Darth Capitalist Theoretically in the Black
FOR IMMEDIATE RELEASE
Contact:
Andrew Shriner
DarthCapitalist.com
Palo Alto, CA — October 7th, 2009 — Darth Capitalist has just learned via Google Alerts that DarthCapitalist.com, the Internet’s 9,731,859th most popular destination, has an estimated worth of $248.20 according to WebsiteOutlook.com.
Apparently, if Darth Capitalist were to run advertising it would yield $0.34 per day. Given our hosting and domain costs and almost 3 months of operation, our IRR would be 8.01%.
“I would like to thank our dedicated team of production, editorial and research staff for their hard work and dedication in reaching this milestone in theoretical enterprise value,” said Andrew Shriner, founder of Darth Capitalist.
Given Darth Capitalist’s hypothetically cash flow positive balance sheet, it joins the ranks of FaceBook and other highly successful Silicon Valley digital media companies to have recently reached this milestone.
Thinking of Joining a Startup? Then Think Like a Venture Capitalist.
Guy Kawasaki is an interesting fellow. When I was finishing up business school, a few classmates and I asked to meet with him in his offices at Garage Ventures, and Mr. Kawasaki was kind enough to humor us. The author, entrepreneur, venture capitalist, and recreational hockey player is a little like a jovial force of nature that has difficulty sitting still in its chair.
And he writes. A lot. There has to be a dedicated server over at Twitter just to handle his throughput. His recent 10 Questions to Ask Before You Join a Startup is a good article, and in the spirit of the collaborative conversation of the web, I thought I’d add my perspective.
If you are considering joining a startup team, you need to think like a venture capitalist. After all you are making the ultimate investment–yourself.
Early stage venture capitalists are in the business of managing risk, and for startups that risk primarily occurs in four areas:
- Market Risk – Will this company’s product or service succeed in the marketplace?
- Technology Risk – Will this company be able to successfully build this product or service?
- Management Risk – Will this team be able to get the company to the next level or beyond?
- Financial Risk – Are they significantly capitalized to achieve the milestones of this funding round?
When you are evaluating an opportunity with a startup, you should frame your questions with the same thoughts in mind. I should probably point out that some of these are “hardball” questions (such as the cap table one), and it is probably best to wait until after you have received the job offer to ask them.
So without further preamble, here is the Darth Capitalist guide to the 10 Questions You Should Ask Before Joining a Startup.
Financial Risk:
1. How much money is in the bank and what is the monthly burn rate?
Mr. Kawasaki and I agree wholeheartedly here. The point is to find out how much time is on the clock. Divide the cash position by the monthly burn rate and you know how much time you have. Keep in mind that if the company is ramping up the hiring, the burn rate will increase. You might want to discount the number of months remaining by about 20%.
2. What are the financing milestones?
When venture capitalists invest, they are actually buying something with the money. There will be a set of milestones that will enable the company to get to profitability or the next financing round. If the company doesn’t hit those milestones with their current cash position, the likelihood of a follow-on round is pretty slim. Have a discussion about those goals and how they map to the company’s priorities.
3. When will you need to do another round?
This is more of a gut check with the company leadership. Map the response to this question with your own calculations from questions 1 and 2. All three of these need to sync. If they don’t, then you should have grave concerns about how well the company’s leadership has thought through their financial, staffing, project management and sales plans.
4. May I see the cap table?
This is the mother of all hardball questions. The capitalization table is the snapshot of the company’s equity ownership. This will tell you the number of shares outstanding in the company and who owns what. You will be able to see what percent of the company your equity compensation equals as well as how much is owned by the investors and founders and how much is set aside in the employee pool. The employee pool reserve is important because it offers insight into the hiring plans that the company has. At the very least, you need to know what percentage of the company your option allocation equals, otherwise those options are just a meaningless number.
Market Risk:
5. What is the size of the market?
The market will make or break the company. This is the most important piece to understand. You need to know how company leadership views the market and the company’s place in it. This will also speak to future plans for product diversification and growth. It is critical that you and the leadership team are strategically aligned on this point, and if you aren’t, have a conversation to understand why.
6. What is the sales pitch?
In any economy, not just today’s, if the product or service doesn’t provide tangible value to the customer or partner, it won’t sell. Period. There has to be a compelling reason why organizations will partner with you, develop on your platform, buy your product, advertise with you, etc. It all comes down to ROI. If the value proposition is a soft sell such as “enhance user experience” and “foster community,” head for the door. Fast.
7. What are the revenue streams?
One revenue stream is nice, more are better. As you surely know, businesses ebb and flow and the ones that can draw revenue from multiple sources are going to be better poised to smooth out the peaks and valleys of business cycles.
8. What are the unit economics?
This is key to knowing the drivers of the business. How much does it cost to acquire a customer, a visitor or a registered user and what is their lifetime value? What are the switching costs for a customer once they are a client or participant? If these questions can’t be answered by the leadership team, this is a major red flag unless this is what you are being hired to figure out.
Technology Risk:
9. Does the technology scale?
This is the flip side of the unit economics coin. How much does it cost to produce your product or provide your service? How many users or customers does the current architecture / procedures support? This is important because reengineering underlying support infrastructure can be extremely costly, especially if the business development / sales team is outpacing implementation and creating backlog. This will result in unhappy customers and unrecognizable revenue.
Management Risk:
10. Does the company have an office manager?
I’m serious. Even in a 10 person startup there needs to be a thoughtful division of labor. If the CEO is ordering pens and refilling the refrigerator with Diet Cokes, his/her priorities are way out of synch with the needs of the company. This is a good proxy for evaluating the overall judgement and priorities of the leadership team.
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