How to choose a startup - to work for - like an investor
At TALENTFIRST we work with programmers and tech companies daily. We understand the struggle, needs, and fears that accompany a job changing process. Every day we make decisions that so many of you, Software Engineers, are making too. 'Is this company really worth my time and effort?', 'Will they still exist 10 months from now?' - surely every person whoever was interested in the startup scene was asking himself or herself these kinds of questions. And we do too!
It's our bread and butter at TALENTFIRST to distinguish between a startup that is likely to succeed and one that is showing red flags and will most probably fail.
In this article, I (Alex, Advisor at TALENTFIRST)share with you the absolute essentials we take into consideration while deciding with my team at TALENTFIRST if the particular company is worth Software Engineers' attention and should join our hiring community. Those tips are universal and used worldwide by successful VCs like YCombinator, 500startups, or Techstars.
Do you see anything missing or have any additional advice you’d like to share? Feel free to reach out to firstname.lastname@example.org and we’d be happy to include it in the next edition.
Introduction to TALENTFIRST
For those who haven't heard about TALENTFIRST — we hire strong programmers for top tech companies around Europe.
We work exclusively with top tech companies as well as with promising and fast-growing startups. We can suggest companies that you have never heard of or may not have considered before.
Are you sure joining a startup is the right choice for you?
Before jumping into the ‘core’ of the topic, it’s essential to understand that even though working at a startup may seem appealing and exciting, it is not necessarily the right choice for everyone.
The startup environment is for people who thrive on fast pace, flexibility, and are not discouraged by rapid and frequent changes. “Done is better than perfect” and “move fast and break things” are slogans describing the startup workspace you must have heard. In terms of software development, we’re talking here about fast release with an iterative and incremental approach — there is very little time leading from idea conception to production with rapid deployment. The objective is to provide a minimum viable product, then systematically tests it and adjust in the next iteration.
2. Quick learning
Such a job is without a doubt demanding — but obviously has some advantages that make the lack of comfort worthwhile. You can accelerate your career development significantly working with smart and talented people around, networking with them, and continually learning at high speed — you will be challenged a lot.
3. Product Engineering
Another positive aspect is working very closely with the business. As a result, you get to deeply understand every process happening in the product you’re building and inside the company. Moreover, you have a huge and direct impact on the solution, and you shape the entire product.
In well-established companies, you’re working on just a small part of the entire solution, but in the case of a startup, you’re dealing with the whole software. It’s developed from scratch, meaning that you also influence all the technical and technological decisions. Sometimes you will be asked to cover more than the usual ‘scope of responsibility’ because the company will be growing faster than they could hire — this is when you learn. For example, if you’re a Backend Engineer, you might be asked to do some minor frontend bug fixing. Thanks to this, you will have a more versatile set of skills and will grow alongside the company.
How to choose a startup worth working for?
It’s not an easy job to foresee if a company is likely to succeed in the future, especially when they are a startup, and very little data is available. The first thing everybody is looking for as proof of the company being interesting to consider is funding.
First of all, what you should be paying attention to (and this is also what investors do) is the growth rate and the trajectory of it. Look for growth and not just big numbers, for example, a startup that was flat for the past year with €2 million monthly revenue is not as exciting as a company with a growing monthly income of €100 000 that started 6 months ago. Paul Graham wrote in one of his articles (link) that some founders when asked about their growth rate, tell that ‘we get about a hundred new customers a month.’ That’s not a rate. What matters is not the absolute number of new customers, but the ratio of new customers to existing ones. If the company has a constant number of new customers every month, they’re in trouble because that means their growth rate is decreasing.
Getting VC/angel support
When the growth rate of the company is good, investors recognize it, and it’s only then when the investment can happen. A startup being backed by a VC or well-known angel investors proves they have already convinced people that know this business this company has a solid foundation and is working on a solution that has a chance to succeed on the market.
However, let me be clear — what people often don’t understand is that external funding or being in an accelerator is not a necessity for a company to succeed. Startups such as Craigslist or Github grew with no external money. By the time some of them received funding from institutional investors, they were already big companies with significant traction and revenue. So if the growth rate of a company is reasonable, even though they haven’t been backed by any investor (maybe they’ve chosen not to), it doesn’t mean the company is likely to fail.
Taking part in accelerator programs like e.g. Axel Springer, 500 Startups or Y Combinator is promising — it indicates the company has access not only to money but an equally crucial vast network of connections and knowledge base. By being part of an accelerator program, startups are offered benefits like mentorship and educational workshops. The founders get to work with super-experienced people working at companies like Zalando, Zattoo, and many more who guide and support the startup in further development. But let me repeat what I’ve stated before — it’s not a must-have to take part in a program like this. If a startup has other sources of knowledge or is making money and doesn’t need external support, it’s actually not bad at all!
