There are many attractive factors about joining a startup, being a part of something more directly, having more ownership and responsibility, wearing multiple hats, the speed that you can move in, everyone focused on a singular mission. I personally love it, but it’s a wild wild world out there. Traditional statistics that 10% of startups will be successful. As a result, there is a lot of not just job security concerns, but also company viability concerns. It is not for the faint of heart.
That said, startups exemplify the feeling of being on a rocket ship. There are many other rocket ship opportunities that are not startups (find a business unit in a company where all the eyes are on, and is in its nascent stages – e.g. don’t join the frappuccino team at Starbucks join the food team). Many companies’ internal rocket ships though don’t offer the thrill and ownership you get at a startup.
So if you decided that a startup is for you, you’re not alone. This is the question I probably get asked the most, so rather than having to repeat myself over and over, I thought it would be better to put all my discussion points into one blog post.
What is a startup?
Before we dive in, it is important to define what a start-up is. Just because a company is small doesn’t mean it’s a start-up. What we’re talking about here are companies that are seeking rapidly accelerated growth, typically venture-backed else bootstrapped. These are not lifestyle businesses where it is grown to support a single group’s equity interests. These are companies looking to have a dent on the universe – often time through technology.
A company that has gone public (e.g. Workday and Splunk) are no longer startups. They’re mature businesses that are a going concern. Startups naturally have a volatility to them. They are still trying to figure things out at get to a stage where they have the maturity to understand sales, product, market, etc.
How should I think about joining a start-up?
There are three primary factors about a role at startup:
- The stage of the startup – what is the maturity level of where the startup is.
- The industry is working in or problem that startup is trying to solve.
- The role you will have in that startup.
Stage of the Startup
Startups are inherently risky. Since, 1 in 10 startups will be successful, its important to decide what is the right level of risk for you. That said, there are two primary types of startups: Business to Consumer (B2C) which includes social, mobile, local applications, games, the gig economy, and most e-commerce sites; and Business to Business (B2B), which includes SaaS-based applications, developer tools, advertising technologies, and computing infrastructure applications. There are some sectors that can be categorized in either (e.g. IoT, FinTech), but for the most part companies will usually focus on being just a B2B company or just a B2C company, it is very hard to be both – especially early in a company’s life.
Given that I wanted to explain the life of each type of company:
The primary focus of a consumer-oriented business is to achieve viral growth – the more users you obtain the more potential revenue that is possible. It absolutely imperative that the number of users grows at an accelerating rate in order to obtain viability and profitability. That said, there is a formula for how companies get to this level. In a venture-backed model, this formula is linked to the rounds of funding a B2C company receives. This is a general outline, and not a hard and fast rule:
- The first, typically institutional, round of funding is the “seed” round, typically, 500k-2M. Prior to this financing round, companies should have a launched product or a prototype of a product. After receiving this round of funding, companies should be entirely focused on getting a product to market – attracting many users and ensuring customer acceptance. A typical measure for this is related to user engagement, which can be measured by the number of unique users, the length of an average session, how likely a customer is to keep using the application, and so on. Companies are trying to show early customer adoption, and take out any technology or product risk. If a company you’re encountering that is pre-Series A isn’t laser focused on this (e.g. if they are hiring a product manager when an executive/founder is not running product), it should be a warning sign.
- The next round is called a Series A, typically 2-10M in funding: Once a company receives this round of funding, they should focus on moving adoption into real growth. This means they must focus on expanding the product (more features and/or offerings) or expanding the market (different user base) – building the foundation for high growth/revenue. In a slower funding market (e.g. starting in early 2016), companies need to also begin resolving operational and business model questions as well as show early indications that it can monetize to be profitable.
- Finally, a company with a Series B funding round must be putting its dollars towards removing business model risk and driving towards profitability. This ideally should be the last round of funding before a B2C company can be self-sustaining.
- Further rounds of funding (ie. Series C and higher) can occur, but typically when a company has proven that there is more potential value at each subsequent round of funding.
