Evaluating a Startup as a Potential Employer

If you have read the previous two posts (Startup Jobs and Understanding Startups), I hope you are now feeling more positive about the opportunities and benefits of joining and working for a startup. By exploring opportunities with startups you really have very little to lose and potentially a great deal to gain — provided you know what’s what.

It’s critical, of course, to choose the right startup to join. You need to be able to distinguish the future stars from the lemons so you will hopefully avoid the lemons.

Before You Decide to Join a Startup…

Here are the top three things you must know before you make the decision to either join a startup or walk away.

1. What stage are things?

Lots of businesses call themselves startups.

Many are nothing more than someone who has come up with an idea and convinced themselves it’s going to be huge. And that’s it. They have no prototype, no capital, no premises, and no staff. Nothing.

It’s just them and their (possibly) “brilliant” idea.

At the other extreme, there are businesses that are trading, which have investors, customers, staff, premises and a service or product.

But because they are still in the early stage of their anticipated growth, they still consider themselves startups. They may well be at a point where they need to secure more funding for the next stage of their growth.

Position on the Startup Continuum

So when you hear a business is considered a startup, the first thing is you must be able to do is to establish where they are on this continuum.

  • Generally speaking, businesses at the beginning of this continuum have no ability to pay you from their business revenues. Because there are none. Sometimes a startup founder may be independently wealthy or have access to other capital through personal connections and this can remove this obstacle. But these are the exception not the rule.So, unless you are completely convinced by the brilliance of the idea and its prospects of success, AND you can afford to work possibly for no pay for an unknown period of time, walk away, or negotiate a deal where you will be paid upfront or in the form of future equity (more on this later).
  • The further a startup gets along the continuum however, the less risky it is and the more ability the business has to pay you. This doesn’t automatically mean that you’ll have a secure job there for the next 10 years, but it does mean you’ll get paid for as long as the business is able to.

[Read Understanding Startups to see the six key stages of a startup.]

Cashflow Position

Note the key words, “able to” (above.) Startups can have very wobbly cashflows. For example if the business has been over-optimistic in its recruitment of people or its investment in premises and consequently is carrying large overhead, any unexpected delay, costs, or blips in its revenue stream can result in there being no money to pay staff.

So, try to find out what the business’s cashflow position is. It’s a reasonable question to ask. You don’t need to audit the accounts to do this. You just need to know what the monthly incomes and costs are. If the incomes can cover the costs, then you can take some comfort that the business is probably not going to collapse in the short term.

2. Who is involved, and what’s their track-record?

Step two is look at who is involved. The track record of the key people in the business is vital to know. If the founders have a track record of success in the same or a similar business, not only are the success prospects much better, but you also can have more confidence they will be succeed. They will be doing something they know well. This makes a huge difference in their probability of success and consequently your job prospects.

The more breadth of talent that is already present the better. A visionary genius alone won’t get far without a team of others who know how to build what’s needed. If there’s a crack team of people who have all done this sort of thing before, that’s a really good sign. Not only are the success prospects much better, you can take a lot of confidence from the fact that these people would not be there if they didn’t believe in the business and its future.

It’s time to sleuth things. Check out the founders and other team members online. Ask others who know them about their history. It’s very risky to rely on what anyone tells you about themselves. You want independent verifications, not people’s own spin about themselves.

3. Has the business had any outside investment or scrutiny?

This is the third key aspect to know. If the business has been able to secure some funding already that’s a good sign. But take note who and where that funding has come from:

  • Savvy investors If the source is external such as wealthy private investors, venture capital firms, or bank loans, you can take reassurance from the fact that none of these types of investment are usually made without rigorous independent scrutiny of the business and its prospects.
  • Family and friends On the other hand, if it’s family or friend’s money, that doesn’t black list the business, but it does mean that the scrutiny will not have been as rigorous as with external investments.
  • Crowd funding Crowd funding is a new source of funds for businesses. There’s a lot of hype about it. The most successful have raised tens of millions of dollars in this way.I recently examined the top 100 biggest crowd funded success stories. What is important to know is that only four categories of businesses were in the top 100 most successful at raising funds this way. They were video games, niche movies, software/tech gadgets, and charitable/heritage activities. This is because the crowdfunding investment community is heavily skewed to those who are heavy digital users. So they are the young, intense users of social media, very interested in technology.In essence, they choose to invest not so much because of the business merits of a startup but because they like the idea, product, or service it delivers. Success reflects their wants much more than the business’s prospects of success. So a crowdfunded business in one of these sectors that has secured heavy investment this way is a good bet.If the business is outside these sectors, has no record of success with crowdfunding, and states that this will be the source of its future capital, you should be much more wary.

Botton Line

By applying these three simple measures, you can easily sort out the promising startups from the seriously risky ones. Joining a startup which satisfies these three criteria is a sound decision. They may not be able to pay you top dollar. They may not be around in a year or even six months, but, and this is important, the time you spend there will deliver know-how, experience, and contacts which will make you an infinitely more valuable and sought after person in future.

In the next post, we’ll look at how to get hired by a start-up.

More Information About Startups

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