From Corporate to Startup: 21 Tips for Evaluating Early-Stage Companies and Making the Leap
Have you ever been at the crossroads of corporate stability and the thrill of an entrepreneurial venture? The siren call of startups, with their promises of innovation and rapid growth, can be enticing. Suppose you’re considering moving from the corporate world to an early-stage startup or even contemplating launching your own tech company. In that case, it’s essential to approach this decision with a strategic mindset.
Here are 21 tips to guide you through the process of evaluating early-stage startups and making a successful transition prepared by joint forces of LETA’s portfolio founders. Ask the founders these questions and do your research before switching jobs and establishing your startup.
1. Market Potential
Before diving into the startup scene, assess the market potential of the industry. According to a recent report by CB Insights, 42% of startups fail due to a lack of market need (and be aware that according to research by Harvard. Business School’s Shikhar Ghosh, 75% of all VC-backed startups fail). But that doesn’t mean you won’t create something worthy –simply ensure the company’s product or service aligns with a genuine demand in the market.
2. Team Dynamics and Experience
23% of startup failures can be attributed to an inadequate team. Evaluate the founders’ experience and the overall team dynamics to ensure a cohesive and skilled group is driving the company forward. Pay attention to their character as well–will you feel comfortable working long hours together? It’s not a secret, sometimes you will need to do more than expected and work extra hours.
3. Evaluate Startup’s Product
Evaluate a startup’s product before joining to ensure alignment with values, assess market viability, and gauge potential for career growth. Understanding the product’s impact, uniqueness, and technology helps make informed decisions about the company’s culture, values, and overall fit for your skills and aspirations.
4. Runway and Burn Rate Analysis
Understanding a startup’s financial health is crucial. Analyze the runway — the time a startup can operate before running out of money — and the burn rate — the rate at which a company is spending its capital. This information can be pivotal in gauging the company’s sustainability.
5. Product-Market Fit Validation
Verify if the startup has achieved product-market fit. According to a survey by CB Insights, 13% of startups fail due to a lack of fit in the market. A validated product-market fit ensures that there is a strong demand for the product.
6. Evaluate Startup’s Purpose or Create One
In today’s fast-paced environment, mission and purpose is key. According to McKinsey research, 82% of employees believe having a purpose is important for their company. Purpose can shape company strategy, engage customers and community, and steer choices at moments of truth. It inspires employees: More than two-thirds say their work is defined by their sense of purpose. Also, once inspired by a company with credible purpose, 93% of employees say they are likely to recommend that company to others.
7. Industry Trends and Disruptions
Stay informed about industry trends and potential disruptions. A Deloitte survey found that 87% of executives knew that their industry was going to be disrupted. Choose a startup that positions itself to thrive amidst changing market landscapes.
8. Regulatory Landscape Understanding
Consider the regulatory environment in which the startup operates. Failure to navigate regulatory challenges is a significant contributor to startup failures.
9. Network and Ecosystem Engagement
Evaluate the startup’s involvement in relevant networks and ecosystems. Startups embedded in supportive ecosystems tend to have a higher chance of success.
10. Investor Backing
The influence of investors on a startup’s success cannot be overstated. If there is a VC-backed startup, that means someone trusts you with their money. Furthermore, the fact that the startup has already raised money means that, in most cases, it is sustainable enough to fulfil its obligations and have enough runway.
11. Check Founder Vesting Agreements
Ensure founders are committed for the long term through vesting agreements. A startup can either have vested or unvested shares. A vested share is one that one can act on and sell. An unvested share is one that is possible to act on and sell after a period has passed, or an event occurs. A typical arrangement is that shares will vest after a period (usually four years).
12. Employee Satisfaction and Turnover Rates
Happy employees contribute to a positive workplace culture. You probably don’t want to leave your comfort zone for a company that has a toxic environment. You can find several startup employees on LinkedIn and ask them questions about their level of satisfaction with the company and the turnover rates. These answers could mean a lot in your decision-making process.
