How to Slingshot & Accelerate Your Career in this Market? (Part 1)
…by using investors' framework to find the next rocketship startup to bet on.
The two most common issues of tech employees are job security and reduced total compensation since their stock grants are underwater.
Now is the best time to start searching for the next rocketship startup to join in the next 6 to 9 months.
Employees are naturally risk-averse to switching jobs in this environment, especially given all the massive layoff announcements and hiring freezes.
However, with all public tech stocks' sell-off and private companies' valuations significantly reduced, many employees' stock grants issued at peak market times are worthless.
You can either stick around to wait out the market volatility and hope those stock option values rebound OR generously get reset by management.
Instead, I want to convince tech employees (even the ones with steady jobs like Meta engineers) to start looking for the right startup to join pro-actively. The upside of resetting your compensation with the potential chance of life-changing wealth outweighs the downside.
By sharing my market insights and experience in both public and private markets, I will go through the following:
Part 1
Timing & Risk Assumptions - provide market insights for better decision-making.
What to Look For In Startups - give heuristics on what to look for in startups.
Where to Begin Your Search? - figure out how to filter out startups by stage.
What Are Some Key Things You Should Know About the Current Market? - provide some color on "default alive" & bridge rounds, runway, and liquidation preference.
Much like a Formula 1 car hitting an apex corner, you can slingshot and accelerate your career in this current market.
Timing & Risk Assumptions
Since the default assumption (especially in this environment) is that joining an early-stage startup is too risky, let’s assume 80% of these companies are unsuitable for you.
Let’s go through some critical assumptions before we start the research process.
(Feel free to skip/glance through this section if you are not interested in the market commentaries, but I would argue that this data provides some valuable near-term insights that will help you make better decisions.)
Prediction: Venture Capital Market Will Bottom Out in 6-9 months
The two primary drivers behind fundraising activities are expectations over exit prices (ex: IPO) and valuations.
According to PWC research, the IPO market remains shut mainly for the rest of 2022, with a large deal pipeline being pushed back to 2023.
In the current "risk-off" market, public stocks' earnings and revenue multiples have contracted due to inflation concerns, which have led to a series of interest rate hikes. Since public stock multiples are proxies for pre-IPO / late-stage companies' valuations, it's no surprise to see private companies such as Stripe and Instacart are affected by the current tech sell-offs.
As of July 2022, there are some optimistic signs with the recent positive statement by the Fed that the economy is slowing, and any decision to raise interest will be data-dependent. The stock market reacted positively to the news with some significant rallies in the following weeks.
The combination of this optimism and “better than expected” earnings and outlook results from large tech companies, including Amazon and Apple, have many investors (including myself) predicting the sell-off has bottomed.
Since public stocks often lead to private valuations by several quarters, I predict the venture market will bottom out in 6-9 months.
Fundraising Environment Is Not As Bad As You Read
According to the latest quarterly AngelList report, deal activities have declined compared to last year's period. Despite the slowdown in the venture market, there is a lot of dry powder sitting on the sideline, with $230 billion available, according to Pitchbook data.
“I think there’s a big disconnect between the narrative that you hear from the media or directly from VCs and the actual data that’s coming through,” “Deal count is extremely high. There’s 3,600 funds that raised money in the past four years, so there are a lot of investors in the market. That’s $230 billion of dry powder.” - Kyle Stanford, senior VC analyst at Pitchbook.
Many venture funds successfully raised tons of capital from investors during the bull market. Since LPs are affected by the current stock sell-offs, raising new funds is challenging.
In addition, some GPs might be reluctant to make capital calls from LPs in this current environment. These two factors explain why deployment to founders is slow despite the massive dry powder on the sideline.
Finally, many startups raised massive rounds during the bull market at record-high valuations. With plenty of cash in the bank and long runways, these startups are hiring for important roles by offering competitive salaries comparable to the ones paid by major tech companies. Your first goal should be filtering and identifying these startups.
Inspiration From the Last Recession
The best startups that are well-capitalized and executing at a tremendous pace in growing new markets are in a position to hire the best talents (like yourself) in this environment. In the last recession in 2008, some of the best startups emerged, including Coinbase and Airbnb. Similar rocketship startups will come out from this downturn.
While we are starting to see more startups fail after failing to secure funding or exit via small acquisitions, your goal is to filter out these companies to find the next rocketship startups that can change your career.
What to Look For In Startups
Here are some heuristics to consider to filter out the suitable startups for your search. Jaireh Tecarro (frequent collaborator and fellow Hustle Fund Angel Squad member), who has plenty of experience working at many startups in various market cycles, shared her thoughts on what to look for in startups:
Free Cash Flow - The company is free cash flow but also has a big idea, the north star, that can sustain while simultaneously building something contrarian and right.
