Picking the Right Startups

Each new startup I help take to market offers many potential rewards but there are risks too. 

The most obvious reward is the financial upside of equity in a successful company.  But there are less tangible benefits like the thrill of being part of a team realizing the potential of their vision.   Probably the most important long-term reward is that each startup success enhances my reputation and opens doors to additional startups with strong potential – while improving the skills I need to maximize these opportunities.  This allows me to continue doing the most enjoyable “job” of my life.

But the risks are very real.  A startup in a bad space with a bad product won’t be much fun to market – and I’ll probably fail.  And when the company flops, it will damage my reputation.  Enough damage to my reputation and I’ll have to figure out a new pursuit.  Of course most people recognize that it’s impossible to have a perfect startup record, but the opportunity cost of committing to the wrong startup means I won’t have the bandwidth to take on a potentially hot company.

Given these rewards and risks, I increasingly find myself evaluating opportunities with a VC-like diligence.  I’ve created an opportunity assessment worksheet that identifies key risks in the business. The standard format makes it easier to compare opportunities.  One of the biggest risks of any business is the inability to raise capital, so early on I set the requirement that I’ll only work with companies that have recently raised a series A or large seed round.  A very good VC can also help improve the odds, as they’ve achieved a better track record with their historical picks (and many would argue their “added value”).

Beyond general business risks, I obviously need to be confident that it is a marketable business and one on which I can make a meaningful impact.  The ideal category is what I refer to as a “disruptor” startup.  These are businesses that enter an existing category with a breakthrough feature or very disruptive pricing model.  My iterative, metrics driven marketing approach is perfect for helping these types of businesses discover their ideal market, differentiate appropriately and identify viable customer acquisition drivers.  Generally these businesses can get substantial traction just by harvesting the existing demand for the category.

Another startup category I often consider is what I call “innovator” startups.  These are much more challenging to take to market, but under certain conditions they are very marketable.  If they solve a specific important problem for a large addressable market and the potential customer lifetime value is high enough, it is generally possible to fund the full demand generation process.   Still, it takes a lot of time to discover the right target users.  Not only do they need to suffer from the problem, your product needs to effectively solve the problem.   Your next big problem is finding a profitable way to reach these target users and messaging they’ll respond to.  These are difficult go to market assignments, but they definitely improve my skills. 

For now I find myself alternating between these types of startups and avoiding those that don’t fall into these categories.