Pay attention to the growth rate - what matters is not the absolute number of new customers, but the ratio of new customers to existing ones. Don’t look for big numbers, but for growth trajectory!
Having a VC or well-known angel investors backing a company is a good sign, but remember external funding is not a necessity provided the growth rate is solid.
The same goes for participating in accelerator programs - it is a good sign as it provides the startup with more resources and knowledge, but it’s not the only way of getting them.
The next thing that is absolutely crucial for the startup to succeed is the team working on it. Often, in the beginning, it’s just the founders, and obviously, they’re the ones steering the wheel. The most natural thing to do is to check their background and credentials — it’s a useful data source to check who you might be dealing with, but you have to be careful here! The credentials and experience that usually look good on a CV might not be so in the startup environment. They can even be perceived as unfavorable for being suited to founding a company.
It’s hard to make a judgment based on their CV, who knows that better than us, right? ;), so if I were you, I would ask the founders the following questions:
Do you think procedures and structures are necessary for a company to achieve its goal?
How do you feel working on things that are defined ‘on the go’ or changed overnight?
What’s the line between dynamic work organization and chaos?
Answers to these three simple questions will show you how the founders with corporate experience feel working in a startup environment.
When it comes to the team, and especially the founders, it’s good to be aware of what kind of skill sets, experience, and abilities they have and how complementary are they to one another. When starting a company, you’re going to need expertise in areas like:
Sales, because you need to sell your stuff and make money,
Marketing, because you need to acquire users/clients to grow,
Operations, because the company needs repeatable and optimal business processes to exist,
Domain knowledge/experience, because you need to understand what you’re doing and do it better than your competition,
Venture capital (preferable), because you sometimes need money to scale,
And most likely, engineering, because you need your product/services live.
These are just the most basic ones. By ‘expertise’ I mean a production-based, professional experience in the real world. Startups usually have 2–3 Co-Founders, so feel free to investigate, e.g. on LinkedIn, what have they done in the past, and whether the combination of their skills provides the basic setup necessary for success. This is also what investors are paying attention to because it might be tricky when there are experts in just one or two of these areas onboard and have the same experience. I’ve also listed above “domain knowledge/experience” — there are so many startups nowadays that are trying to solve non-existent problems, so one of the proofs for you that this startup might be different is by looking at the background of the founders. If they have e.g. worked in the food industry where they have faced problems or a potential niche to cover, it’s a sign they are onto something. But this again might be tricky — a person without experience in the field has a fresh look, and it’s easier for them to come up with new ideas and implement them successfully while the rest of the industry might have thought it wasn’t doable.
As you can see, there are no easy answers! The venture capital experience is, for sure, a good thing to have because it gives the startup an understanding of investors’ point of view, and they know what they’re looking for when raising money. However, we should all remember that making business is not about getting funding from VCs — it might be useful, but it’s not obligatory. It definitely comes in handy, but lack of such experience is not a deal-breaker.
I know it’s already quite a lot we can deduct by just looking at the background of people in charge of the venture, but there’s even more. Do you know what is one of the top 10 reasons why startups fail? Team issues. Many startups are founded by people who don’t know each other at first and have no experience working together. As a result, it often happens that when facing the first significant disagreement, challenge, failure, etc. — the team splits. They don’t know how to solve problems together and reach consensus and how to work together. It brings us to another good indicator that we can read from the founders’ background. If you can see that they have already worked together in the past (e.g., in the same company) and they know each other it’s fair to say that this arrangement has better chances of surviving when the first storm occurs. If founders don’t know each other, it doesn’t mean they don’t know how to work together — they might! It’s best to ask them, e.g. what’s the biggest disagreement they’ve gone through? What keeps them working on this idea? How would they introduce their co-founders?
How founders approach business
What investors check before investing is if they will make money — this is something that startup founders often don’t understand, but this is their obvious goal. Therefore what drives most investors is finding startups that, at some point, can become big, large companies to get a significant return on their investment. If you can sense from the founders that they’re not interested in a long term development of the company and they’re planning their exit without even having an MVP, the investors will most likely get this feeling too and won’t be interested in putting their money there — sorry, it’s just business!
Check the background and credentials of founders — it’s a useful data source, but you have to be careful here! The credentials and experience that usually look good on a CV might not be so in the startup environment.
Make sure what skills and abilities there are already in the team and if it provides the basic setup necessary for success.
