The 2 Things that Really Matter When Choosing a Startup

So, you’ve decided to join a startup – congratulations!?Startups are uniquely wonderful experiences that everyone should try at least once or twice in their career, regardless of function or role.?While nowhere near as risky as actually starting one from scratch, joining an early-stage effort is still anything but “safe”.?Even though job security doesn’t really exist anymore, startups run out of money and shutter way more frequently and without warning versus larger, more established firms.?This leaves all employees, not just marginal ones, out of a job.?The fact that you’ve decided to take on this kind of risk is commendable, especially if you have family and other major financial responsibilities.

Next comes the very important choice of which startup to join.?How do you decide which one is a good fit or even a viable option to at least have a shot at being successful??By now, you should’ve done the research and identified firms you believe in, whether it’s about products, mission, and/or people.?Once you have your shortlist, there are two discrete and easily identifiable factors you should consider.

Profit Motive

If you prefer non-profit organizations, startups are probably not for you, and you can stop reading here.?Otherwise, let’s consider the importance of profit motive, given that running out of money is among the most common reasons small businesses fail..?In the startup world, this generally means investors, such as “angels”, venture capitalists, and banks, decide to stop funding it – they cut their losses or stop “throwing good money after bad”, as the saying goes, when execution of the business strategy is not working.?It’s rarely a knee-jerk reaction because it guarantees losses on existing investments.?Obviously, the ultimate judgment of a business’s viability is whether it’s hitting its revenue targets, which should cross over into profitability at some point in the business plan.?Eventually, investors expect to stop funding the business and achieve a return on their investments, typically through a liquidity event such as an acquisition or IPO.?A money-losing business is less likely to be acquired at an attractive enough valuation or be able to sell shares to the public because it’s basically asking for capital rather than producing immediate value.?It’s true that many startups are acquired prior to profitability, but this is usually due to intellectual property and key human capital that the buyer bets will make a positive impact on its own bottom line – ultimately, more profitability.?A money-losing business with great people and products and at least an implied path to profitability can be interesting.?The same business with no possibility of profit is almost worthless, no matter how great the product and the people are.

Startups have almost no control over when (or even if) they’ll be acquired, but they do have almost complete control over when they will be profitable – at least when they plan to be.?Obviously, they need to execute, and this is the bet you are making by joining.?But you need to be able to bet on something.?Hoping for an outcome outside the business’s control, which will require continued funding for some indeterminate time period, is not a strategy - because hope is not a strategy.

I would suggest looking out for the following general “red flags”:

1.??????The business is in its earliest stages but is overtly (and likely, unilaterally) positioning itself to be acquired as its main strategy; you can safely assume this will distract from what should be its primary tactical purpose, which is to attract and acquire customers.

2.??????The business is giving away its main product for free, in the hopes of aggregating enormous amounts of users; this is okay for brief promotional periods or to acquire the very early adopters, but it should have very clear plans as to when it will start charging for its wares.?Note that some “freemium” models are quite legitimate, but make sure the company is fully committed to monetizing the support or service it sells on top of the basic product.?Otherwise, it has little or no real profit motive.?Ask yourself this simple, obvious question: if the product or service is so great, why isn’t the business interested in monetizing it?

3.??????The company is losing money as a “placeholder” until some third-party event or market rhythm emerges; for example, it needs some external scientific breakthrough for its finances to work.?This is hope, not a strategy.?Unless it’s actively investing in this eventual breakthrough and has convinced investors to fund it “to the bitter end”, it has no control over this outcome, and therefore, the business plan is just “spreadsheet math”.

The first two red flags are typical of a business hastily banking on liquidity rather than building a viable, sustainable practice.?It’s the proverbial “unicorn” model.?The problem with unicorns??They’re extremely rare, and they exist only because some behemoth will eventually acquire them for a ridiculous valuation.?And in fact, many still fail because again, they are focused on this almost unheard-of outcome rather than building sustainable business.

The third red flag, besides the obvious risk that the breakthrough doesn’t happen in time, indicates the business is seriously exposed to disruption.?If there is a market need, someone else will figure out how to make the finances work without waiting for this breakthrough.?They will then boldly focus their resources on scale knowing they won’t lose money with each customer they acquire.?Startups should be disruptive, not disrupted!?And, speaking of…

Market Need

Profit motive is a must, but without market need, it will be difficult for the business to acquire customers.?People and businesses buy things more out of necessity than desire.?No matter how “cool” a company’s products and services are, if they don’t serve a purpose, they won’t gain much traction.?Purpose doesn’t mean the reason the company is in business – again, it’s safe to assume that you’ve already researched this and that it aligns with your values.?Purpose refers to a specific problem it’s trying to solve, and the respective need in the market to have it solved.

How do you best identify market need??Follow the pain!?If the product or service doesn’t seem to be addressing something “painful”, which could mean costly or tedious, it’s likely to be more of a novelty than something targeting real necessity.?The surest way to create value is to address need.?It’s true that markets don’t always realize they “need” something until someone introduces it as a product or service, but you should use your best judgment, draw on your experience, and even socialize with your peers and mentors to make sure this need exists.?Remember, you must still make a bet – the need may be less painful when the customers see the price tag, the product may not actually solve the problem well enough, and/or the sales execution may not be able to capitalize on the market despite the great, necessary solution.?But consider the odds before you bet.?Operating a large-scale business is a very expensive way to peddle novelties, and it’s unlikely to get very far in the long run unless customers eventually demand its products and services.

Look out for these red flags when evaluating whether there is really a market need:

1.??????It’s not immediately obvious; this is probably the most self-evident marker because the company’s overall value proposition shouldn’t be obscure!

2.??????When you ask what problem(s) the company is trying to solve, the answer is a description of the solution itself.?Beware of solutions looking for problems.?This may indicate there isn’t actually a compelling enough market need, or that the company is drafting on transient hype.?This is rarely sustainable.?At the very least, confusing problem statements may be evidence of mediocre product strategy – also not a good thing!?Check out Blueprint Seven Six for more on this.

3.??????The problem, while real, is way too marginal or esoteric.?It may even sound “engineered”.?For example, while large-scale businesses may pay money to improve efficiency by a small percentage, consumers likely won’t.?Make sure the problem is compelling enough to motivate the target buyers to address it by paying for solutions.?Ultimately, the company will need to test the market to prove this, but common sense is always an important compass.

Investors don’t usually fund business plans that flash these red flags.?However, you might encounter them in later stages, when out of desperation, a startup attempts a hasty “pivot” strategy, for example.

Summary

Joining any startup is a tremendous opportunity to build experience, practical skills, and lasting relationships – whether it ultimately succeeds or not.?Joining the right startup has obvious, added benefits.?Always look for profit motive and market need before you make your final decision, regardless of function or role.?And once you do join, try to add as much value as you can while enjoying the ride!