Avoid red flags in an early stage startup
Things you should care about as an early employee or co-founder
So you want to be part of a start-up. That’s great. Now, the problem is which startup to join. Maybe you want to build your own. Good news: there are many startups to join, and many problems to solve. So how do you decide?
In this article, I will cover some of my thoughts as a first-time founder, and what I’ve learned along the way. So strap right in.
1. Too many founders
Early-stage founders tend to doubt themselves a lot when it comes to doing activities they haven’t done professionally before. A founder will sometimes brand themselves as either: 1) Technical-founder, 2) Business-founder, 3) Idea-founder, which is fine, but only in the later stages of the company. In the pre-revenue stage, unless the founders have built a company before, they should be just “a” founder.
What I have seen happen at many early-stage companies is that founders tend to count themselves short, and recruit other founders based on the capabilities they don’t have just yet. When you are a founder, you are not any type of founder. If you are technical, you probably still need to learn more technical skills. If you are a business person, you probably need to adapt to more startup-specific finance skills, and if you for some reason think you’re just an idea person, sorry to say, but your initial idea sucks and you have to re-do it as you go.
Even in specific domains, no one knows everything to begin with, and everyone will have to learn as they go. Founders should learn to be comfortable operating under the methodology of “learn-as-you-need” and “do-when-you-must”. Adding a founder to the roster need to be very carefully considered as the drawbacks are great and ultimately hidden for first-time founders.
My current belief is that two founders are the optimal number. Why two? Two is the smallest positive integer larger than one. Anything above that, the marginal benefits is less than the marginal costs. What are the costs of multiple founders? I’ll share my experience and summarize them as follows:
Coordination problems
“Not my job”
More founders tend to lead to a greater division of labor. I’ve even experienced founders suggesting splitting the pre-revenue company into two different products “to take multiple bets”. People become far more disconnected than they think, when they aren’t down in the machinery. They simply lose touch with the operational, engineering, or sales problems, when they don’t experience it themselves. It will result in slower turnaround times, and poor solutions.
Decision problems
“Too many cooks”
Have you ever tried being in a car with two drivers? Neither have I. Companies with too many people on top will have a hard time making decisions, and have a harder time goal-setting.
Ideally, you want someone to set a target, and make everyone run for that target. When you figure out that the target was bad, you revise and set a new one. This iteration should be short and execution fast.
Fast iterations are not possible if many people’s opinions need to be heard. Once you enter a contract with a VC, this problem becomes even more apparent. Allow the startup to fail-fast by keeping the headcount in leadership low.
Motivational problems
“Not my baby”
Founding a company should not be seen as a personal sacrifice for the greater good. Founding a company should be driven by pure self-interests. Because the sacrificial type will almost never last. And if they do, have mercy on their pitiful lives.
A person becomes a founder because they want to solve a problem and take ownership of a solution. While the first part might seem to be altruistic, is it merely a prerequisite for establishing a company. What most founders are driven by is money, control, and excitement (aka “passion”).
As such, more founders dilute the motivation of all existing founders. More founders, more problems. Less control. Less money. The motivation of founders decreases, and as a result, so does the likelihood of success for the startup.
2. Raising money too early
There are many different takes about raising money. Some believe you should blitzscale your way to the top, and other believe the best way is to bootstrap as much as you can. Whichever variant the startups chooses, don’t commit and rely on external resources too soon.
Many founders believe that raising money is the first step of success. Even if they don’t need the money, they’d still like to raise capital because they like the idea of having an investor standing behind them.
Raising money before having either a clear customer focus or a useful product prototype is a bad sign. Without having figured out the methodology of how they want to run their startups, bringing in investors will bring uncertainty and confusion into the minds of the founders. Investors are not going to be a regular boss for the founders. They will not give you the correct path of doing things, and might confuse you. Trust your own guts.
Raising money should happen as late as possible. Ideally, this should be when the company has a very clear path of how additional cash will help them reach the next step. At this point, there is a clear methodology and strong conviction that’s robust and is able to withstand seemingly contradicting feedback.
From the outside, I’d try to judge the startup based on if they have managed to setup a system to test for product market fit, and also how quickly they can spin up a new product. Both easily answered by asking which KPIs they are tracking (if any), and how many different products they have launched (and failed). Both are indicators of learning. Having clear KPIs tells you which criteria they bet on. Having failed multiple products means that they are less delusional about sticking to one product and that they can kill their babies.
3. Too focused on strategy
Strategy is a sure killer of start-ups. Any roadmap or milestone that estimates more than 3 months is as useful as going to a fortune teller. Maybe you can make your co-founders and hires believe you. But you probably spent too much time and effort working on the storytelling and designing slides.
The only strategizing you should do is how you can either improve your product or get it out to your users. Don’t let yourself get ahead and dream about international expansions and cross-partnerships with Apple. Don’t try to design your moat from the very start. The same goes for the tech side. Don’t engineer for scale. Instead, engineer for iteration speed.
Doing strategy work is dangerous. It is a black hole that swallows your time. And you’ll let it because it feels productive. So you do it even more. And you’ll start to isolate yourself from the product.
I’ve seen this first-hand. And it’s typically the person that calls himself the CEO that will tend to do this. But call him out. It is not important. Put the CEO in charge of product, sales, hiring, taxes and admin, and maybe a little bit of fundraising. In that order of importance. Prioritize all things that actually moves you forward and gives you feedback if you do it wrong. Strategy is feedbackless work.
4. Domain interest from the core team
If you are ever interviewing for a co-founder role or an early employee role you should ask yourself: “Do I care about the problem we are solving, or do I care about our customers?“ Ideally, both of these should be a sounding yes. But at least one of these should be a big yes. If not, do not waste your time and energy.
The interest of running or joining an early stage startup should exceed the possible financial gain that might come later on. I think it is OK to be motivated financially, but that motivation will go to zero real quick when the startup does poor financially. So to keep your motivation and sanity high, you need to be motivated by something else than the potential exit. Do the following thought experiment: if the company did poorly financially for 5 years, would you still have fun working? If you are not motivated by the work itself one bad year will feel like a lifetime of dread. In return, you will perform poorly and reduce the risk of success immensely.
The same goes if you are joining an early stage company with an established core team. If the company is less than 6 people, and not in a hypergrowth phase, then I would push the interviewer to meet most people in the company before deciding. Motivation and the lack of motivation will greatly affect people working together. It makes a lot of sense to interview the people you potentially are going to work with, and see if they share a deep interest in the problem.