If founders have already worked together in the past it’s fair to assume that this arrangement has better chances of surviving when the first storm occurs. If Founders haven’t worked together before, ask them a few questions to get a better feeling how they work with one another.
If you can sense from the founders that they’re not interested in a long term development of the company it’s not a good sign.
Size, type, and value
Another huge and important thing for every startup is the market they’re targeting and its type, size, value. Almost everything depends on the market type — if there’s already competition on the market, the company shall prepare a different strategy than when entering a new one with a new idea. If you’re interested in reading more about the types, feel free to take a look here or here.
Market size and its value are basic information for future investors, telling how much potential business is really out there. Market value is perhaps a more prominent figure as it tells us about the revenue the market offers. If you’d like to dig deeper into this topic, I recommend taking a look here or here. The market size and value are one of the first numbers VC or angel investor is going to ask the founders about — if the founders are not prepared to tell you this information, it’s definitely a bad sign.
Market value: TAM
Investors are usually looking for big TAMs (Total Addressable Market) because it creates an illusion of quick & huge profit. But it can be misleading — the eventual size of the market opportunity is paramount, but several other factors should be considered when trying to assess the market opportunity. For example:
A lot of companies, like, e.g. Airbnb has changed the markets they operated in. Airbnb expanded the TAM of the short-term rental market by smoothing the trust barrier associated with renting out your home or staying in someone else’s.
Another situation that we often see is when a startup’s initial product is just an entry point for them to expand later. A good example is Amazon that started off with selling books, and by now, it’s expanded their scope to nearly everything.
So don’t let TAM evaluation influence your entire decision. I’m not saying it should be disregarded; however, it’s best to keep an open mind and take into consideration that the TAM a company is starting with can be changed later along the way.
There’s no way you can be 100% sure something’s going to work, but being aware of the market type, size, value, and possible competition help in wrapping your head around what a startup is trying to sell.
Check the type, size and value of the market the company is going for as they’re all using different rules.
The market size and value are one of the first numbers VC or angel investor is going to ask the founders about — if they are not prepared to tell you this information, it’s definitely a bad sign.
Ask about the company’s TAM but keep an open mind and take into consideration that the TAM a company is starting with can be changed later along the way.
How to know a product is good?
You can have the best team in the world and be hitting the largest market, but it’s not going to work without a good product (or service). I have partially mentioned this in the paragraph before regarding the competition. Investors are looking for uniqueness in the product, and venture capitalists’ are influenced by its competitive advantage. Investors look for features that distinguish the company from potential competitors, and they look for evidence that a startup has an advantage that the competition cannot easily overcome. The goal isn’t to prove that no one else will ever compete with the startup; the reality is that somebody probably will. The goal is to prove that when somebody does try to compete, they’ll lose. And this is what you should be looking for when considering a startup to join. Just like you, VCs do not like taking risks, and they’d rather bet on a sure thing.
What should also be a positive sign to you or investors is that the product already has some users that are bringing the company money. Like it was previously mentioned before, startups are developing a product that, in the end, no one is willing to pay for or use, so if you can see that there are already people interested in this solution — it’s great! Being resourceful and determined enough to make things work, even without substantial capital, is always a good sign. The farther the startup goes on their own, the more likely investors are to think to themselves: “If they can do that much with so little resources, imagine how effective they could be with my money behind them.’’. And you should be thinking like this too!
Look for the advantage the company has - investors look for evidence that a startup has an advantage that the competition cannot easily overcome.
When a product already has some users that are bringing the company money it’s definitely a good sign.
There are lots of things to be considered to decide the chances of a company to succeed. Sometimes you will get more information, sometimes less, so try to take advantage of direct contact with the company during the recruitment process and ask questions that are important to you. Apart from checking all from the above, you can also make use of our three additional questions that could be asked to the founders:
1. Which of your original assumptions weren’t confirmed?
Normally, some of the assumptions made early in the process were wrong. It should actually be a bad sign if all the assumptions turned out to be right, and you should be careful when hearing something like this.
2. Why are you raising the capital and what you intend to do with it?
The answer to this question is important to you from the investor perspective. For a company to get funding, they need to have a proper plan and to be able to explain what they need the money for. The founders should have a clear goal in mind.
3. What’s your biggest threat?
This one will tell you how aware is the founder of what’s going on in the market, the competition, and what he might be focusing on to avoid. If you’d done the due diligence before the interview, you could compare your findings with the interviewer’s response.
One final remark — remember that the interview is for both you and the company to get to know each other better. Try to keep an open mind and not be too suspicious when speaking with the founders — it’s understandable that you have questions or even doubts. Still, it’s always better to stay objective and communicate in a casual way, not fishing for issues.
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