Thoughts on Business and Technology

So you want to join a Start up ?

Silicon Valley next exit green signal vectorSilicon Valley is the undisputed hub of innovation in the world today. It’s well known for its ecosystem of startups, entrepreneurs,venture capitalists and a skilled workforce. It is also home to many of the largest high-tech corporations.

Silicon Valley is a nickname for the San Francisco Bay Area, which is located in Northern California in the Unites States.

In the past couple of years there has been a significant increase in the number of professionals and new graduates moving to San Francisco/Bay Area in search of the next “Google”. There’s tremendous energy and excitement among the workforce and it’s well founded based on the recent valuation of some of the high flying startups like Uber , Airbnb , Snapchat, Pinterest etc.

Most of us in the Information Technology industry have to choose between the stability and security of a well established high-tech company like Google, Amazon or Oracle and the uncertainty and growth of upstarts like Uber.

I was in this situation in 2008-09, I was working at Yahoo and I had to decide whether to stay at Yahoo or look for other opportunities. The financial crisis had hit the markets hard and we were officially in a recession. Yahoo wasn’t doing great, but my job was relatively safe. I had started interviewing, and had gotten offers from LinkedIn ( a start up with 350+ employees) and large tech companies that were doing well despite the financial crisis.

I wasn’t sure how to evaluate these opportunities, especially the startup’s. Unlike public companies the information about startups is scarce. there’s little or no track record and the future is all about potential. Statistically,the odds are stacked against startups.

 90% of all startups fail with-in the first 3 years. – CB Insights

While I was looking for answers online,I discovered a memo written by David Henke ,who served as senior vice president of engineering and operations at Linkedin from 2009 to 2013

davidhenke_LinkedinI had known of David Henke since my days at Yahoo; like many engineers at Yahoo I was one of his fans and greatly admired his leadership style.Henke is a colorful personality and a Silicon Valley veteran. Prior to LinkedIn, he was the SVP of engineering and operations at Yahoo for over 4 years. He led a team of 500 engineers in Panama (ad system) to overhaul the company’s search marketing platform.He ran engineering and operations at AltaVista, an internet search engine company, from 1998 to 2002.

In the memo titled “So you want to join a startup ?” Henke and his colleague Buena Suerte provide a checklist to evaluate startups as potential employers. I collected a lot of material during my research, but I found this memo to be the most comprehensive and practical.I share my checklist in this post.I also share the process I follow to evaluate startups. I used the same checklist when I was evaluating LinkedIn as a potential employer; I decided to join LinkedIn in 2009.

So you want to join a startup ?

If you’ve read through the post this far, I assume you’re interested in startups, or you might already have an offer from one. I hope you find my checklist helpful.

If you decide to join a startup,you’ll be investing a significant amount of time so your decision process should be similar to that of investors or venture capitalists.

People

The founders are one of the most important factors that venture capitalists consider when deciding to fund a startup, and so should you. Founders lay the foundation of a startup’s culture and its future.

It’s important to learn all you can about the founders – their background, education and track record.Pay attention to their past successes and failures and how they handled them. You’ll find lots of reviews and comments about companies and founders online,but you should also do your own research instead of blindly trusting them.

I would also talk to current and former employees and request their feedback if possible.

When I was studying LinkedIn, I tried to learn about the founders and venture capitalists backing the company, especially Reid Hoffman, the co-founder and chairman.

About Reid Hoffman and LinkedIn from my notes ( June 2009 )

Jeff WeinerBefore founding LinkedIn, Hoffman had started a dating site called SocialNet.com and raised $1.7 million but it never really got off the ground commercially. He left SocialNet in 2000 and joined Confinity, co-founded by his friend Peter Thiel, which was later merged with X.com, co-founded by Elon Musk to form PayPal.

Hoffman gets glowing reviews for his work at PayPal by Peter Thiel and Elon Muck, who are successful serial entrepreneurs.

One of the key insights gained from my research is the importance of the network that Hoffman developed and the sense of camaraderie that existed among the members of his network.

A few months before I started interviewing at LinkedIn, Jeff Weiner, one of the popular executive at Yahoo, had joined LinkedIn as interim CEO. Jeff was well respected across Yahoo, and his association with LinkedIn was a strong plus.

Technology

High-tech companies are a medium for bringing change ( hopefully positive ) to society through the use of technology. There are many examples of high-flying startups with popular products that failed when they hit scaling limits, which stifled their ability to innovate quickly.

Depending on the startup, the importance of a strong engineering culture might vary, but a strong engineering culture is always a good sign.

It’s helpful to look at the accomplishments of the team in terms of :(1) open source projects they have initiated or support (2) research and publications (3) engineering leaders and their track record and most importantly, (4) product quality and user experience.

