Think like an Investor - What Should Senior Leadership Talent Consider When Deciding Which Startup to Join?
30 Essential Questions for Senior Leaders to Evaluate a Startup Opportunity
Years ago, we wrote an article on our blog discussing how founders think about bringing in experienced hires to form their leadership team. The article highlighted the mindset needed to ensure these hires succeed. At that time, startups were hiring aggressively and working hard to convince top leadership talent to join them.
Fast forward to 2024, many senior leaders had joined startups during the excitement and hype of record fundraising from 2021 to 2022. However, in late 2022,when fundraising slowed down, many found themselves out of jobs as startups experienced unprecedented layoffs, especially in fintech, e-commerce, and web3. Consequently, 2023 saw the lowest amount of funding raised among SEA startups since 2018.
Today, startups are hiring intentionally and cautiously, and top leadership talent, some impacted by layoffs, are evaluating their next move with the same level of caution. These leaders have options and must evaluate them more carefully than before to ensure they make the right choice. However, we’ve noticed that many senior candidates are not fully asking founders and board members the tough questions. Some have decided to give up on startups entirely, which is unfortunate given that there are still promising startups worth joining, just as there are still valuable investment opportunities for VCs.
Drawing from our own experience and interviews with venture capitalists, investors, founders, and leadership talent (see the full list of contributors at the bottom of the article), we have distilled the top questions that senior hires should ask as part of their due diligence. After all, if you are making this jump, you should 'think like an investor.'"
Note: We have deliberately excluded specifics on compensation (salary or ESOP) and career considerations in this article.*
Vision and Growth Potential
Understanding the vision and growth potential allows the candidate to assess the company's future prospects, align their career/personal goals i.e. their “whys”, and gauge their potential impact within the organization.
“The vision, ideally, should align with the candidate's "why”. And at the very minimum it should not conflict with their passion, values or beliefs”
~ Jupe Tsui, previous CFO at Qashier, RedDoorz
What is the company’s vision and north star?
What is the company’s growth trajectory over the past few years, including revenue, user base, and market expansion? ( the data may or may not be available depending on the stage of the company but regardless there should be some leading indicators of growth)
What are the company's growth goals, and how does the company plan to achieve them? What are the business drivers? How realistic is this goal ?( they should be able to compare to a similar business or discuss this with relevant data and research)
What are the market trends and how is the company positioned to capitalize on them?
Who are the company’s role models? Who are the main competitors in each market? How does the company differentiate itself from competitors, and what strategies are in place to maintain this competitive advantage?
“Sign an NDA, ask for pitch decks to investors or even financial statements to dive deep. This might be a red flag if Founders are not willing to share these documents”
~ Delbert Ty, CMO CoffeemeetsBagel
Funding Situation
"I was excited about the startup and signed up to a fundraising plan which required perfect execution. Unfortunately, COVID hit in the 2nd month. The next couple of months were more turbulent than what I'd expected when I joined."
- Sabrina Ng, Fractional CFO for Startups
Assessing the funding situation gives an insight into the company's financial stability, a real chance of achieving the growth trajectory, and ability to execute its strategic plans, crucial for evaluating the company's sustainability and success.
What is the current cash runway of the company, and when is the next funding round planned? What is the burn rate?
Who is on the cap table ie who are their existing investors, their level of involvement, and their expectations for future funding rounds? You can ask about the board composition.
Are there any outstanding debts or financial obligations that could impact the company's operations or growth?
How does the company plan to utilize funding from future rounds, and what are the key areas of investment?
Benchmark valuation against peer companies (comparables)
Exit Strategy and Liquidity Options
Examining exit strategies and liquidity options ensures the candidate understands the potential for equity realization and long-term value creation, crucial for assessing the overall financial viability and potential returns of their investment. (this is assuming all senior talent will have equity - else why are you joining a startup?)
“ You need to know what’s up for grabs after investors had their funds returned”
~ Ali Fancy, Partner at Cento Ventures
Ask how much money the company has raised so far and the recent valuation. Subtract this from the valuation of the current round. That gives a rough idea of what is 'up for grabs' after investors have had their funds returned, in an exit. i.e. it offers a rough estimate of the value remaining for distribution among shareholders and employees with equity stakes.
How is the valuation calculated? The answer is usually a multiple of “net revenue” and there are benchmarks for this multiple for different types of businesses. Check how realistic it is. For eg a multiple for a ecommerce business could be 5x in current times but much more in the earlier days ( anecdotal information, please do your own research)
What is the company's exit strategy? Is there a tentative timeline or target for a potential liquidity event?
