup over the summer. Having reached deep into my personal network for coaching on thinking through the decision, I was also very interested in comparing Guy’s thoughts with comments from my friends and colleagues on the decision.
So following are Guy’s 10 questions along with my comments, where appropriate.
1. How much money do you have in the bank? This is a simple question. You just want a number. If you’re told that “investors are ready to put in more” or “we have a line of credit,” beware because a promise of money isn’t the same as money. Ask yourself this question: If I promised money to a company and it’s about to crash and burn, would I put the money in it anyway?
This is an important question that I would re-phrase as “How long can you afford to live with zero income?” The question isn’t quite that simple as different startups are are different places in their lifecycle. If they are early stage, then you probably won’t be offered a salary; later stage companies may.
2. What is your net outflow per month? What you’d like to do is take the answer to question 1 and divide it by the answer to question 2. This will tell you how long before your company runs out of money and dies. If the answer to the question centers around “We will achieve revenue soon so our net will improve and give us more runway,” it means the company is in trouble because no product ever ships on time nor achieves the company’s “conservative forecast.”
This simply speaks to basic due diligence, as does several of the following questions. The overall basic question you are trying to ask is simply what do you think the probability of the startup succeeding is? More importantly perhaps, how much can you increase that probability by joining the company?
3. What is the post-money valuation of your last round? “Post-money valuation” is the value of the company after the last round of money was put in (again, lines of credit and promises don’t count). If the company doesn’t have either seven digit annual revenue or tens of millions of page views per month and post-money valuation is greater than $10 million, it usually means that raising another round will be difficult because previous expectations were set too high. If it cannot raise another round, it will die.
4. What can you do that your competitors cannot? This is good to know because it speaks to the defensibility and value of the company. Life is challenging for a company that has undistinguished products and services. This doesn’t mean the company will fail, but it has to be “special” in some way soon.
5. What can your competitors do that you cannot? This is how you can determine if the company management is optimistic (good), delusional (sometimes good, often necessary), or just plain pathological liars (always bad). The actual capabilities are not as important as much as the moral character of the answerer, so listen carefully.
Here, I disagree. While the “moral character of the answerer” is important – I do not think it is more important than the actual answer. DO you have something your competitors do not? If you don’t, then regardless of the startups moral character, you will have an uphill battle growing the company. On the other hand, if you can verify that the startup has some sort of “secret sauce” no one else does, then you may be looking at an excellent opportunity.
6. Who are your investors? Hopefully, there are one or two well-known venture capitalists. However, a perfectly acceptable—and perhaps even better—answer is that there are no investors other than the founders, and the plan is to bootstrap the company as long as possible. These days revenue is the best source of capital.
Here, Guy shows his history of working with IT startups, as they are relatively easy to bootstrap. Many other startups are much harder unless the founders have plenty of capital of their own. I’d look not only at the investors, but the startup’s funding strategy and roadmap. These may be what they are bringing you on to develop, but if they don’t even have an idea of what they need and when, then that may be a red flag.
7. Who is on your board of directors? If there are outside investors, they are likely to be on the board. That’s cool. But you should beware of boards that are only the founders and their family and friends. You need at least one “adult” on board who can be the hardass bull shiitake detector.
Also try to evaluate the personality fit between you and the Board. A Board with members that are highly networked in your target industry are extremely valuable. I’d also try to evaluate how motivated and engaged the Board is. Do they view themselves as merely “advisors”, or are they motivated to help create the startup’s success?
8. Has anyone in the engineering team actually shipped a product? You may think I’m kidding. I’m not. Shipping a product is very different from being a programmer. A company only gets paid for products that ship—not for trying hard to ship.
And shipping your first product, especially if a customer paid for it is a huge step in the eyes of investors.
9. Assume that you have $0 for marketing, how would you market the product? Any bozo can market a product with a million dollars. What you want is a team that can (a) make a great product that markets itself and (b) catalyze people to believe in the product enough to market it for you. If the answer you get is, “When we’re ready to ship, we’ll raise more money to market it,” you should run for the door.
10. What keeps you awake at night? This is an excellent question to figure out what the major challenges are for the company. If the answer is, “Nothing, we’re on the brink of worldwide domination,” look for the door again. If the answer is, “Scaling fast enough for our anticipated demand,” try not to laugh. The right answer is, “We’re a startup. I worry about everything: money, sales, engineering, support, and recruiting. I hope you will join the team and relieve me of some of this burden.”
So there’s some really good questions to ask yourself should you be approached by a startup. I ultimately decided not to join this particular startup. They are not without their challenges, but I think they have enormous potential. They recently attracted their first investor who put in six figures and they do currently have product in the marketplace. I continue to coach them and it will be fun to see how they grow and how big their success is.
Why didn’t I join them? This is a great lead-in to the question I will add to the list:
11. Are you the right person for the startup? All of Guy’s questions are focused on evaluating the startup, but none really ask if you are the right person at the right time for them. Startups need different skills and achievements at different times in their development. Make sure you are a fit for them.
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