If a company is operating at one of these stages, ensure that it is doing very well at its given stage – that is a great sign that things are going well and this company is going to have a lot of impact.
With B2B companies, their sales cycles are longer, but each transaction value is higher. As a result, products need to be more mature and require more investment. This changes the way you measure the progress of a company in a given stage. The stage maturity level I detail below describes what typically occurs during each stage of a B2B company:
- The seed round typically is used to fund the initial product development. Depending on the type of business purchasing the product (SMB vs Enterprise) it will require varying levels of investment. It is not unheard of for companies to even raise a post-seed round to continue funding development
- Once the product is developed and launched, the money raised during the series A (typically 10M in funding) is to help develop product market fit, which means companies need to provide evidence of customer traction (i.e. recurring revenue)
- Once traction has been proven, the series B funds are used to scale scale revenue. This means the startup must go deeper and broader with its sales. It needs to begin upselling and cross-selling to existing customers, go up and down market on its current verticals, and start using its product in new verticals
- With these proven, startups typically raise a series C. With this money, companies focus on unit economics. For a SaaS business, this means focusing on customer acquisition costs (CAC), and lifetime value of each customer (LTV). These have to work out well to eliminate the business model risk and drive the business towards profitability.
- If a company is raising a Series D: either, you have to be concerned that the company is struggling towards to identify a stable business model, and is raising additional money to fill the gap, or the company is raising money to start another new business model/market opportunity.
Selecting the right stage
Andy Rachleff recommends choosing a company that already has product market fit, and jumping on the rocket ship when it’s already launched. My personal opinion is to choose a company that matches the role you want. If you’re a salesperson, you probably want to join a company that is at the stage where they are ramping up sales, if you’re a marketing choose a company at a stage that is ramping up marketing, and so on. This allows you to learn fast and quick. The company will grow around you and you along with the company. It’s one of the best feelings to be in a role where the team size doubles almost every 6 months.
Industry and problem to focus on
DO NOT pick a company or industry or technology just because it’s hot or people are talking about it. Beware of the hype curve. Today’s hot technology is tomorrow’s HD-DVD player. Pick a industry and problem that you are passionate about and ideally also have some experience in or knowledge about (e.g. joining a company that is providing a technology that one of your parents works in).
The role you will have
Traditional startup roles are pretty well defined. Below is a quick summary of each role.
- Software Engineer – these are typically categorized into 4 types of SWEs: Full Stack (generalist), Front End (the V of the MVC model), Backend (the M&C of the MVC model) and then Mobile Engineers (focused on Android or iOS apps) – these roles typically require a deep technical background with an understanding of the systems and architecture they are developing
- Systems Engineer – these roles are focused on the infrastructure, developer operations, performance and reliability of the application.
- QA Engineer – this role is focused on developing methods to improve overall quality of the product
- Product Manager – Focused on defining product development priorities and long-term roadmap to guide development to get closer to product market fit, and ensure there is less friction in attracting customers to the product.
- Product Marketing Manager – the PMM role is focused on developing the marketing strategy and content related to the product
- Sales – primarily only a B2B role, is focused purely on customer acquisition. For B2C this is handled often by the Product Manager
- Business Development – this role is designed to manage partnerships
- Data Scientist – a new role that is often a necessity in almost every startup is focused on developing algorithms. This role either acts as services (usually for B2Bs) or as a machine learning engineer, who operationalizes an existing algorithm
- Customer Success/Engagement – again another B2B only role that is focused on improving LTV. This means they are handling support, upselling, cross-selling, and ensuring customers are gaining increasing value from the product. For B2C’s a lot of the engagement metrics are managed by the Product Manager.
What is the right role for you? I will discuss how to pick the right job for you (startup or not) in a future blog post.
Those are the three big things, that will help you get a really narrow set of companies to pursue. Once you know where you lie on those three dimensions how do you find those companies? I’ll discuss how to find a startup in a future blog post.