What are the primary options for achieving liquidity, such as an IPO, acquisition, or merger?
Who could be target acquirers? Has the company received any offers or expressions of interest from potential acquirers or investors? If so, why were they not accepted?
What mechanisms are in place to ensure transparency and fairness in the valuation and distribution of equity proceeds? especially liquidation preferences. Understanding the liquidation preferences is crucial for candidates to evaluate the risk associated with their equity holdings. Large liquidation preferences can significantly impact the distribution of proceeds in an exit, potentially disadvantageous to early shareholders and employees.
Ask about the strike price of the ESOP. Inquiring about the strike price of the Employee Stock Ownership Plan (ESOP) provides insight into the potential value of equity options granted to employees. If the strike price is set too high relative to the company's actual valuation, it may render the options "underwater," diminishing their attractiveness as a form of compensation. This information helps candidates assess the potential financial rewards associated with joining the startup.
Leadership and Decision-Making
Evaluating leadership and decision-making processes enables the candidate to understand the company's culture, communication channels, and alignment of values, crucial for determining their fit within the organization and potential for influence and advancement.
Leadership Dynamics. How is the leadership team structured, and what are the roles and responsibilities of key decision-makers?
Board Dynamics -what is the relationship with the Founder? How are they each involved in the operation, especially in key decision making? How many and who are they? Do other directors has other interest eg Corporates Venture Capital
Leadership Communication: What mechanisms are in place to ensure transparency and communication within the leadership team and across the organization?
Conflict Resolution: How does the company handle disagreements or conflicts in decision-making, and what steps are taken to ensure alignment? Please ask for specific examples
Can the company provide examples of significant decisions made in the past (good or bad) and how they have impacted the company's trajectory or lack of?
Is the role really needed?
Questioning the necessity of the role ensures alignment between the candidate's skills and the company's strategic objectives, minimizing the risk of role redundancy and ensuring the candidate's potential for meaningful contribution and career advancement.
“What key problems in the next 12-18 months must this person solve?”
~ Junxiong Ho, CFO of Funding Societies
Why is this specific role being created now, and what objectives does the company aim to accomplish by filling it? Ie What key problem in the next 12 months must this person solve?
How does this role fit into the overall organizational structure, and what teams or departments will it collaborate with?
Can the company outline the key responsibilities and expectations for this role, including any short-term and long-term goals?
What resources and support will be provided to ensure success in this role, and how will performance be evaluated?
How does the success of this role contribute to the company's broader business objectives, and what metrics will be used to measure impact?
Are they clear who they are looking for?
Understanding the company's clarity on their expectation of the candidate ensures alignment between the candidate's skills, experiences, and career aspirations with the company's needs, reducing the risk of miscommunication and enhancing the candidate's potential for success and growth within the organization.
“I will ask the Founder what is his ideal hire for this role and why. Not being able to articulate that is a significant concern.”
~Delbert Ty, CMO at CoffeemeetsBagel
What is your ideal hire? What attributes or experiences does the company believe make the candidate uniquely qualified for this role?
Can the company provide examples of specific challenges or opportunities where the candidate's skills and experience would be particularly valuable?
Who else did they consider for the role and why were they not selected? What gaps were there in their skill/experience?
What support or mentorship will be provided to help the candidate succeed in this role and integrate into the company culture?
“ How do you see me helping you solve the problem? Is a question I would expect from any senior leader that I am hiring”
~ Tham Keng Yew, Founder of Supply Bunny and various other startups
By asking these critical questions, senior leadership talent can better evaluate the potential and stability of a startup before making the leap. It’s essential to approach this decision with the same rigor and due diligence as an investor would. This not only ensures alignment with the startup's vision and goals but also mitigates risks and maximizes the chances of a successful and fulfilling partnership. As the startup landscape continues to evolve, being well-prepared and informed is crucial for both personal career growth and contributing effectively to the startup’s success. Remember, the right questions can reveal invaluable insights, paving the way for a strategic and well-informed decision.
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https://techcrunch.com/2023/11/01/southeast-asia-funding-at-its-lowest-level-in-six-years
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A big thank you to the contributors of this article:
Ali Fancy
Jupe Tsui
Jun Xiong Ho
Sabrina Ng
Delbert Ty
Tham Keng Yew
And some others who declined to be named.