Tuesday, May 13, 2008

How to evaluate a startup for you

I have a young friend who works at Google, is considering a startup and came to me for advice this weekend about how to think about his decision. He's in the very fortunate position that he's not yet 30, he's made a nice nest egg because his first startup, in which he was an R&D engineer, was bought by Google early enough that his stock had meaningful value and so he can now step back and decide what he wants to do next without significant short term financial pressure.

As we sat in my garden enjoying the sun, we walked through a set of questions I asked him to help him think through whether the company he's considering is the right one for him.

1. What's the strategy and business - and can you get passionate about it?
Startups take a huge amount of energy to get off the ground and scale. If you don't care about the end product, or the impact of the business on its customers, it will turn into a grind when the going gets tough - which it inevitably will at some point. Even if the technology problem is fascinating the end solution needs to have meaning to you.

2. Can you make a difference to the company?
Again, it's about personal satisfaction, especially for engineers. Can you connect with the impact of the product on the end customer - and is the company impacted by whether you do an OK job or a great job? The fun ones are the ones where your technical breakthroughs flow directly to the top line.

3. Does the job/company you are considering meet the needs for where you are in your life and career?
This is a fuzzy one, and it is important to look at life and career. When I am advising I ask pointed questions like -- what is the experience you most want to get (independent of making money) and do you get it in the job you are considering? Remember, it may fail and you don't want to have wasted time on too many dimensions at once. Does it provide the technical/skill development/management/market experience you need next?

If I am talking with a friend I'll also ask the marriage/kids question and tell brutal stories from the choices I made - or better yet get my 16 year old daughter to tell them and she doesn't pull her punches. It's 1000% critical if you are married that your spouse is supportive of what you are doing because they pay the price.

4. Do you admire the CEO? And will this CEO be around for while?
Company cultures are made, or rot from, the head. If there is a terrific founder in place who you trust and has the maturity to work with the investors and bring in a new CEO if needed - great. If there is a terrific CEO in place who's there to stay for a while - great. But if there is a founder who's brilliant but clearly flaky and you know he's going to be replaced soon, be wary unless you are coming into a position of sufficient control that you feel you can influence the decision.

5. Can you learn from your manager?
For people early in their careers it's critically important that you work for someone who can teach you. There are a thousand ways to do things wrong for every way to do something right and it's much more efficient in the first 10 years of your career to work for someone who can teach you the basics, with quality, quickly.

6. Can you make money?
Again, any startup, if it's on a path to success, will eat the lions share of your time, so make sure the ROI is worth it. Think through revenue over time, look at comps for valuation multiples, consider your option package and the potential for future options, find out how many shares are outstanding and how many more rounds of cash are probably needed (and assume it's at least one more than they tell you) - and then do the math. Do you think you'll make enough money to make the financial risk and short term reduction of earnings worthwhile?

7. Finally, and most importantly - will it be FUN?
Definitely the most important question. Life is very short.

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