"Never test the depth of the river with both feet." - Warren Buffett
The idea of joining a startup is intriguing. It’s incredibly enticing to embrace the chance to be part of something really big, not to mention an unparalleled learning opportunity and possible springboard into your own venture. However, you don’t want to lose your shirt (or your pants, shoes, or faith in humanity) either. You need to do your homework.
The latest data shows that 90% of startups fail within the first year. So how do you make sure you're joining the elite 10%?
Let's take a look at the top five reasons startups fail, and then see what questions to ask to make sure the startup you're thinking of joining doesn't pose a high risk.
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Reason for Failure: No Market Need
Question to ask: How does your product/service align with the current demographic trends?
“If you build it, they will come." While that idea may have worked for Kevin Costner's character in Field of Dreams, such advice can prove disastrous for a startup. Failure to do proper research on what the consumer wants is a grave error. Putting a plate of food in front of someone with no appetite for it is a waste of time and certainly a waste of money. Make sure the company is offering something the market needs and wants. Startups don't have the time or funding to go back to the drawing board to figure out what’s trending in the marketplace so they can catch and ride the demographic trend at its peak. They need to get it right from the very start. If the startup in question is late to the party, then you should reconsider.
Question to ask: What kinds of consumer research have you done?
Make sure the startup has the research, data, and early signs of success in the marketplace. Have they conducted focus groups, tested out a prototype, gathered feedback and made refinements accordingly? Have they done due diligence to set their product and/or service up for success? If they haven’t, it may be difficult for you to be set up for success as well.
Reason for Failure: Money Issues
Question to ask: Do you have good funding?
A startup needs to have enough money to last at least a year. If they have six months or fewer worth of funding, then they are already going out of business.
Question to ask: When is your next funding round?
It's a huge risk to begin work at a startup within months of an upcoming funding round. At that point, you've had very little time to influence the company's viability, so you'd be left crossing your fingers and hoping that they've been doing well without you. Investing time and energy to build a startup is a calculated risk to begin with, but putting yourself in a position where your job security rests exclusively on the efforts of your predecessors is an even bigger gamble. Proceed with extreme due diligence and caution. Whatever answer they give, deduct two to four months in case they've underestimated their expenses.
Question to ask: What's your runway?
Startups are almost always on the verge of running out of money. They are dependent on their next funding round or their next big client. You should ask how many months of runway they have left, so you know what you're getting into. You could be out of a job in three to six months after joining.
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Reason for Failure: Not the Right Team
Question to ask: Have you built a business before?
90% of startups don't make it. If the owner has build and sold a startup before, then the odds go down to 25%. Clearly if they've been successful building teams in the past, they will continue to do so.
Question to ask: Tell me about your team. How many have worked for startups before?
This is key. Look for a team that has a few startup veterans under its belt. Their experience with startups (the good, the bad and the ugly) is invaluable. And, keep in mind, they would have vetted out the startup based on experience. So if you're interviewing with a company comprised of some startup veterans, it’s already been endorsed to some degree.
Question to ask: What kind of experience does your team have and how will that experience help drive your business forward?
If you’re considering taking a job with a startup that focuses on a specific sector such as real estate or education, then you obviously don't want to hear the team has no subject matter experts. Nor, do you want a team with an unhealthy balance of too many managers and not enough doers. You want leaders in the field that are also hands-on, high performers.
Question to ask: Do the key partners get along?
A company's culture comes from the top down. If the people who started the business don't get along, the entire company feels the fallout.
Reason for Failure: Lack of Vision
Question to ask: What one thing must be done?
Ask what one thing must be accomplished for the startup to succeed. There are two reasons to ask this: It will determine if they have a clear, focused vision, and it will give you a sense of how your job should be aligned with that goal.
Question to ask: When will you go public?
A good company should wait 7-10 years before they go public. Why? Because if they're good then they are undoubtedly growing faster than the market. So they should stay private as long as possible to maximize benefits for shareholders and employees. So try to figure out if they are ultimately interested in an exit. Some owners are not.
Question to ask: What's the focus for the next three months?
This question is a shortcut way to learn about what your job experience is going to be like. For example, if the startup says it plans to launch two new tech features for its product, and you're applying to be an engineer, you'll likely have a great first three months. You'll know that you have the opportunity to show your skills and your contributions will be noticed. On the other hand, if you're applying for sales, the startup's plan to focus on product features might mean you're selling a product that might be outdated soon.
Reason for Failure: No Marketing Strategy
Question to ask: What's the sales strategy?
Startups are often focused on product and user traction first, but it's critical for the company to eventually monetize. While some startups keep operations running from proceeds of fundraising, it's important to understand — before you join the company — how the startup intends to make money from customers or users. Having an intimate understanding of the sales strategy will help you gauge the likelihood that the company will succeed and can be your best position when you're interviewing for a job at the firm because you'll have a great strategic focus.
Without great risk, there are no great rewards. Just make sure the risk you’re taking is a calculated one. The rewards could be life changing.