Q&A: How Do I Evaluate a Startup's Stability?

By Susan SchreterBusiness on Main

Question: A startup is interested in hiring me for a senior-level position. How can I tell if the startup is relatively stable?

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Answer: Your due diligence should focus on sizing up these three things: the leadership capabilities of the startup’s top decision-maker; the corporate and financial structure of the company; and customer demand for the company’s products or services.

Here are four areas to start your investigative review:

1. Business structure. Startups can be organized for legal and tax reporting purposes as corporations, limited liability companies, sole proprietorships or partnerships. Knowing the company’s business structure can give you a clue to the founder’s financial sophistication and growth objectives. A corporate organization is the preferred business structure for employee stock option plans, raising money from VCs and angels, limiting certain liabilities for company directors and officers, and, of course, going public.

2. Financial sophistication. There are two key metrics of financial stability — revenue generation and profitability — that should be a part of your interview discussions with the business founder. Because most startups are months or years away from achieving these two important metrics, it’s important to ask what amount of capital will be required for the company to reach cash-flow breakeven. If the founder isn’t laser-focused on answering this question with precision, then consider other job opportunities.

Business founders who don’t know how much capital is required to become sustainable rarely impress investors and lenders. Don’t be afraid to ask how much money the company has in the bank, what the founder has invested to date, and where new capital will come from.

3. Hiring criteria. Mediocre staff members tend to produce mediocre results. If your objective is to join a super-successful startup, then its leadership has to set high standards for employee performance. Has the founder hired any friends or family members? This may be a warning sign of hiring out of convenience rather than competence. Did the founder give you a detailed job description? Does the founder have a sensible strategy for building out the company’s management team to handle the fast-changing nature of a startup? Does the company have a board of largely independent directors?

4. Market analysis. Startups need more than a good idea to survive. As one of the company’s first hires, your job may be to figure out how to transform the idea into a workable business. It’s possible for a startup to brilliantly develop an innovative product or service, obtain patents, organize impressive production and distribution relationships — and still fail.

If customers aren’t willing to pay for a young company’s product or service, then it’s game over. Spend a lot of time with your prospective boss talking about the target customer profile and initiatives to test customer receptivity to every imaginable aspect of the company’s product or service. If the founder just “assumes” success, then you can assume that the new company will struggle from trial-and-error mistakes.