Looking for an entrepreneurial stint: at what startup stage should you join?

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!

  • I think you are right when you look at it from risk/reward perspective, but I think that they may have been thinking about it from a comfort level perspective. I think you hit the real reason: “the seasoned executive might feel more at home in a larger company with more processes”

    Its much more comfortable for someone from the corporate world to move into an established company. That’s what they are used to. They are testing the waters and taking baby steps into the ocean, rather than jumping right in. It makes perfect sense to claim that it’s because they think they are lowering risk, but I think they are simply coming up with an excuse that sounds good to avoid completely getting out of an environment they are used to.

  • Fabrice,

    I would tend to disagree with you on this one. The major crux of this issue which you are not addressing is that, as you state, “a seasoned executive is looking to do something more entrepreneurial”, is very very different from becoming an entrepreneur. I am sure, as you know, there is a very different skillset involved in actually developing an idea from concept into a working company as compared to taking a company and running operations. If an executive was really looking to start a company and had that idea and inclination, I don’t believe that he would come ask you whether it is better to join a post-series A or not, he/she would just go start that venture.

    The problem is that you are used to a certain way of working when you are at a large corporation and thus many people can handle moving to a smaller company and essentially doing something along the same lines but in a greater capacity, however going right out and starting something is very different.

    I would think that an executive who wants advice and is looking at being a little more entrepreneurial would best be served at a post funded corporation.

  • Mike:

    I agree for the average executive but in this case it’s a self-selection who want to be entrepreneurial. Besides it’s not as though they work for the government. They work for Microsoft, Google, etc.

  • Agreed. People who have spent too much time in the angel/vc mindset view capital risk as the largest factor in a seed/early stage company’s success or failure. I would argue it’s actually finding the product/market nexus that Steve Blank preaches in his Customer Development model (http://bit.ly/2Sd87e). If you are an exec who is not capable of dilligencing the opportunity you are about to join without the seal of approval from a VC, than you shouldn’t be joining the company in the first place. Risk/reward is so clearly in favor of joining pre-raise (but post product/market fit). Oh, and if you’re reading this and are an engineer turned marketer with a strong inclination toward analytics (and an understanding of the relationship between product design and marketing), I have a company that is right in the sweet spot of where Fabrice thinks you should be looking to join: http://bit.ly/AsCzh

  • If you read Felix Dennis (How to Get Rich) he claims that “Senior Managers” very rarely make the move into entrepreneurship. They have too much too lose, too stuck in their ways…