How to pick startups, and the unfair advantage employees have over VCs
In my last post, I covered an update on the 14 companies that I was seriously considering in Feb 2018 when I decided to join Honor. 15 months later, most of these companies have done very well. 12 of the 14 appear to have been good picks as of right now. 4 were outstanding picks as of right now. Of course, we need more time to see how things turn out in the end when some of these companies reach exits. But overall, the “portfolio” is doing insanely well.
These posts are for the little guys. You know, the people working for startups busting their asses off to build these amazing new services. It’s not for investors, so I’d like to provide an overview of how I think about picking startups as an employee. It turns out we even have a few unfair advantages at picking over the big guys like VCs and famous folks in Silicon Valley.
Unfair advantage #1: good artists copy, great artists steal (Pablo Picasso)
As an employee picking a startup, you are allowed to steal your picks from the best completely for free. VCs invest in a startup before you work for the startup. Eg, if you’re joining a Series A startup with 20 people and First Round Capital funded their Series A, you know that First Round has vouched. They’ve done due diligence. They had the much harder job of picking before anyone else had picked. They have a track record of picking well. They invested at a certain valuation, and when you join, your options will be priced at the same valuation. In other words, it’s good social proof.
And you can get that social proof from all of the best VCs super quickly and easily. I prefer to use Crunchbase to see which VCs backed which startups, but there are plenty of tools to help you do this.
So the next question becomes who’s worth following? That’s up for debate, but personally, here’s who I feel good about following…
a16z
Accel
Benchmark
First Round Capital
Founders Fund
Greylock Partners
Homebrew
Initialized
YC (when they make a big follow on investment)
Unfair advantage #2: I am no one (Arya Stark)
It can be challenging to get real, candid information about how a startup is doing. You cannot trust press on a startup. You don’t have access to the raw financials, and even if you did, the numbers can lie too. But you do have one thing going for you, no one at the startup cares about you!
Before you apply or interview, talk to people who work at the startup. They’ll usually tell you a lot more than you would expect. You don’t need them to reveal confidential info like user growth, revenue and margin numbers, or things like that. (More on those types of data later…)
Ask them things like…
Do you like working here? Why?
Are you doing the best work of your life right now?
Do you think the company is going to [fill in blank for whatever the company’s goal is]?
How do you like your coworkers? Are they capable? Do they care more about their own career advancement or helping their team win?
What’s been most surprising since you joined?
Do you feel energized going to work everyday?
When do you plan to leave?
The general theme here is that instead of trying to diagnose whether the company is great or not by analyzing its business, you’re relying on its employees feelings about being in the building to indirectly assess the same thing. In my experience, you will learn a lot more this way than by doing direct analysis on the market, fundamentals, etc. You should do that too, but this stuff is more telling.
Unfair advantage #3: I am no one (part 2)
There is nothing preventing you from buying the product of the company you’re looking at or calling their customers for feedback. Most people will give you real feedback. Why would they do that?
Why not!? What’s the harm in it? You’re no one. There’s no consequence it them telling you the truth, so take advantage of that!
Eg, I used to work for an ad tech company. Before one of our engineering managers joined, he cold called one of our customers and asked them what our click-through rate was. We had a great product and our click-through rate was over 10x industry avg for that client. Had the eng manager been an investor or a “known guy,” I’m sure out of respect for us this client wouldn’t have said anything… but he was no one.
Everything else
My intention has been to focus on unfair advantages you, as a potential employee, have when vetting startups. These are meant to complement all of the other stuff you’re supposed to do. Those are things like…
- Read everything you can find about the company on the internet
- Decide whether you’re passionate about the market and the product
- Research the competitors
- Research the financials
One last note on the financials. Once completing the interview process and getting an offer, you should be able to get key information related to the company’s financials. Specifically, you should be able to get…
- ARR (Annualized Recurring Revenue) and growth rate: ARR is calculated by multiplying last month’s recurring revenue by 12 to get an estimate for future annual revenue
- Gross Margin and future expectations of gross margin
- # of customers and growth rate
- Customer retention: eg, after 1 year, how many customers continue to pay for the product
Sometimes these metrics can be tricky from an accounting perspective. You will likely need to ask clarifying questions. Some may not be relevant for a particular type of company. But you should get a good idea of what these metrics are for any company that gives you an offer. Companies may hide behind the fact that they don’t disclose these metrics for competitive reasons. That is fair, but I can tell you from first hand experience that this particular excuse is much more likely to be a red flag (ie, they’re hiding something) than a legitimate competitive concern.
There are exceptions. Eg, if a company is close to going public, that’s a legitimate excuse not to share. Other than that, be skeptical if you can’t get access to these metrics.
In conclusion…
Life’s unfair. It’s a lesson we all learned in childhood… but it works in both directions. Use it to your advantage.
