Evaluate a Startup like a VC
Find a great B2B SaaS startup
When searching for a new job, put on your venture capitalist hat to make a great choice. After all, you are making a multi-year commitment. Unlike a VC, however, you can only choose one company instead of a portfolio of companies, and you will spend most of your waking hours working there. Below is a framework for how to evaluate startups qualitatively and quantitatively.
Qualitative
Market: “Great markets make great companies” noted Don Valentine, the grandfather of venture capital. Startup should be solving an urgent problem for many customers. Ideally, startups are in a growing market. Ask about who the customers are and what problem they are solving- companies should be able to be precise.
Team: Look for founder-market fit, where the founders have relevant expertise and passions. The team may be ideal customers for the product, or have worked in the industry. Assess whether the founders have high integrity and drive, and if they can attract talent. Do you think you can partner with and learn from the team?
Product: Ask startups to describe the product they are building, and how the features fit together to solve a core problem for their customers. If you are an engineer, dig into their tech stack. Watch out for convoluted answers.
Competition: Startups should understand the competitive landscape and how they are similar and different to other companies. Ask about how they are differentiated from competitors. Be weary of companies who say that there are no competitors or say that they are the best without evidence.
Go-to-market: Building the best product is not enough. Startups should have a clear plan for how they plan to acquire customers to meet their growth targets. They should have realistic expectations around stage conversion rates and customer acquisition costs.
Quantitative
As startups mature, evaluating startups becomes increasingly about metrics. The below metrics are targeted at early-stage B2B SaaS startups.
Scale: Annual recurring revenue, or ARR, is the main metric for scale. Series A startups typically have $1–3M of ARR, and Series B startups have more than $5M in ARR.
Growth: Early stage startups have explosive growth. Many of them aim to 2–3x their ARR on their way from a few million in ARR to over $100M on their journey towards being a public company (see the T2D3 path). Typically, high-growth startups are valued on their projected forward revenue for the next twelve months (NTM ARR). Joining a high-growth startup will be beneficial for your career.
Margins: For software companies, their gross margins mainly consist of cloud computing and support costs. High gross margins allow companies to invest in product and sales as they grow and eventually generate strong cash flows. Good gross margins are typically above 60–70% for early-stage companies, and companies should aim to eventually get to over 80%.
Sales efficiency: Startups should aim to not only grow quickly, but also efficiently, gaining high net new ARR with low sales and marketing investments. Benchmarks depend on whether companies sell to SMBs or Enterprises. Magic numbers greater than 0.75 for enterprises and 1.0 for mid-market, and payback periods of less than 36 months for enterprises and 18 months for mid-market are considered good.
Retention: SaaS businesses have highly predictable revenue compared with one-time transactions; instead of starting at zero each year, their revenue approximately starts with what customers paid them last year. If startups cannot retain their customers, they need to find more new ones to grow. Metrics benchmarks depend on what segment is sold to. Gross logo retention over 75% for mid-market customers and over 90% for enterprises is good. Net dollar retention over 100% is good, and over 120% is great.
Hopefully, the above framework helps you evaluate startups qualitatively and quantitatively so that you can make a great choice in your next role!
Join Abnormal Security
We hope that you will strongly consider Abnormal as part of your job search. We play in a large market- our goal is to stop Business Email Compromise (BEC), the #1 cybercrime. Our team hails from leading ad tech companies such as TellApart and Twitter, as well as cybersecurity companies like Proofpoint and Palo Alto Networks. We are funded by Greylock Partners and Menlo Ventures and recently raised a Series B financing. Check out our careers page.
