Exit ≠ Win - How to evaluate startup quality

A better way to evaluate startup success. I’ll help you see through the term "exit" to evaluate the real outcome, and share a few tactics on how to get a good exit of your own when joining a startup.

David Head
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Show Notes

Over the years I’ve had many friends ask “Should I join this early stage startup?” They’ll get around to describing the Founder/CEO and say something like “They’ve had three exits.” or "They've sold three startups."

Then I explain that many “exits” and "sales" actually don’t produce much (if any) substantial money for the founder, and even more rarely substantial money for the employees. Many “exits” are “acqui-hires" where the product gets thrown out and the team gets hired with a signing bonus.[1] Some founders may say it’s an “exit” if they sold just a tiny piece of the product like the domain name.

There are also many cases where startups grew and created tremendous value for users, but they were bad businesses, and the team decided to simply shut it down . Maybe the team decided it wasn’t worth sacrificing a year of their life to join an acquirer they didn’t want to work for just to say they got an “exit".

All “exits” are not equal. In fact, exit doesn’t equal win.

In this article I’ll share a better way to evaluate startup success rather than a binary “exit” or no “exit”. I’ll help you see through the term to evaluate the real outcome of a startup, and share a few tactics on how to get a good exit of your own joining as an employee.

Evaluating startup based on impact and value

Fundamentally, a startup is supposed to do two things:

  1. make the the world a better place
  2. make the team money

Making the world a better place

When it comes to adding value to the world, it’s a function of impact per user times how many users.

Did the startup help users succeed in areas of their life or career that they otherwise may never have? How much did users did it serve?

Adding value to the team

There are two primary axes here:

The first is most important of course. There’s also an arguable third axis which is:

Ultimately, one could argue loving your day-to-day life is arguably more important than the sheer dollars you pocket if you’re miserable.

Deciphering the “acquisition” articles

In many cases when an acquisition or acqui-hire takes place, there’s an article in TechCrunch or similar. Seeing an article is a better filtration mechanism for knowing which exits were good or bad, but not by much.

It’s often hard to tell whether it was a “good” exit or not (in terms of making the team and investors money). There are “undisclosed valuations” where the founders each netted eight figures and all of the employees were able to buy houses. There are also “undisclosed valuations” where a 1,000+ person startup sold for 1/10th of the money raised in their last funding round.

How to tell how much money an “exit” made the team

If you can find an article with a valuation listed, you can do some math and come up with a moderate quality guess.

If it’s “undisclosed”, you’ll have to speak with the founders or past employees, who will either be direct and tell you, or you’ll have to read between the lines. In this case, it’s more likely if it was a good outcome for the team you’ll get a more direct answer.

Unpacking how to do the math when you see a valuation in an article, say it says the company sold for $100m. Your next step is to look at how much money the company raised. If it was close to $100m or more, it’s likely the employees didn’t get a great outcome.

How the contracts are generally setup is that investors get their money first, then founders, then employees. So in the case of that “exit” the investors may have made their money back, then the founder may have negotiated a special bonus of $1m or so to follow through with a sale, since they wouldn’t have made anything with investor liquidation preferences.

Short-circuiting the process to pick a successful startup

If you want the best chance of joining a startup that will give you a good exit, the simplest and most reliable way that I’ve seen both in public advice and through the grapevine is asking investors which startups are the best in their portfolio to join.

Investors have insider knowledge about the startup’s growth and financial situation. They also have vast data on other startups so their pattern matching abilities are tuned. They will have the best guess at which startups in their portfolio will make them the most money.

So then instead of you thinking a startup good because X brand-name investor invested in them, email X brand-investor and asking what the best companies in their portfolio are to consider joining.

Investors are always looking for ways to add value to their startups. So if you seem like a good team member, you may be able to network your way into an intro.

Be wary of high valuations

Higher valuations mean there’s less upside for you.

The media also loves to report on higher valuations more than lower. Your best bet is to join a startup that’s raised as little as possible. David Hsu from Retool has a great article on this where he describes how Coinbase’s exit would have netted an employee 57x what Uber’s would in a scenario where they joined 5 years before the IPO.

The key takeaway is that investors are good at negotiating, and that’s unfortunately often at the expense of employees.

Conclusion

The takeaway is that many (maybe most) startup “exits” aren’t positive outcomes, and it’s really friggin hard to make better money joining an early stage startup than a larger company. 

Most startups don’t have the mega outcomes that get highlighted in the media. There’s a large survivorship bias since startup media only covers what seem like successes, and investors own the media and make more money by convincing more people to start and join startups. Then the people who have good outcomes go out of their way to talk about that versus ones who haven’t are more tight lipped.

Be skeptical any time you hear the word “exit” and look deeper to determine the real results. The best thing you can do is to consult investors in private about which teams to join.

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