Joining a startup ? A checklist

My career saw me moving from a MNC to an owner managed company, to a couple of startups, before heading a startup and currently advising startups. Having spent some time in the startup ecosystem, I have often been surprised by how often people, including those with considerable business experience, are wrong about startups they interact with.   

Most startups fail. Various estimates are that 90% of startups in India fail in the first 5 years. While startups continue to be registered in large numbers, outpacing those who officially shut, most of them end up in a corporate coma. They exist but not conduct any significant business. The high failure rate is something investors factor in. Suppliers and customers do not have a problem with a startup failure as there are always new companies entering the same space. The worst hit are employees. In a failing startup, they have to endure months of uncertainty before the end and then find it difficult to get a job elsewhere, partly because all firms in a sector get into a downturn (or lose investor interest) at the same time and because association with a company that failed, or being out of a job, hurts one’s resume more in India than in other countries I’ve worked in.

Googling `what to look for when joining a startup’ produces a lot of results and lists, but none I found relevant to employees for a startup in India. It is unlikely that promoters will provide the information that new hires need to know – many of their key employees won’t have that information either. When asked if one should join a particular startup, here is what I suggest they do: I’m assuming in this article that the startup has been around for a couple of years, has seed or Series A funding and it’s a job in a management position. 

1.      Financials. It is important to do a reality check on the past and projected revenue and profit numbers an interviewee is given. Companies are required to file their P&L account and Balance sheet and this info can be obtained online form the Ministry of Corporate affairs (for a nominal fee online from various providers, if not through the MCA website.

If the company has failed to file returns by the deadline (30th Oct for f.y. 22-23) it’s a red flag. Quite often there is a big gap between the numbers indicated by the promoter when interviewing (or wooing) a prospective new hire and the actual numbers filed. One could also ask for the 6 monthly unaudited statement of the current year, to validate the projections made for the year.

The annual statements filed also give information on shareholders. The extent of promoter shareholding can be seen along with other investors. Often big names claimed to be shareholders, are not. The list of directors is similarly useful. Check if the promoters are also directors in other companies, or if there are independent directors on the board (and not relatives of the promoters). There is often useful information available in financial statements, such as weather the promoters are paying themselves, how much has been borrowed etc.

2.      Funding: Any fund raise by a startup, however small, is covered by the media. Googling the company and cross-checking reports will give an accurate picture of funds raised. Ignore talk of `we are about to close funding with XYZ’. Everyone claims to be raising money, few succeed. The financial statements would tell you how much of that funding came in and how much is left over at the end of the (last) financial year.

Look at trends in funding for the sector the company operates in. During Covid, Ed-Tech companies were well funded. They are now laying off people as fast as they hired in 2021. Adverse events affecting the industry are well covered by publications focused on startups. A sector that loses investor interest in the West today, is likely to do so in India tomorrow.  

3.      Profitability: This data provides the basis to validate what should be the most important info a prospective new hire should obtain in an interview. If it is making a loss, how long can its operations last given the funding it has received, or, how will funds be deployed and would result in a path to profitability. Is there an understanding of what the company has to do on key parameters like customer acquisition cost and customer lifetime value?

The promoter may hope to exit from a loss-making business by selling it, but that usually does not provide a future for an employee, as the acquiree would tend to cut numbers from an acquired company, before its own. Ask for the latest monthly P&L the company has shared with its investors (a company’s willingness to share it is a good sign of how transparent it is with employees). How does the company compare with competition on key parameters – who does it regard as competition? Does the company even benchmark with competition?  If there is no local competition, is the company benchmarked against the best globally?             

4.      People: Ask if you can talk to the company’s key people. If that is not possible, check LinkedIn to see what their backgrounds are. Have someone call them to see if they are willing to jump ship, or (if a friend is connected to one of them) if it’s a company they would recommend. Look at employee reviews of the company on sites like Glassdoor. Former employees – LinkedIn makes it easy to search, will often be comfortable talking about the company.   

5.      Product: Check reviews of the product & customer feedback. See if press reports are positive. See how good their website is. Call the helpline. Look at how complaints posted online are addressed.  Googling the company or its products will give you a good idea how effective its online marketing is. Does the company reach you with an ad after you visit its site, or not at all, or so often, that it’s irritating.

6.      Purpose: A Startup is far riskier than a job with a regular company. If the pay is higher, it’s usually in the form of ESOPs. Given the probability of actually making money from an ESOP – not only because very few startups get to the stage where ESOPs are worth something, but due to the conditions around cashing in, assume that you are not going to benefit from an ESOP. If the reason to join is the kind of business the company is in, you need to be convinced that the company is solving a problem important to you and their solution is exciting. If you are interviewed by a co-founder, it’s an opportunity to gauge if you vibe well and can work alongside that person. If HR does the interviewing, ask about the company culture – working hours, attrition, people related challenges etc. Does the company see you as a long term resource who can move across functions, or someone hired for a specialized skill (or as a rainmaker, with contacts from their previous job) ?   

Though this list applies as much to a Unicorn as to a smaller company, a larger company can continue to do business for years even with an unviable business model, which benefits those joining (and getting out) at the right time. 

My other posts on startups in this blog:
https://rpdeans.blogspot.com/2023/08/the-problem-with-delivery-app-business.html
https://rpdeans.blogspot.com/2023/08/the-coming-unicorn-meltdown.html
https://rpdeans.blogspot.com/2023/07/why-coffee-chains-are-still-not.html