HOW TO VET A VENTURE-FUNDED STARTUP
Failure to properly assess the risks of joining a startup might blow your whole house down.
Article by Dr. Nakeema Stefflbauer Illustration by T. Stefflbauer
In my first startup job, I didn’t ask financial questions until the 9/11 crisis, after heads began to roll. Given the massive cuts triggered by the COVID-19 crisis, many job-seekers need to quickly assess the job market, including job offers at startups. However, lack of regulation means that the average job-seeker may well take up residence in a literal house of cards. For this reason, I’d advise anyone who is considering a role at a venture-funded startup to make sure that they understand exactly who is betting what on whom.
Like venture capitalists (or VCs) who evaluate startup founders in the context of their teams, you should also evaluate startups in the context of who has funded them.
CEOs at traditional corporations will often have a mentor or two, and the majority of venture-funded startups have a pair of hands (or ten) attached to their investments. VCs view startups as investments to be funded and scaled up to super-sized market valuations. Once a startup has a multiple-millions valuation, they typically get acquired or go public through an initial public offering (IPO) on a stock market: this is called an “exit”. Exits mean success, and pretty much everything else equates to failure.
Startups that struggle to exit may burnish their image through aggressive marketing or may swiftly terminate employees through whatever small-business loopholes exist. Another favourite way for startups to maximize cash on hand — and thus, to extend the funding “runway” — is to offer employees stock options in lieu of salary. Wherever you may be in the world, you will want to get a tax advisor’s input on what stock options and their vesting schedule mean for you. In Germany, for example, you get taxed on what options are theoretically worth, unless a special “shadow” or virtual stock plan is created. This means you could conceivably accept a deal that gives you a small salary plus taxes due on wealth you don’t actually have.
Think very hard before you accept share offers over rent money, especially if telltale signs of a struggling startup are already there. While you might see a ten-year-old “startup” as a safe, reliable bet, most venture-funded companies have less time than that to make their investors a healthy profit. The VC clock to exit is ticking before the founder even does their victory lap.
In interviews with startups, especially those with a first-time founder, assume that you’re an investor who’s evaluating them.
Be suspicious of startups that have had multiple CEOs or CTOs in a twelve-month period. Question startup founders who believe investors are like visiting Heads of State and off-limits to employees. Challenge startup founders who crow about the funding they’ve raised but clam up about the timeline or “runway” associated with that money. Founders who are reluctant to elaborate on what they’ve done before founding a startup are also a risk. What kind of a risk?
Imagine a startup founder who wants to hire you has never spent significant time working in a large, established company. Who is going to recognize that employees might need more than free pistachios and a bus pass to work sixty-plus hours a week? Very possibly, not that founder.
Today, venture investors often ask founders to describe their plan to attract and retain superior talent. They want to know what their corporate culture is, and how they will create an organisation for which the best talent want to work. VCs are also focused on market-making businesses: startups that can grow to monopolize an industry function, or very close to that. As a result, VCs spend a lot of time listening to pitches — and saying no. This is not a bad skill for job-seekers to learn. Startup founders may or may not be visionaries, but the successful ones are forceful, convincing, and passionate enough to shake millions out of venture investors’ wallets. VCs aren’t usually licensed psychologists or private detectives: they draw conclusions about a startup’s potential like the rest of us should — based on their experience with previous startups and by asking questions.
If you’re considering work at a company whose strategy is unknown to you, then you probably aren’t a key part of it.
It is imperative that you inform yourself about a startup’s funding runway, its founders’ previous management roles and about founders’ investor relationships. Smiling through interviews and trying to judge someone else’s people skills is not the best way to evaluate your opportunities at a startup. Although you may be tempted to simply accept the product hype-men (or women) who present themselves to you as visionary leaders, consider how they answer your questions about startup strategy and who is supporting their venture: this will give you a sense of what they think about your role in their company. Good questions that relate to a startup’s venture status include:
How much funding have you received, and how long ago did you receive it?
Which VC leads your capitalization table?
How engaged are your investors? How are they helping you?
Do you plan to do more fundraising in the next 12 to 18 months?
How much do you intend to grow the startup (hiring) over the next year?
VCs don’t invest in the idea of a cool startup or in its image: they evaluate numbers, track record and growth prospects. There is less emphasis on numbers in early-stage funding rounds (seed stage/series A) and more during later-stage funding rounds (Series B, C, D and beyond). Along with serious industry-level, client-level, and financial due diligence, most venture investors consider visiting founders “on the job” and in the context of their team as critically important.
For job-seekers, engaging with startups large and small can be a challenge. VCs are ready to risk a specific sum of money on a startup. But, in these COVID-19 times, startup employees risk job termination via two-minute pre-recorded Zoom calls. Established corporations and public companies may have more rigid set-ups and plenty of analog activities, but they also generally have functioning Human Resources departments, performance reviews and professional development programs. Too often, even the trendiest startups do not.
The risks of joining a startup company are many, so informing yourself about a company’s financial and cultural backdrop should be a reflex. Go ahead and ask your questions of the senior managers or (if they can’t answer you) ask the founder(s). Research on your own and check a startup’s references. Then, choose wisely.