Looking for an entrepreneurial stint: at what startup stage should you join?
November 11, 2009
In the past few weeks I met a few seasoned executives who had reached a point in their lives where they had saved enough to take on additional risk and were looking forward to experiencing the thrill of joining a startup.
What is interesting is that for the most part they felt that they should join an existing startup which had recently raised a Series A round and was looking for a CFO/COO/Head of Business Development/Head of Marketing depending on their respective experiences.
The reasoning was that they partly de-risked themselves by going to a company which was already funded and thus both capitalized and vetted by professional investors who have deemed the project worthy. Thinking of the risk/reward, I don’t think this is the correct decision.
When a company raises a Series A of funding it typically has built its website, launched, obtained a bit of traction and now needs more capital to grow. It is usually too early to tell whether the company will be extremely successful. In other words, it’s unclear that joining a company at this stage is significantly less risky than starting your own company or joining a startup at an earlier stage. After all, a seasoned executive can be thoughtful about the company he or she elects to start or join (especially if they use my 9 business selection criteria :), can help execute and is likely to increase the probability of getting a Series A.
By joining a company that already has its series A funding, the seasoned executive will save 12-24 months at the cost of changing his/her equity participation by a factor of 5-20! It’s not inconceivable that he/she would get around 2% after the Series A where they could have obtained 20% at an earlier stage. If you are willing to take the risk of being an entrepreneur, it makes more sense to go all the way and join a very early stage startup or start your own.
Alternatively join at a later stage and join a company that is rocket ship and has a shot of a multi-billion dollar exit in the next few years. You will get 0.1% of the equity, but the exit is much closer than that of an early stage startup if the upside can still be huge – it’s easier to grow a company from $100 million in value to $500 million than from $1 to $100 million… Moreover, the seasoned executive might feel more at home in a larger company with more processes. However, make sure you join rocket ships with huge growth trajectories because they will get the high exit multiples. Today those companies would be companies like Gilt, Twitter and Zynga.
If you can identify a Series A funded company on such a growth trajectory that’s even better, but usually at that stage it’s still unclear how successful the company will be.
Conclusion: If you are ready to jump in the entrepreneurial fray go early stage or join a late stage rocket ship!