MBAPlans "In The News" |
| How to Size Up a Start-up: Are They For Real? |
| By Jason Tanz |
| This article originally appeared in the February 2001 issue of MBA Jungle. |
| After
working two years at an international development bank in Washington, D.C., Paula
Mellinger was itching for a change: She wanted to move to the happening world of New
York's Silicon Alley, and she wasted no time lining up interviews. Her first conversations
with the management of a brash young Internet start-up moved along like a dream. The CEO
was eager to hire her: He offered a generous salary, a fantastic options package, and the
opportunity to call the shots for the entire marketing department. He didn't give
Mellinger much time to weigh the offer, but, frankly, he had her at hello. "I was
swept up by the opportunity," she says. "And I liked the money." That euphoria, however, didn't last long. A little more than six months after she started, her cash-strapped employer laid off a third of the staff—including Mellinger. Last year's stock market turmoil jettisoned more than 23,000 dot-commers from high-profile jobs. The lesson learned: The most secure-looking start-up can suddenly be forced to cast off half its employees. Sometimes all of them. And yet, even after the dot-com meltdown, top talent remains in high demand, which means that securing job offers can be relatively easy for graduating MBAs. The real challenge is deciding which, if any, to accept. Given enough time, any lucid MBA ought to be able to distinguish a potential eBay from the next flop.com. But a prospective employer's hard sell—punctuated with a three-day exploding offer—leaves little opportunity for a thorough market analysis. There are, however, some quick-and-dirty approaches that can help sort the crystal from the coal. The Company They Keep Good money usually doesn't back bad ideas. If there's a recognizable venture capital firm behind a company—say, a Sierra Ventures, CMGI, Sequoia, Benchmark, or Kleiner Perkins—a job seeker's greatest fears should be allayed. Before pouring in their millions, the top venture capital firms vet the bejesus out of a potential partner's concept, management strength, and market opportunity—now more than ever, since a successful IPO has become more difficult to pull off. Scott Sax, formerly a managing director of the Web consulting firm Razorfish, puts it bluntly: "The quality of the money is much more important than the quantity of money." Not having top-tier financing does not always portend trouble, but it may signify that a prospective employer warrants closer inspection. If an unfamiliar venture capital firm is funding the start-up, check the track record of its portfolio companies—either on the VC firm's Web page or on a financial site such as Reuters or Bloomberg. And if a company is reluctant to reveal its backers? "I'd walk away," says Sax. "What do they have to hide?" Beyond VCs, there are plenty of other proxies to help judge a company's business plan. For instance, some law firms accept equity instead of cash. Consider it a vote of confidence if a reputable firm has forgone a guaranteed fee for a risky shot at equity. It suggests that the firm's top brass has calculated favorable odds for a positive payoff. Get With the Plan Of course, many start-ups begin hiring before VC or law firms get involved, which means the business idea—not to mention the financial picture—has yet to receive serious scrutiny. In these cases the business plan is the obvious place to start an assessment. "Begin with the executive summary. If the idea's not 100 percent clear on paper, it may not be clear in the founders' heads," says Giovanni Valencia, president of MBAPlans, Inc., a Secaucus, New Jersey, company that helps entrepreneurs pitch their ideas to potential investors. At minimum, be sure the idea has all the elements of a successful business: a strong product, a viable customer base, skilled management, and a realistic source of revenue. Even if the company has reputable backing, you should establish whether the vision being implemented is the same vision the VCs liked on paper. The best approach is to ask management a series of questions: What business are you in? How will you make money? What's your exit strategy? Then go to others in the company—a founder, an office manager, a VP—and ask the same questions. Discrepancies in their answers suggest that someone's trying to hide something or that not everyone has their arrows pointed in the same direction. For good measure, ask tough questions as well—more to gauge the reaction than to assess the actual answer. What if a major player enters the space? Is there a clear line of succession if the CEO leaves? Dismissive responses suggest lack of foresight. Acknowledgment of the issues is reassuring. And killer answers speak for themselves. Figure the Burn Cash in hand divided by the monthly burn rate equals the number of months before a new infusion of money—or a Chapter 11 filing—is needed. Peter Wendell, a general partner at Sierra Ventures in Menlo Park, California, suggests asking how many employees are on the payroll. To estimate the monthly burn rate, he multiplies that figure by $10,000 to $15,000. Armed with this data, he asks how much cash is on hand and when the next round of financing is. Then he does the math. Another test of the business model is to ask about sales forecasts. "Revenue projections are commonly inflated in business plans," says Valencia. He recommends this quick reality check: "Lower the revenue forecast by one-half, even two-thirds," he says. If a hiring firm is projecting $30 million in revenues, figure $15 million and see what that does to cash flow. If the company can't stay afloat at that level—well, it's your call, sailor. Growing Pains Don't be swayed merely by a confident swagger, says Randolph L. Tom of Dynasty Capital Services, a strategy-consulting firm in San Francisco. If a top manager isn't charismatic, energetic, and convincing, she has no place in a senior position. Previous job responsibilities are far more important. Read the manager's bio. Ask about her past and press her on the specifics—whom she worked with and in what divisions. The specificity points to credible references, or at least suggests she's proud enough about her record to provide details. A company about to increase its payroll tenfold needs managers skilled at growing a business, not just running one. "Few people will effectively manage the transition from 20 people to 200 the first time they try," says Geoff Baum of Garage.com, which facilitates funding for start-ups. The rest either hire someone who can handle rapid growth, or they go out of business. However, a manager's past failures don't necessarily signal trouble. In fact, the presence of founders with a shared history—even with bad outcomes—suggests a positive chemistry and some hard-earned experience. Boo's Clues A final caution: Growing start-ups are often hungry for employees, hoping a large staff will impress potential backers. Just as you'd be wary of a blind date talking baby names before the crème brûlée was served, shy away from an employer desperate to get you onboard. A few red flags: If a candidate speaks only with HR, it's a sign the company hasn't focused on his place in the organization. If you receive an offer after only one interview, be very, very careful. "Ask about a contract, a 401(k), even an employee manual, and see how they respond," says Joshua Livnat, a professor of accounting at NYU's Stern School. "They may not be offering them at an early stage, but people who are serious have thought about these things." Finally, don't allow yourself to be mesmerized by ritzy digs, says Baum of Garage.com. "They may be flying first-class. They may be having parties. But if they're not making money, it's time to start worrying." Nobody's saying you have to put in 16-hour days at the ass end of a tar-paper shack. A little Moët in the refrigerator can be nice—as long as there's a secure job to go along with it. |
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