13. Evaluate Intellectual Property Assets
Secure intellectual property rights are crucial. Efrat Kasznik, the president of Foresight Valuation Group, and a Lecturer at the Stanford Graduate School of Business, says: “At the end of the day, patents are kind of the signal that the investors are looking for. They don’t really understand branding assets, things like trademarks. Going back to technology assets — people understand patents. It’s something they can look up.”
14. Global Market Potential
Consider the global market potential. Startups with a global focus may have an advantage in securing funding, as they can tap into larger markets and potentially generate higher returns for investors. For instance, we at LETA Capital consider only global startups as our investment opportunities, and most of our portfolio companies operate in 20+ countries.
15. Scalability Assessment
Evaluate the scalability of the business model. Scalability refers to a business’s ability to handle an increasing amount of work or demand efficiently without significantly increasing costs. Are there processes in place to handle increased demand without a proportional increase in resources? Can the business easily expand into new geographic markets without major modifications to its operations or business model? How adaptable is the business model to changes in the market or industry trends?
16. Understand Exit Strategies
Understand the potential exit strategies for investors. Companies with well-defined exit strategies are more likely to secure funding. Here are some key considerations and strategies that investors typically explore: Initial Public Offering (IPO), merger or acquisition, secondary sale, management buyout (MBO) or private equity buyout.
17. Diversity and Inclusion Policies
Diverse teams outperform their counterparts. A McKinsey report indicates that gender-diverse companies are 21% more likely to experience above-average profitability. For ethnic and cultural diversity, there are statistics of a 33% likelihood of outperformance on EBIT margin.
18. Evaluate Marketing and Branding Strategies
Effective marketing strategies are crucial for growth. According to HubSpot, In 2022, marketing goals revolved around increasing revenue/sales (27%), improving the customer experience (22%), boosting brand awareness/reaching new audiences (20%), as well as increasing engagement, and strengthening brand loyalty through customer relationships (18%). But in 2023, half of marketers say these goals will change. For those marketers making a pivot, increasing revenue/sales still tops the list, but the focus will shift to improving sales/marketing alignment, fostering relationships with customers to increase brand loyalty, revving up advertising, improving customer understanding of their products/services, and understanding audience targets better.
19. Customer Acquisition Costs vs. Lifetime Value
Examine the balance between customer acquisition costs (CAC) and customer lifetime value (CLV). A healthy startup maintains a CLTV to CAC ratio of 3:1 or more. This ensures the company is not spending excessively to acquire customers.
20. Data Security and Privacy Compliance
With increasing concerns about data security, ensure the startup is compliant with privacy regulations. Moreover, try to assess the data security aspect. The Cisco 2017 Annual Cybersecurity Report provides insights that for organizations that suffered a breach, the effect was substantial: 22% of breached organizations lost customers — 40% of them lost more than a fifth of their customer base and 29% lost revenue, with 38% of that group losing more than a fifth of their revenue.
21. Customer Reviews and Reputation Management
Check customer reviews and the startup’s online reputation. This works both for B2C and B2B startups, but the platforms may differ (either AppStore and Google, or G2 and Capterra). According to BrightLocal, 46% of consumers feel that online business reviews are as trustworthy as personal recommendations from friends or family. You should definitely pay attention to reviews and examine the media as a part of your startup due diligence process.
Making the transition from a stable corporate environment to a vibrant startup world can be exhilarating and rewarding. But I advise evaluating the abovementioned 21 factors so you can enhance your chances of surviving and thriving in the fast-paced startup ecosystem. Remember, the startup journey is not just about taking a leap; it’s about making an informed, strategic jump toward a future full of uncertainties and adventures.
Do you run an innovative tech startup? We are investing in early-stage revenue-generating software startups and would love to hear from you! You can reach us at info@leta.vc or fill in the form here.
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