Breakthrough Technology - The company is operating in a strategic, highly innovative, or just a breakout scientific/technological breakthrough.
Deep Pockets - Founders already have had a win. Therefore they can bankroll themselves and effortlessly get VC funding based on their stellar reputation. These founders are essentially their own VCs. With their rainy day funds, they can keep building their startups, depending on how much cash they want to burn themselves. This type of startup is the riskiest, but at least founders can self-fund it.
Where to Begin Your Search?
The most suitable startup to consider is the company that either has achieved Product / Market Fit ("PMF") or is close to it, as shown in the diagram below:
As shown in the diagram above, startups between Validating (1) and Scaling (2) stages provide many employees with plenty of upside opportunities even though the startups already derisk from a product development perspective. Startups in this group typically hit enough milestones to be able to raise Series A or B.
For those who are interested in learning what does startup's PMF look like, check out Lenny Rachitsky's handy Twitter thread, which includes this beautiful Product-Market Fit "Ikigai":
Lenny Rachitsky also wrote a post about Product-Market Fit, where he aggregates all the insights provided by key figures such as Marc Andreessen, Elad Gil, Steve Blank, Andy Rachleff, and Michael Seibel. I highly recommend subscribing to his newsletter.
Some key PMF-related metrics from the post that you would want to understand as you start your research and talk to the founders include:
Retention - evidence of users stick around
Exponential Organic Growth
Cost-efficient Growth
CAC < LTV
Suppose you have seen some of these startups' characteristics and the company hasn't raised its price round (ex: Series A). In that case, this is the best potential risk/reward opportunity you can find. And feel free to let me know about it :).
While not all the startups fall under the Free Cash Flow description above, you should have a strong sense of the near-term potential since these companies have derisked by achieving PMFs.
Get a chance to meet the prospective startup founders/team. Your conversations around their products and those important metrics mentioned above will provide insights on how sustainable their business is to navigate this challenging market cycle to progress towards their big idea.
The combination of these insights, runway left, and when the founders need to go back to the market to raise the next round will help you decide whether to quit your job or not.
Bonus - If you receive a job offer from a potential rocketship startup, check out my post on how to understand your equity compensation offer.
What Are Some Key Things You Know About the Current Market?
Default Alive & Bridge Round
An essential read is the guidance provided by Y Combinator to advise its portfolio founders on preparing for the current market downturn.
The primary message is that startups need to cut their expenses and focus on extending their runway to reach “default alive.” For a company that has a low runway, they need to raise money as soon as possible. Given this concern, many startups have raised extension or bridge rounds in the last few months.
Runway
As a prospective employee, you should read the guidance and quiz the founders on how they are managing resources and expenses to extend their runway in this current market.
Some of the research you can do includes:
Search for the latest funding news from Crunchbase and Tech Crunch.
Estimate the monthly cost based on the company's number of employees that you can find on its LinkedIn page.
Ask the founder about the company's financial health, including a) cash on hand, b) monthly cash burn, and c) planned runway. Pay attention to how the founder answers the follow-up questions related to adjustments made in anticipation of challenging times.
For the startups with runway risk, you need to filter out these companies since there is a high chance that they will not survive through the bear market.
Liquidation Preference
For the companies that can raise a bridge round, you should understand if those financing rounds come with liquidation preference. In my prior post, I mentioned what happens when a startup runs into trouble and has to exit by being acquired by another company.
Liquidation preference would then come into play in the event of any exit, where the investors' preferred stock would get paid first, and whatever is left will remain for the common stock owned by founders and employees.
For example, if the startup has a small acquisition exit, the employees' stock options might be zero if the total proceeds are smaller than investors' equity post liquidation preference.
Part 2 & Final Note
My next post will continue this series on finding the right rocketship startup for your career using investors’ frameworks and insights. Please subscribe below to get notified.
What happens If There Is a Recession? - figure out which startups are vulnerable to recession.
What About Hardware & Deep/Hard Tech Startups? - learn about non-software companies’ key risks.
The Exception to the Guidelines - Self-Founded ex-Founders & Bootstrapper - share the insights of startups with a different approach to fundraising.
Finally, I want to add that many awesome startups launched during the pandemic are remote-first companies, such as Magic Eden, which hit unicorn status after launching in 9 months.
Suppose you are one of the FAANG employees in content and not looking for a new job. In that case, it's worth exploring other opportunities, especially since these large companies are ordering everyone to return to the office.
If you are interested in learning more or have more questions about this, don't hesitate to contact me on Twitter.
Thanks to Jen Liao and Jaireh Tecarro for providing valuable insights and reading drafts of this post.
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