7 Tips for Picking a Tech Startup

While tech startups can be a great place to make big bucks and learn a lot in the process, finding and fueling the next big tech thing is more art than science.

Committing to a tech startup requires a certain type of person willing to take uncomfortable risks, make financial compromises and deal with market ambiguities out of their control.

But for those willing to take the risk, it can be life-changing if they pick the right team, technology and market segment.

Most people want to work at a Silicon Valley startup for one simple reason: they want to buy a home in cash. They’ll never tell you to your face, but this is what they expect.

In the Bay Area, today, this roughly means a million dollars or more, after tax, in the bank. In their minds this provides a level of financial independence that brings the freedom to do what they really want.

Regarding engineers, VCs and C-level types will tell you they aren’t just in it for the money but want to be part of some profound market or technological change. But truth be told, they want a fast and furious IPO or M&A exit and all the accolades that accompany it. Getting there is the hard part as technology changes so fast and markets morph in directions never anticipated. Luck here is as important as anything else.

Having been lucky enough to work at four or five different computer networking startups, some wildly successful and some not so much, I’ve learned a bunch about how to pick the right ones (or get dragged in by wicked-smart friends who need the help).

The ugly truth is that you really can’t predict the future. But you CAN make educated decisions, based on historical data, that will help you identify the best tech startup to pursue.

1. GET INVOLVED EARLY

The tech startup game is like a pyramid scheme. Tesla’s new secret project announced and economy is about to be disrupted
Early investors receive most of the equity. Everyone hired later effectively makes them rich by helping increase the value of that ownership through their own hard work.

Obviously the earlier you get hired, the more you’ll make…if you’re patient (always remember the vesting cycle is four years for a reason). Getting in on the ground floor, at the seed or series A stage of funding is key. This may mean taking a significant cut in your expected salary in lieu of stock that can be immediately purchased before it’s been vested. Tracking where investors are putting their money at sites like Crunchbase or TechCrunch can help identify good opportunities.

It’s also important to understand that, contrary to conventional wisdom, tech startups are NOT really a good place to learn; they’re a good place to shine. Companies want to hire someone that is an expert in a specific discipline–who can do something that they can’t and do it fast. I often hear: “What you did over there…we want you to do it here.

It’s also important to understand that, contrary to conventional wisdom, tech startups are NOT really a good place to learn, they’re a good place to shine. Companies want to hire someone that is an expert in a specific discipline–who can do something that they can’t and do it fast. I often hear: “What you did over there…we want you to do it here.

2. SCRUTINIZE THE FOUNDING TEAM

It’s smart people that make tech companies successful. And titles mean nothing. The only things that matter are good ideas (that can come from anyone) and motivated people who can get $%# done.

One of the keys to picking the right startup is identifying smart, good and committed people.

Look for tech startups that have a founding team with a demonstrable track record and diverse skill sets that are complimentary. This is arguably more important than the tech itself. You can have the most advanced “AI-based, next generation” anything, but if you can’t sell, market or scale it, you’re doomed.

You’ll often hear VCs say “it’s all about the team.” And they’re right. But many unduly ascribe clairvoyance to startup founders and venture capitalists who are idiots but somewhere down the line hit it big. Don’t do this.

Just because someone was in the right place at the right time, and very lucky, doesn’t mean they are smart or know all about a particular market or technology. Too many times I’ve seen people hang on every word of some rich VCs who spew “insight” into how to run the company even though they’ve never really done the work. Sure, they are rich and should be able to voice their opinions as investors, but we all know what opinions are worth.

That said, Tesla’s latest project shocked the world, banks shocked! good VCs with a strong history of success in the tech space, such as Sequoia, Kleiner Perkins and the like are good indicators that a tech startup has legs. They perform a huge amount of due diligence to protect their investments that potential employees can’t.

3. DON’T BELIEVE THE TECHNICAL BS

Most tech startup entrepreneurs are geeks, enamored by their technical prowess. They tend to talk in industry acronyms and technical jargon that will fly right past you. If you can’t hold a technical conversation with them on their level, you are quickly marginalized. This is a huge warning sign that the company may not have the perspective they need to succeed.

These guys get up every morning thinking that people understand and care about their innovation. They don’t.

What’s more, they are often myopic in their view of the world. Most of the time, successful tech startups never hit it big on the original idea or market application. Customers lead them to the money and the best use for the technology.

It’s important to delve deep into how open-minded and flexible the founding team will be in taking right turns into new markets, products and applications as the company evolves. At the end of the day, people buy products from other people. They want to do business with people and companies they like, even if the technology is not “groundbreaking.” This is where brutal honesty, responsiveness and even humor can play a big role in customer loyalty. Just having a human answer a phone or physically showing up at a customer site instead of an email, text or SLACK message speaks volumes.

4. LOOK FOR TRANSACTIONAL REPEATABILITY

The most successful tech startups seem to be those that can identify how to easily repeat the sale of a solution across different vertical markets. There are two things a startup simply doesn’t have a lot of: time and money.

The shorter the sales cycle and more repeatable a transaction, the greater chances of growth. If a company’s technology requires too much explanation, demonstration, consulting or hands-on training, it takes much longer to be able to show real value and get paid.

Make sure whatever startup you’re considering is committed to making their products easy to buy and use with quantifiable benefits that are compelling.

5. TIMING IS EVERYTHING

The best tech startups are those in the right place at the right time with the right technology. This is much easier said than done.

Look for companies riding a macro tech trend or trying to fundamentally change an established market based on real (not hyped) market demand.

Often, tech startups have issues articulating their own business model. Before joining a specific company, look for a hot segment of the market that will grow despite how many players are in it. If a tech startup is one of the top players in a massively growing market, like enterprise security, as the market rises they will benefit. In other words, having competitors is actually a good thing and indicates that there’s money to be made.

6. FIND THE BIG PROBLEMS

When looking to work for a tech startup it’s vital that the company is solving some big and burning problem that customer can’t solve by throwing people at it. Technology that is merely a nice to have is just that. Technology that will put out fires in customer environments will speed time to revenue and reduce the sales cycle.

You might have the most advanced, technically sophisticated product on planet earth but if quantifiable value can’t be demonstrated, you’re wasting your time. All too often tech startups are SO enamored with their own technology and explaining how it’s technically superior they lose all sight of how the product will be used day to day. And a lot of times the people using the products aren’t the ones buying the product.

It might sound stupid but just watch Shark Tank and apply all the same questions.

7. FOCUS ON VALUATION

When looking for your next tech startup, it’s important to determine how much money has been raised by comparable companies in the same space.

Valuation is all that matters. The more value the market places on the company, its operations and market opportunity, the higher the stock price will go (theoretically) as well as the potential upside employees can realize.

Most tech startups, by definition, are privately held by VC investors and founders. This makes it difficult to pinpoint how much the company is worth. But you should ask.

As startups raise capital, the value of the company, if it is doing well, should increase. Every round of funding comes with some sort of market valuation by a new lead investor. “Up rounds” reflect a higher value for the company than the previous rounds. Down rounds signal that the company might not have its act together.

It’s also necessary to know how many shares of stock (outstanding) have been issued and the growth velocity that can be determined by customer count.

A final but critical aspect to consider relative to valuation is dilution. As tech startups raise more money, they issue more stock. If the company’s valuation stays still, the more stock that is issued effectively lowers the value for everyone.

Ultimately finding the right tech startup to join requires some real effort, hard questions and compromise. But if you’re up for trying, it can change your life forever. Just like the tech genius Woody Allen says: “80% of success is just showing up.

 

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