how do I judge the stability of a tech startup?

September 20, 2016 12:19 PM

how do I determine if the tech startup interested in hiring me is likely to stick around for more than the next couple of years?

I just met with someone from a small startup that's looking for a software engineer with a skillset closely matching my own. I was given what seemed to me to be a pretty comprehensive pitch, with lots of talk about who has invested how much and which high-level people from related companies have been brought in and so forth, and the tech demo seemed pretty well done. Great! I think?

But I'm not an investor or some C-level guy; I don't really get pitched to like this. I've worked at small places before but never on the ground floor of a startup. How do I determine the amount of substance backing up what I just heard? What words or actions from today would help me figure out, by either their presence or absence, if it's likely or not that this company goes under in the near future? I'm not asking about their chances of making it big; I'm interested in stability and longevity.

(yes, I realize I should have asked this *before* the meeting so I could show up armed with the proper questions, but oh well. I'm new to this, remember?)

thanks!

posted by Old Kentucky Shark to Work & Money (14 answers total)

Do they have a working product out yet? If so, is it profitable?

If they are still at the "tech demo" stage, what are their revenue generation plans?

What is their office like? Is it full of expensive toys that don't have much to do with actually producing a good product? Who is in charge of managing the financials? Is it someone experienced with "real" companies or just living off of the VC funding stream?

Do they plan to raise another round of investment? If so, do they intend to ship product first? If they are still raising money on vapor ware, I'd be wary.

Otherwise, "two years" is not a crazy high bar to meet, and if you think you'd enjoy working with them for those two years, even if it means job hunting again in 2018, it might be worth the leap assuming the money is right (I'm sure you're going to be appropriately skeptical of stock options).
posted by sparklemotion at 12:32 PM on September 20, 2016

Ask them how long their runway is - how long they can operate on their current funding. They should know that, and if they don't, that's probably a pretty big problem.
posted by zsazsa at 12:52 PM on September 20, 2016 [6 favorites]

Find out who handles their human resources and payroll. It's fine if this is outsourced (to e.g. Justworks), but it has to be handled by professionals for whom it is their main job, or one they've done before, unless you're 22 and OK with things not working out.

Will it be around for "the next couple of years"? Knowing nothing about the business, location, etc. it's impossible to say. But very roughly, if it's 0 years old right now, probably not. If it's been around for two years already, perhaps 50/50. If it's been around for longer than two years, it's more likely it will make it two years than not.

But remember, most startups don't make it. There are good reasons to work at startups but stability and longevity are not among them, and if that's what's important to you then you should avoid startups. There are enough big companies that pay better, have better benefits and will still exist when you retire for this to be easy. Read A Letter To A Young Programmer Considering A Startup, even if you're not young.
posted by caek at 12:53 PM on September 20, 2016 [2 favorites]

Much wisdom to be gleaned from Mr. Lyons and Ms. Kim.
posted by late afternoon dreaming hotel at 12:55 PM on September 20, 2016 [1 favorite]

Ask how long their runway is, how they generate revenue, and how they are financed.

Two years of stability should be enough for you, right? If it goes under in two years, it just means you can hop to another job. So I'd be looking for signs that it will last two years, rather than just six months. After that, I'd want to make sure there were opportunities for me to grow in the role, while making a contribution. So you have something to market once your two-year stint was over.

Generally you'd want to see how they generate revenues, or where their financing is from. If they have raised a round or two of financing it should be pretty easy to find online, since startups like to release news releases about that sort of thing.

If they are generating revenue, how is it being generated? Is the revenue being generated by their product or service, or are they bootstrapping, doing paid work to support (eventual) commercialization?
posted by My Dad at 1:19 PM on September 20, 2016

Absolutely ask about profitability, and if the answer is "not yet," absolutely ask how long the runway is at the current burn rate, and what the process would be to extend that.

I interviewed with a startup in Houston years ago -- one that ultimately became somewhat infamous -- that was really cagey about this, but did eventually answer that they weren't profitable, and had only two months of expenses in the bank.

"You realize how alarming that is, right?"

"Oh, it's really not. $founder will just advance us more because he believes in the product."

"Are there funding agreements in place that trigger infusions based on milestones or something?"

"No, it's at his sole discretion, but he really believes in the product."

I did not take the job.
posted by uberchet at 2:21 PM on September 20, 2016 [3 favorites]

Nthing cnek. Find out who handles their human resources and payroll. It's fine if this is outsourced (to e.g. Justworks), but it has to be handled by professionals for whom it is their main job, or one they've done before, unless you're 22 and OK with things not working out. I briefly worked at a startup that's been around for a few years but is basically staggering from cash crisis to cash crisis. It has made promises to its employees about stock ownership but none of that is in writing. And the HR person was the founder's spouse who was a trained attorney but not an HR person and was doing 47 things all at one time. That may be okay for the first year. It's not okay after that, IMHO. I would run far, far away from a startup that didn't take such matters seriously.
posted by Bella Donna at 2:38 PM on September 20, 2016 [2 favorites]

Here are questions I ask:

- What is the product, and what need does it fill? (i.e. why will people want to spend money on it)
- Who are your customers? (Consumers, enterprise, etc)
- Do you have any paying customers lined up?
- How long until the product is ready for production use by customers?
- How much runway does the money you're raising give you? (i.e. how long until you have to raise another round to keep going?)
- What is the plan to grow the company wrt engineering, marketing, and sales? (i.e. can you afford all of that with this round?)
- Is there some secret sauce (e.g. patent, trade secret, first to market, etc) that makes your product hard to copy?
- When are you raising the next round?

