003: 3 Questions to Answer Before Diving into Startups
How to get started on your startup journey
If you feel like the world is awash in startup companies, that’s because it is. In 2021, over $600 billion was deployed to startups across 25,000+ funding rounds. Startups feel more mainstream than ever before, but identifying top companies to join and figuring out which roles to apply to can feel daunting to someone just dipping their toes in the water.
To help people navigate the process, I’ve outlined three questions prospective employees should consider before diving into the world of startups.
Questions to consider:
What is your risk tolerance?
What sectors do you care about?
What are you optimizing for?
Question 1: What is your risk tolerance?
Startups are inherently risky regardless of sector, stage, or funding amount. When deciding how mature of a company to join, you first have to identify where you would fall on the Risk vs. Reward curve.
Risk is often associated with danger. However, when it comes to startups, risk is not impending doom - it’s the amount of uncertainty you are willing to tolerate in exchange for a marginal amount of potential upside. With risk comes reward, and with reward often comes a new risk appetite. Whether you want to join an early-stage company or something a little later, startups always have some level of risk.
Why you should join an Early-stage Startup
After starting your own business, the second riskiest thing you could do is join an early-stage startup. The company might not have found product-market fit, may be unable to pay their employees high salaries, is unlikely to have great brand-name recognition, and probably has an uncertain future.
Still, early-stage companies can be great places to learn and network, and can often offer generous equity packages to their employees. Some other reasons to join an early-stage startup include:
Hands On Experience: Joining an early-stage startup is the perfect gateway to starting your own company. Early-stage startups provide unique learning experiences to employees otherwise unheard of at larger companies. For example, a product manager at an early-stage startup will likely have a front row seat to how decisions get made within tangential business units like marketing and business operations. Since teams can run small, they could have a perspective on the strategies and day to day operations of those groups.
Ownership: Early-stage companies are steered by the collective voice of its employees. If you speak up and take action, you have the chance to get experience in multiple disciplines of the business and help set the course for what’s coming
Career Growth: One of the hardest things to do in startups is hiring. Even if founders can get someone interested in joining, they likely can’t pay them the same cash compensation as their mature counterparts. To get prospective employees over the finish line, startups will often flex on the role’s title or equity compensation to make up for the delta.
Speed of Learning: If you decide to join an early-stage startup, get ready to wear a lot of hats. That means being scrappy and willing to learn how to get the job done, even if it’s out of your job description. A common trait of the newly minted MBAs and consultants is that they want to do ~strategy~ at a startup. The truth is, strategy doesn’t exist the way it does in large companies. At a startup, you have to be ready to pick up new skills, fail fast, course correct, and get out of your comfort zone to keep the ship sailing.
Financial Opportunity: Early-stage employees are eager to punch above their weight to make an impact and hopefully turn their equity grant into cash via an IPO, acquisition, or secondary sale. If you join a rocket ship company that goes on to exit, you could have a large pay day. Remember, early-stage startups can’t give the same cash compensation that you would find in big tech or some corporate roles, so having a lot of equity vested during an exit could be life changing.
Why you should join a Growth-Stage Startup
Conversely, the most de-risked stage on the Risk vs Reward curve is joining a growth-stage startup. Ideally, a growth-stage company will have some combination of product-market fit, competent management, growing revenue, headcount, customers, and more. Growth-stage companies are a great entry-point into startups because they provide more stability and likelihood of “success”. Other reasons to join a growth-stage startup include:
Financial Gain: Higher probability of an exit as growth companies have a more reasonably assured financial outcome than early-stage startups - the question is more ‘how large’ and less ‘will there be an exit’?
Early Success: Startups that fail don’t look great on your resume. “The 100th engineer at Facebook made far more money [and had more access to more opportunities] than 99% of Silicon Valley entrepreneurs”. Dustin Moskovitz - CEO at Asana, and Co-founder of Facebook
Leverage Your Skills: Growth-stage startups let you flex some of those muscles you picked up in consulting, banking, or your MBA program. Where early-stage startups might be ~move fast and break things~, growth-stage startups can be more structured and can require hard skills honed through previous corporate experiences.
Accelerated Experience: Rising tides lift all boats. As the company grows, so does your responsibility. You could go from being the first member of the Strategy & Operations team to running North America Go-To-Market.
Build a Great Network: At a growth-stage company, the founding team will be accessible and open to new ideas. Oftentimes later-stage and public companies are layered in bureaucracy. As a plus, if the company succeeds, you will have a great network of accomplished colleagues ready to take on their next challenge.
Choosing between early-stage startups and growth-stage-startups depends on your risk tolerance. If you’re optimizing for financial gain and speed of learning, early-stage startups could make sense for you. If you want to test the waters and plan for optionality and credibility, a growth-stage company could be the way to go.
If you want the best of both worlds, choose a mid-stage startup that you think is poised for growth.
Question 2: What sectors do you care about?
Everyone has different interests. Some people get excited about software while others geek out over the consumer economy. No matter your interests, 2021 proved that there’s a startup for everyone.
While VC funding does not equate to outsized likelihood of success, it does show that there are more startups now than ever before. Companies are being formed, funded, and scaled at breakneck speed.
Identifying which sectors you’re interested in will help inform your decision making for both targeting companies to join and evaluating future job offers. Below are three examples you use to evaluate potential entry points into startups:
Vertically aligning within a specific sector could make you a valuable resource. Someone who just did a 2-year administrative rotation at a hospital might have a ton of industry knowledge within hospital operations, payor negotiations, physician template management, and more. That person would likely be an asset to any healthcare startup providing physical and virtual services to patients.
Alternatively, you might want to take your skills and apply them to a burgeoning sector that you’re more excited about. Perhaps you were an investment banker focused on energy, and are now interested in working in Corporate Development at a Climate Tech company.
Similarly, there could be sectors or roles that you don’t have direct experience in, but want to break into. Maybe you’re a data analyst who works in SaaS and is ready to build a consumer app for music discovery.
When thinking about what sectors excite you, try to be open minded. Things move quickly in startup-land and what was hot in 2017 (mobility, like scooters) might not be hot in 2022 (web3, like The Metaverse).
If you’re looking to discover top startup companies to join, check out Startupon. Other helpful resources include Accelerated, Breakout List, and Wealthfront’s list.
Question 3: What are you optimizing for?
Given that there are thousands of companies out there, VCs have to make intelligent decisions with imperfect information - that means identifying the people, products and markets that could result in exceptional outcomes.
The sad truth is, no one knows for certain which companies, founders, or teams will end up being the category defining winners of tomorrow - not even the investors who get to choose which companies get funded. Still, prospective employees should put on their VC hat and analyze a potential employer the way an investor would.
Below, I identified 5 dimensions in which early-stage VCs evaluate startups and crafted similar questions for prospective employees to ask themselves when thinking about whether or not a specific startup opportunity is right for them.
The importance of each question will vary based on what you’re optimizing for. If you are looking to join the next big rocket ship, understanding market dynamics should be high on your list. If you want to leverage the startup experience to start your own company, mapping out your own self interest will be key. If you are looking to gain startup experience to parlay into a job in venture capital, make sure you build a strong network.
There are no right answers
Joining any startup is a risky bet. Even if you’ve done your due diligence and asked all the right questions, nothing is guaranteed or going to be handed to you.
Lastly, a startup’s success or failure lives on with its employees. Being the 100th person at Uber or Coinbase will (usually) be more impactful than the first employee at a failed startup.
At the end of the day, the best person to manage your journey is you.
Inspiration: