Choosing the Right Startup-5 Points to Consider

Apply these principles and your batting average will go up

I am a startup skeptic. If you pitch me 100 startups, I will eliminate 95 from consideration in a matter of minutes. I have always been this way. It would seem ironic that I’ve spent almost my entire career working for startups.

My first real job out of college was as a technology recruiter for a company called OTEC. OTEC was a traditional recruiting firm that also happened to be the company that HotJobs was spun out of. One of the OTEC co-founders became Hotjobs founding CEO. The other stayed with OTEC. Both did well.

OTEC was the ultimate training ground for smart young folks just out of college. This was in 2000/2001/2002, so I had the good fortune of experiencing the tail end of the dotcom boom, and the ensuing crash. It was as talented a group I have ever worked with, still to this day. We were very young, very smart, highly creative, with some big ol chips on our shoulders. To say we were competitive is the understatement of the century. That’s a good combination of stuff.

The OTEC Team circa 2001ish. A great young group that has gone onto greater things. What’s with all the white pants though? It was a different time…

Through that experience, we learned to handicap startups relatively quickly. Everyday we’d watch startups get financing. And we would read it off and knock em down. “These guys got $20 million? No chance”. Or “Salesforce.com raised more money? No chance these guys can compete against Siebel!” (We were wrong about that one by the way). But we also ended up being right a lot. Not everytime. But a lot. 13 years later, I apply those lessons everyday, with some new tricks learned along the way. Here are 5 things to checkoff before going to your next SaaS startup:

1. Is There Lead Velocity? — If there ain’t no leads, then there likely ain’t no market. Or you are ahead of the market. That’s not the end of the world but it creates a lot of uncertainty. No great SaaS company (that has scaled) did it on the back of a 100% outbound sales and marketing strategy. None. Except maybe Veeva, which worked because they were selling multimillion dollar deals to a niche market. It also helped that Salesforce didn’t compete for their market. Otherwise, you look at Salesforce, NetSuite, and all the other hugely successful SaaS companies — those were marketing demand machines. I do believe you should have an outbound strategy to compliment your marketing demand gen strategy. But if you are almost entirely outbound, you will likely never achieve scale unless your ASP is 7 figures and up. And good luck with that part.
2. Is There a 10,000 lb Gorilla Ahead of Them? — While lead velocity is great, it can be deceiving. If you are in the CRM space and want to go upmarket, and all your leads are SMB, well guess what? You’ve got Salesforce on your bow, on your starboard, and on your port(did you like my sailing analogies? I’ve never done it btw). If you want to take on Salesforce, you had better come packing some serious heat with a truly disruptive concept. If you have a 10,000 lb gorilla in your space, same rules apply.
3. Can They Tilt Upmarket? — This binds itself to point #2. Many times early lead velocity is heavily tied to SMB midmarket opportunities. Which is great and totally normal. It aligns with a bottoms up approach. But can you move up? Is there a Salesforce in the enterprise? Will the enterprise be able to consume your product the way the SMB market does? Is their commitment from the founder/s and engineering team, and the know how, to build the features to tilt upmarket?
4. What is Their ARR/MRR to Capital Raised? — Some people disagree with me on this point. But for a B2B SaaS company, if your ARR is grossly out of proportion to the amount of capital raised, it’s not a good thing. Because it signals that the company and investors have doubled/tripled/quadrupled down on something they don’t even know works. I’m talking about raising 4o to 50 million on 1 million in ARR. I don’t like those metrics. At all.
5. What is the Month over Month Recurring Revenue Growth? — This is where we are seeing some metrics that just stagger the mind. You saw Zenefits’ fundraising last week announcing 30% MoM growth. That is crazy. There is another startup in the CallCenter/Voice space that is also doing 30% a month in MoM growth. If you see those kind of metrics…it’s go time.

So Ask these questions when interviewing. And then apply the numbers and answers to other startups you may be talking to. It will help you crystalize what the right decision for you is. Good luck. Happy hunting.