How to Slingshot & Accelerate Your Career in this Market? (Part 2)
…by using investors' framework to find the next rocketship startup to bet on.
In my last post, I discussed that it’s not all doom and gloom for tech employees in the current challenging environment.
I shared my argument why now is the best time to start searching for the next rocketship startup to join in the next 6 to 9 months.
Even if you are not necessarily looking for a job, it's worth getting some market insights and ideas on looking for any breakout companies for future considerations.
If you haven't seen Part 1, I used the investors' framework and went through:
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? - 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.
In Part 2, I will go through:
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.
What happens If There Is a Recession?
As an angel investor and active stock market investor, I think about the potential of the future and the near-term risks of any investment. As startup employees, your decision-making should incorporate both potential and near-term risks, including the possibility of a recession.
In the challenging fundraising environment, many startups have cut costs to be “default alive,” as mentioned in the last post.
As we enter the real possibility of a recession, revenue growth in some sectors is more vulnerable than others. Some of the questions that you should be asking include:
Who are the primary customers?
What’s the problem the startup is trying to solve for its customer?
Is the product a painkiller or a vitamin?
Suppose a B2B enterprise startup sells SaaS products to other startups and mid-market companies. In that case, there is a possibility that their customers might not renew the contracts since these companies are looking to cut costs themselves.
If there is a recession, consumers might not spend as much on non-essential products & services, which could impact certain e-commerce/marketplace companies.
In addition, the current environment has affected many Buy Now Pay Later ("BNPL") startups. The most prominent one is the 85% decline in Klarna's valuation in the recent funding. With interest remaining high, the outlook for BNPL and their fintech partners is unfavorable.
The second quarter earnings season provides investors with plenty of outlook about corporate and consumer spending. Those market insights provide some excellent proxy of what to expect for startups' near-term outlook.
What About Hardware & Deep/Hard Tech Startups?
As an angel investor, I have a deep passion for deep tech (electrification of transportation, sustainable energy, and space exploration) and hardware startups trying to solve challenging problems.
These companies could be the next Tesla & SpaceX because they can CAPTURE & GROW massive markets with breakthrough technology.
If you are an engineer, designer, and data scientist thinking about joining non-software tech startups, here are some good reads:
Technologies Are Converging
According to Ark Investment Big Ideas 2022, five innovation platforms are evolving and converging simultaneously: Artificial Intelligence, Robotics, Energy Storage, DNA Sequencing, and Blockchain Technology. You can read more here.
Recurring Model for Hardware Companies
As hardware companies are moving from a traditional sales model to subscription services that resemble software companies, there are more opportunities than ever for multi-discipline engineers and other knowledge workers. Silicon Valley Bank and Eclipse Ventures recently published this excellent report on the trend.
Solving Hard Problems
Andreessen Horowitz has been very vocal for more founders to build companies that can solve challenging problems, including manufacturing, defense, housing, etc. If you are interested in such companies, you should read some of their essays, including this.
While we can still use some of the Product-Market Fit guidelines listed in the first post, here are some near-term risks for the broader hardware & deep tech sectors:
Runway, Sales Cycle & Dilution
Traditional hardware and deep tech companies require much more capital than software companies. In a challenging environment with a strong recession possibility, your goal is to find a well-capitalized company with a long runway to sustain this cycle.
In addition, these companies have very long sales cycles (depending on the company's specific sector and stages). While it's nice to see companies with a healthy total value of revenue contracts and massive Letters of Intent (LOIs), you should assume that it could take a long time before commercial revenue comes to their bank account.
Knowing how much runway a company has given the actual cash in its bank account is vital. For example, companies with a runway of 18-24 months left can provide you with some comfort if you consider leaving your current role.
Another consideration includes non-US startups since raising the next round of funding takes longer for international companies. It would help if you considered whether these companies could raise huge rounds from US investors, given the concentration of capital here.
