“I am considering leaving my corporate job to join a startup,” said my friend. “I thought you would be a good guy to ask on how I should evaluate the startup. This is a big decision for my family and me. I don’t want to make a mistake. What questions should I ask?”
My friend has a great career at a Fortune 50 company. He’s been there for a little over ten years. He is, I am sure, judged loyal and capable in his current position.
Now he is being drawn by the aroma of startups. The excitement, the opportunity to make a difference, the chance to make his mark and earn his fortune.
I said, “There are four questions you need to ask. All four must be answered to your satisfaction. If not, pass on this opportunity.”
1. Is the founder’s experience relevant?
All of the successful startups I have invested in had founders who knew their market firsthand. They worked in it for years. This gave them a distinct competitive advantage.
They knew the culture of the market. They felt like one, dressed like one and talked like one. They knew the market and loved it because they gained their business experience there. Further, the idea the founder pursued in the startup was birthed while working in the market.
By knowing the market at the ground level, they knew how the people thought and how they bought. And people buy from people who understand them and their business.
Finally, the founder has a network in the market to which they are selling. This network is invaluable. They know who is who in the market. They intuitively know the movers and shakers, the influencers and decision makers. They know the market leaders and the market losers.
All of this spells reduced risk. This founder is a good bet. He has a better chance of succeeding than someone who identified a market through a customer discovery process.
2. Does the business model make sense?
For a business to succeed, it must start with a plan to generate free cash flow. The more complex the path to revenue, the less likely the business will succeed. The higher the fixed expenses necessary to be in place before generating revenue, the less likely the business will succeed.
Back in the dot-com era, there were very few business models which made sense. The pitch was “Spend, spend and spend some more” without regard to profitability. Everyone was saying, “It is a land grab. The first company to command market share will have the highest value.” All of those companies went out of business.
A business model which makes sense is one which clearly demonstrates how the company will make money. And you can be sure of this, a company which makes money will not go out of business and will always be valuable to someone.
3. How much cash will it take to become profitable?
If you are ready to leave your job for a startup, be certain you have a fighting chance to succeed. You can only succeed if the business has enough cash to get to sustainable cash flow.
With this in mind, you need to understand how long it will take for the business to become profitable. Once you know how much cash it will take, be comfortable that the founder can get that amount of cash from someone.
Cash can come from the founder, customers, lenders and investors. The longer the lead time to profitability, the more the founder will be forced to seek investors as the only option.
Getting outside investment money is really difficult. The founder is competing with every other startup looking for money.
But you have an opportunity to be objective about this opportunity. Since you most likely don’t know anything about raising capital from outside investors, here is a good question to ask yourself.
4. Would I invest 50% of my net worth with this founder in this business?
Leaving a good career for a startup is life changing. It could be very good, or it could be very bad. Because the risk is high, you need to approach this decision by getting good answers to these questions.