Years ago, I was choosing between several startup offers. I ended up joining an early-stage startup that has grown into a multibillion-dollar company. The startups I turned down no longer exist.
Did I have a crystal ball? No, I wish, but I did have a process for evaluating each opportunity.
The startup landscape has since become much more attractive. It used to be about learning a lot but earning a little. That’s no longer true — many startups are paying close to big tech salaries with more equity and learning upside.
The private market is ever in your favor. So how do you make the most of it?
Most startups fail — you hear this a lot. What you don’t hear is that most startups are clown cars looking for a gold mine. With no clue what they’re doing, it’s not shocking that the failure rate is so high.
This post is about how to improve your odds of avoiding the dumpster fires and finding the gems that are worth your time. Let's look at the vital signs.
A common mistake is gravitating towards huge valuations and dollars raised. While big numbers are seductive, capital has become cheaper by the year.
Quality of capital is not. Tier 1 investors have access to the full pipeline. Whatever startup you find, they’ve seen it. And if they did not fund it, you gotta ask: what do I see that the professionals missed?
They’re also behind the majority of successful tech IPOs, so tracking their portfolios is a simple way to find a qualified list of startups. No guaranteed outcome, but a good place to start. There are also investors specialized in verticals (e.g., Craft Ventures in B2B SaaS) that could be useful to add on.
A common mistake is discounting first-time founders. Yet to not bet on first-time founders is to miss out on some legendary companies: Amazon, Facebook, Google, Microsoft… a large portion of big tech.
I find it’s far more important to assess their 1) track record, and 2) appetite for learning:
- Have they started side projects before? How did they go? What did they learn? Many “first-time” founders are actually prolific builders
- If they worked at other places, did they build new products?
- Where did they develop their business / product / technical chops? Who did they learn from? How determined are they to keep growing?
One test is to offer unsolicited feedback (on the product, hiring process, etc.) If the founders welcome it and dig deeper, that’s a good sign; if they get uncomfortable and shut down… that reveals more than any sales pitch ever will.
It’s natural to size up a founder based on where they are today, but it’s more valuable to understand how they got to where they are. Joining their startup is betting on their long-term trajectory, so slope > y-intercept.
Interview process / early employees
A crucial product built by the startup is something you directly experience: the interview process. The great ones constantly iterate on how to attract and identify talent.
Are they testing scenarios that are relevant to the job? Do you walk away with a clearer sense of what you’ll be doing? Would top talent happily go through this process?
Just like a great product attracts customers, a great interview process attracts the right employees — people who make small and big decisions that shape the trajectory of the business. Ideally, the early employees on the team could easily get great jobs elsewhere, but have chosen to bet on the place.
Any fast-growing startup will happily share how fast they’re growing. But like dollars raised, it’s important to dig into the quality of that growth:
- How do new customers learn about the product?
- What types of channels are they? Organic channels (e.g., referrals, SEO) are ideal. Paid channels are ok to start, but make sure to dig into the payback period. Never bet on cost staying the same, especially when it can get competed up
- Do the channels get stronger over time? This is where organic shines, but paid falls flat; the minute you stop paying is the minute your pipeline dries up
- How much growth is driven by each channel? Ideal to see (potential for) a mix that keeps the business resilient
Founders should be able to recite this information to you in their sleep. Moreover, they should be excited to help you build an informed picture of the business. This is the kind of thinking they need to continue growing!
Growth can propel a startup, but its long-term value is capped by retention, aka % of customers and revenue that stick around. The more that stick, the better the #s look, the more you can afford to pour into growth. It’s a virtuous loop.
Some leading signs of stickiness:
- Does the product get better over time as the customer uses it more? (Spotify)
- Does the product get better over time as more customers use the product? (TikTok)
- Does the product get harder to switch away from over time? Could be from sheer habit (Wordle), deep integration into workflow (Stripe, ConvertKit), content that’s annoying to export (Substack, Podia)
- Do the customer’s needs stay consistent over time?
This last question reveals a large part of why consumer startups are deceptively tricky.
B2C vs. B2B
Remember when Houseparty and a bunch of group video calling apps ruled the charts? Shaan Puri shared the backstory: despite their wild growth, the founders realized they were on a sinking Titanic.
Their users were high schoolers who didn’t have their driver licenses yet, so they were eager to jump on long video calls with friends. Once they went off to college though, they used it less frequently. After a while, the need vanished entirely.
Their retention tanked not because the product sucked, but because their users grew up. Young consumers are attractive, but they’re also highly fickle… especially if you’re filling their free time.
Meanwhile, business problems are pointed and relatively consistent. They want to grow revenue and profit, and they’re usually ok with paying more as they do better.
Do the customer’s needs stay consistent? is another way of asking: how hard do you have to work to keep them around? Do you need to chase what’s new, or can you bet on what stays the same? Former sounds like fun, latter makes for a stronger business.
Of course, it’s hard to beat the rare glory and riches of making a consumer hit. Perhaps a good test is Nikita Bier’s rule of thumb for persistent problems: help people save/make money, unplug from reality, and find a mate.
Salary vs. equity
Much ink has been spilled on this topic, so I’ll keep it short.
Some startups with pumped-up valuations will wow you with a big equity $ amount, but you can never judge without the denominator. You need to:
- Calculate equity % — your total # of shares / fully diluted outstanding shares
- Equity % is the best way to estimate how much you stand to make at exit; otherwise, you’ll have to guess what the future price per share looks like… which you’ll really need a crystal ball for
- Benchmark your equity % based on stage, role, experience, location
As a startup grows, equity gets more expensive and harder to come by while salary gets easier to ask for. Assuming you have conviction in the startup, it makes sense to get as much equity as you can upfront. With that said, you still need enough salary to live your life and cover the exercise cost and taxes... so you gotta do some personal math to make your trade-off.
Even with rising startup compensation, most will not be able to match the liquidity of the big tech package, so it’s hard to justify joining unless you have 1) strong conviction in the founders / business, and 2) hunger for the learning experience.
It's always better to be a fast-growing startup and not quite in the right role than in a slow-growing or stagnant startup where people are forced to think in more territorial ways.
Some say joining a startup is like betting on a lottery ticket. I say you can’t control the lottery numbers, but you can control your process for picking a startup. I hope this gave you some useful pointers! Here's a deep-dive with more high-signal questions to cover.