You should do some research into startup cap tables and also ask questions about your ownership share and their plans for dilution, etc.
posted by jeffamaphone at 5:55 PM on September 20, 2016

Grizzled veteran of many startups here.

What words or actions from today would help me figure out, by either their presence or absence, if it's likely or not that this company goes under in the near future? I'm not asking about their chances of making it big; I'm interested in stability and longevity.

Nine out of ten startups fail, with perhaps seven of the ten being outright crash and burn, and two being stable but no longer growing, successful companies. So if you are interested in a company that doesn't crash and burn, you've got a 30% shot at it by going with a startup.

Nothing is really a guarantor of success, but there are some things I consider:

I. do the founders have a track record of successful exits or of making useful, novel things?

II. does the thing they want to make have a market, some obvious need that they might fill, or is the entire pitch: 1) make candy bars for otters 2) ??? 3) profit!

III. does at least one of the founders have technical skills to build what they want to make

IV. does at least one of the founders have the business sense to manage what they want to make

V. do the founders have a history of not being sleazy and screwing people over?

Beyond that, there's not a lot you can look for. The best laid plans of mice and men oft go astray. But you can rule out the obvious screwballs.
posted by zippy at 6:08 PM on September 20, 2016 [1 favorite]

I'll share some experiences where I said no (or should have said no) to startups:

1. At the interview, the founders seemed together. The team looked good. And then I saw the server room (back when small companies had server rooms), and there was an air hockey table next to the company's web server.

2. The company made me an offer to work with the people I interviewed with. Then that position disappeared, the would-be-hiring manager was apologetic and embarrassed, and I was now to work with a team I had never interviewed with. Then HR screwed up the paperwork multiple times.

3. The company made no mention at the interview of having only two months of funds. Two months in, they asked everyone to take a 20% pay cut. Including me, for a salary I had just negotiated with them.
posted by zippy at 6:15 PM on September 20, 2016

There was a recent discussion of this topic over at Hacker News over this article.
posted by JoeZydeco at 7:57 PM on September 20, 2016

This is all excellent advice, but as a startup veteran, I want to stress to you that no matter how well funded or together a company might seem, things can shift in a relatively short time. Even if they don't, the expectation in the tech industry is that you don't stay at a startup for years and years. There's a saying, "The only way up is out", and I have repeatedly found this to be true from my own experience as well as for dozens of my colleagues.

The workforce is simply not what is looked like a decade ago. Overzealous VC has glutted the marketplace with transitory companies, who most likely have a exit strategy that benefits the founders and not the employees. Unless you happen on a golden goose, expect to move out of your company within three years in any case. Keep that resume polished and network as much as you can while you're there. The connections you make will ease the way for you to transition into other companies with former coworkers, and is how strong networks get built.
posted by ananci at 10:28 PM on September 20, 2016 [2 favorites]

I'm not asking about their chances of making it big; I'm interested in stability and longevity.

I've been in a half-dozen startups and I will advise you to give up on that expectation. You can have stable and long-lived relationships with people: you cannot have stable and long-lived relations with an entity, which has the explicit purpose to grow like 5% a week for multiple years. Try to have stable and long-lived relations with actual people. If the company fails, so be it.

Make sure that the people are good and competent people. This is the most important bit, even irrespective of the money. Make sure the people are good and competent people, with the cognizance that these are orthogonal characteristics. If you don't have a specific, long and good history of judging people at their best, to predict their behavior when they are at their worst, you don't know. If you don't know, then know, at least, that you don't know.

One thing to consider is rampant elitism. Stanford, Harvard and Berkeley alumni raise something like 2/3 of all VC in the US by size. By number of deals, much smaller, but it's not a fair place, and you have to be OK with this.

Your profile says that you don't live in one of the half-dozen places in which startups qua startups actually exist, however. I don't know if you got some offer in SV, NY or LA and are moving. There are, to a solid first approximation, no tech startups construed as such, with the goal to grow 10000%/annum, south of the Mason Dixon, for example.

You probably won't get within two orders of magnitude of rich. You will learn a lot. Be OK with this.
posted by hleehowon at 12:12 PM on September 21, 2016

Been there done that, and got the t-shirt.

This is relatively simple.

Stock options for grunt employees are worth nothing. The reason is that they are generally non-preferred stock, which means that while your numerator may stay the same "1 million options!!!" the denominator is flexible ("out of 50, no we mean 100, no we mean 390 trillion units"). If you don't understand this and your lawyer is not looking out for you, then consider that you've already lost that "money".

Yes, the odd case of the secretary at Google making $10MM is heard of, but these are not modal.

My advice:

Cash on the barrel: Pitch them a high hourly rate, paid weekly, and offer them some sort of nonsense long-term contract: "If you agree to a 12 month retainer with 1% stock options, I'll drop my hourly rate from $100/hour to $98/hour" - basically fuck them with their own bullshit.

These people are not your friends.

A good answer for all interviews "Interesting, I'll have to review that with my legal advisors."
posted by soylent00FF00 at 7:23 PM on September 22, 2016