What are the markings, if any, of a successful startup?

I’m considering joining a fairly early-stage startup. I’m wondering what kind of “due diligence” I should do to get a better idea of their chances for success.

What are the important questions to ask at an interview?

Some ideas I had:

What problem are you solving?
What prevents a bigger company from stealing your thunder?
What are the barriers to entry?
Is there a benefit to being first in this market?

Any thoughts or suggestions?

I joined the biotech company I work for now in 1989 when they were privately held and had just 15 employees. They are now publicly traded, have over 300 employees (after some ups and downs) and one product on the market with several others on the way so I suppose they could be considered succesful. You don’t say what field the company you are looking at is in but it shouldn’t really matter for this discussion.

I would ask about the founder’s expertise and experience. In my case one of the founders was a rising star in his field of research, a Harvard educated MD/PhD with mentors with good reputations and important positions at various local research institutions. They also had picked up the support of an established Venture Capital firm which had already commited money and was going to put in more as certain milestones were met. The company founders had an idea for a type of drug delivery platform that could potentially be applied to a range of human diseases and had at least some patents pending that gave them something of a head start in that field.

I think the four questions you listed are all very good by the way, especially #2.

I’m not entirely sure I’d know how to approach this in an interview, but one thing I’d want to know about any startup with whom I might become affiliated is whether or not they do, in fact, have a business plan. Having beaten my way down several entreprenurial paths, I’ll say that it is astounding how many ventures take off without one.

BTW, good luck.

(Hi Ringo!)

I was under the impression that a bank wouldn’t give a business loan unless the company had a business plan. Am I wrong about that?


Make sure they can explain what they do in reasonably clear language that actually makes sense…

“We synergize B2B relations between our clients and their customers…”=no
“We sell pies to pie retailers.”=yes

From the startup that I was in (and loved) that fell through - I could have asked your four questions, and been perfectly satisfied with the answers.

It’s Ringo’s question that was the kicker. Not so much that they didn’t have a business plan, but that it made no rational sense whatsoever… and no one seemed to care about that. (Admitedly, I didn’t either…just kind of hoping it all worked out. It didn’t)

Also look for things like how fast they’ve grown and why they’ve grown or not, their customer history, and watch the people… there’s a lot of body language to be noticed in an interview.

I’ve had the good fortune to be involved in 3 successful startups, now in my fourth, including founding two.

You want to think like a VC (VCs are the companies that fund startups, not banks as mentioned above). Remember, just as a VC finds some place to park millions of their dollars, you’re finding some place to park years of your life. It’s a huge commitment for both of you, so don’t treat the decision lightly. Especially since the hours will be long.

What the VC wants to know (prioritized):
Team: Does the team have a track record of successfully building companies? Do they have a track record of building relevant technology? Do they have a track record of selling to relevant customers? Do they have a rolodex of relevant parters and potential acquirers?

Market Size: What is the potential market for the product you’ll make? Most tier one VCs won’t touch you if you aren’t aiming at a $1B market.

Competition and Differentiation: How many competitors are out there? What do you have to give you an unfair advantage? How much development lead-time do you have on the competition? How many patents do you have? What differentiates you from your competition? How will you maintain that differentiation?

Product: Do you have a strong product?

Note that the product is pretty far down the list, and is really secondary in the scope of things. It’s really about getting some sharp experienced people that are aiming at a big market. It’s a given that the market will change, so if you have sharp people, they’ll adjust. If instead you make a choice based on a great product, when the market changes (it will), the product will be useless, and the team won’t be able to adapt.

Also, if you’re new to this, here’s how the money works:

You’ll get some stock options, which are ownership of some percentage of the company. At some point (assuming the company doesn’t fold), you’ll “exit”, either by going public or being acquired by another company. At that point, your shares will be liquid, and you can (or maybe must depending) cash them out. There is a total number of shares outstanding. Ask what this is. There is a number of shares they’ll offer you (typically you’ll have to work 4 years to get them all; they’ll vest over that four years). The company will become liquid at some price some day. So, if you take your shares, multiply by the exit price of the company, then divide by the number of total shares, you’ll get what you should earn from your stock options over that vesting period (4 years typically).

Note that by the time the company becomes liquid, the total number of shares will increase, if they have to raise additional money which is likely. Count on the total shares doubling at least, and maybe quadrupling.

Ringo, I’ve always appreciated your business savvy, but I gotta say: maybe we both have a different definition of “startup”; my definition is a company that’s been funded by VCs and is in the very early stages. No startup will get even close to funded without a business plan and a lot of diligence.

Excellent comments all around, especially the insights from Bill H.

Thank you!

A few years ago my brother joined some friends in a startup company. Based on his experience, here’s some points I suggest you check on.

  1. Business plan. They need a good business plan, and they need to be able to explain it in simple terms. More to the point, do you understand what the company does? See other posters’ related comments.

  2. Funding. What’s their financial situation? How bad is their cash burn rate? Where are they getting new money from? Do they have any operating revenue, or at least firm plans for some? What if the plans fall through? Check the financial statements. If they don’t have any, and they’ve been around for more than a year, ask why not.

  3. People. Are the founders the only ones in charge? Do they recognize their own weak spots and have a way to cover those areas? Do they treat the company as their personal project, for which they might share control, or do they treat the company as a business? How well do the founders work with other top management? Is there a mentor, especially if the company is in a startup incubator or other program, and how involved is the mentor?

  4. Documentation. Is the company a partnership or a corporation? What is its precise form of organization? If you’re being brought in at a high level, ask to see the organizing document – partnership agreement, articles of incorporation, corporate bylaws, etc. Also ask to see minutes of recent board meetings.

  5. Money. Are workers being paid on time? Are the owners taking home any pay? Will you get paid, and in what form? If funding is a problem, expect money to be a big problem. I’ve heard that many startups fail due to money problems.