I recommend being a customer or user of a startup’s product(s) before you decide to be an employee. Product quality and user experience are the best way to judge the quality of the team behind them. If you’re not able to use the product, I recommend talking to existing customers. You can also access customer feedback and industry reviews online.

Market

A great product is not a ticket to success. Unlike the dot-com era , venture capitalists today demand much more than a business plan and prototype. They look for customer base, traction and revenue. So should you.

There are many stealth startups without a product or established customer base.The opportunity to be the 10th or 20th employee of a stealth startup with a star team is very attractive. However, before you decide to join the team it’s important to understand the risks. I recommend Paul Graham’s essay on mistakes that kills a startup to help you understand the risks in an early-stage startup.

Finance

No matter how good the idea is and how accomplished the team executing it, any startup will fail without adequate funds and resources.Henke suggests that you explore the following questions:

  1. How much money does the company have in the bank today?
  2. What is the burn rate (rate at which the company spends per month)?
  3. What is the revenue model?
  4. When will the company run out of money?
  5. When will the company break even?
  6. When will the company be profitable?
  7. Will there be a second round of financing?
  8. What is the valuation of the company today?
  9. What is the valuation of the company on the next financing?

You

Investing in a startup is a financial decision; however joining a startup as an employee has both financial and personal consequences.After you’ve done due diligence on the company, its products, its financial position and its founders, you should find out what they would expect from you and decide whether you are ready for the commitment.

It’s important to understand your role, what you bring to the table and what the expectations are. A tenure in a startup can be transformational if you’re a good cultural fit and are able to learn quickly and adapt to changing requirements.You should not only get used to uncertainty but embrace it. Teams in startups are in a constant flux as the company navigates existential threats and hyper growth phases.

Finally, it is important to know why you are joining a startup, and to have realistic expectations about probable outcomes. Here are a few questions to ponder.

(1) Does the startup fit your personality, lifestyle, financial situation, and career goals ?

Your personality and career goals :

  • Is this the appropriate point in your career for a start-up ?
  • Is the role aligned with your career goals ?
  • Does the role use your strengths while helping you grow ?
  • Are you a good fit for the role and the team ?
  • Will you enjoy the nature of work ?
  • Are you doing this for money only ?

“You may be asked to do many different tasks in a startup. If you like multiplexing, good! If not, this may not be for you.” – David Henke

Your financial situation and lifestyle :

  • Do you have a financial cushion ? Startup jobs are prone to delayed paychecks, firing, lay-off, or simply going out of business
  • Do you need a visa (H1B) to work in the U.S (if you are an immigrant ) ? I waited untill I got my green card before I decided to try a startup.
  • How is your commute ? An hour-and-a-half commute one way can leave you exhausted and less productive. Startups don’t usually provide shuttles with WiFi connections.

(2) Are you and your family ready for the commitment ?

Are you willing to spend less time with your family and friends and work long hours? Are you spouse and family ready to take on disproportionate share of household responsibilities?

(3) Does the outcomes you have calculated match your expectations in terms of returns ?

Prof. Sanjay Bakshi has an interesting perspective on measuring investment returns, which can be very useful.

“Return per unit of stress”  – Prof Sanjay Bakshi

Life in a startup can be very stressful and requires that you sacrifice your time with your family and friends. It’s important for you to evaluate whether the probable payout you are promised is worth the stress and sacrifices you will have to make.

(4) Do you understand your compensation ?

This might be your first job at a startup, and the compensation packages in a startup is different from public companies. One of the significant difference is the equity portion of your pay. It’s important to understand how to value it.

  1. What percentage of the company do your granted shares represent today?
  2. What is the value of the company today?
  3. What expected dilution will you see in your percentage in the next financing?
  4. What is the expected valuation of the company in the next financing?
  5. What is the vesting period for my stock? At what price?

Henke describes an expected value calculation for possible outcomes for companies in his memo. I recommend you read it.

If you’re thinking of joining a startup or have already started interviewing, I wish you luck. In the end, we’re all driven by our emotions, I’ve heard early employees of successful startups say, “I just trusted my gut, I knew this was not just another startup”. I agree: when you make important decisions you have to trust your gut, but it’s prudent to do your due diligence as well. I hope this post was helpful.

Picture credits : LinkedIn : https://www.linkedin.com/in/drhenke | Phys.org : http://phys.org/news/2013-05-linkedin-resume.html

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2 Comments

  1. Dkls September 21, 2015 at

    Hi,Just saw your post. Let’s meet up for coffee when you’re here ! I’m based in the 2nd so easy and right in the siclion sentier Hope to see you soon !Georges

  2. Hari July 3, 2016 at

    Thanks for letting me know

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