Investors have the upper hand when dictating terms for any company looking to raise a Series A / B in the next 6-12 months. Instead of paying attention to how much the company is valued, look at the dilution % or (funding round / post-money valuation).
According to Y Combinator's guide, "most rounds will require up to 20% dilution, and founders should try to avoid more than 25%." High dilution, such as 40%, could impact how much your stock options could be worth.
Key Business Risks
Instead of using software companies’ PMF as guidelines, key business risks include technology validation. For any deep tech companies I invest in, I rely on industry experts to help me validate the technology. For any employee considering joining hardware and deep tech companies, I recommend finding experts to validate this risk if you don’t have a relevant industry background.
Depending on the stage, hardware and deep tech companies will focus most of their time on building the technology. Key business model validation includes solving key customers’ pain points with demonstrable Return on Investment (“ROIs”), the initial pricing model given the core value proposition, and the paths toward growing the operating margin and profitability.
Supply chain constraints are the primary problems many hardware companies face during the pandemic. This issue remains a significant concern for the foreseeable future. My favorite question to ask deep tech founders is how they think about external risks beyond their control. As an employee, you should ask this question to understand how founders think about those risks with some plans to de-risk them.
Before considering any hardware & deep tech startups, you should understand better the near-term challenging fundraising period, runway risk, long sales cycle, and other external factors.
The Exception to the Guidelines - Self-Founded ex-Founders & Bootstrapper
As mentioned above, the exception to these guidelines is former founders who can bankroll their latest startups. There are plenty of such repeat founders who bootstrap their following companies. A good example is Dustin Moskovitz, co-founder of Facebook, who bootstrapped his next company, Asana (NYSE: ASAN), early on before raising any venture round.
As suggested by my fellow angel investor friend, Jaireh Tecarro, even if the founders aren't blue-chip names such as Travis or Adam, it's worth checking out if they have prior exits in the past. Any major exit in the range of $100+ million means this type of founder is capable of funding their startup on their own in the early days.
Usually, tech employees associate breakout startups based on huge funding news or TechCrunch articles. While it's easier to identify startups that can raise massive rounds from VCs, hidden gems come from founders who take a disciplined approach by initially bootstrapping their startups and focusing on profitability first.
In the recent episode of Y Combinator’s Same, Same But Different (highly recommend), Vanta’s CEO Christina Cacioppo and Zapier CEO Wade Foster talked about their decision to bootstrap their companies early on.
Vanta didn’t raise a Series A round until they built products that customers wanted and found their product market fit. Zapier, valued at $5 billion, has only raised a $1.3 million seed round in 2012 and has been profitable since 2014.
Any employee that has joined startups that have taken this different approach would have benefitted from lucrative employee stock options since the company has retained strong ownership and control from external investors.
On the opposite spectrum, you should avoid bootstrapped startups entirely like Basecamp. In most cases, the founders are reluctant to award any equity compensation to employees. Mailchimp is another example where Intuit acquired the company for $12 billion. Unfortunately, their employees were not one of the benefactors from the exit. The other risk of bootstrapped startups is they could continuously grow at the trajectory of small businesses without any liquidity exit on the horizon.
Final Note
As an investor, I can diversify my portfolio to reduce risks. If I build a broad enough portfolio, the winners might become outsized to pull up my returns across the board.
As an employee (for most people), you are all in with your wealth creation and income with the company that employs you. Investing allows you to diversify your risks.
In addition, angel investing should be part of your networking strategies. Investing allows you to identify breakout companies for future job opportunities.
Learn + Join Community
Diversify Your Wealth Building By Invest (see post)
Build your network
Broaden your horizon
One day, working for your portfolio company could be your next dream role.
Also, if you receive a job offer from one of these startups, check out my prior post on how to understand equity compensation.
If you are interested in learning more or have more questions about this, please contact me on Twitter.
Thanks to Jen Liao and Jaireh Tecarro for providing valuable insights and reading drafts of this post.
PS: Sign up☟ if you find this interesting. Email me if you have any excellent topics for me to explore more!
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