I’ve made all the mistakes myself investing in or working for start-ups. Fortunately I’ve preserved time and capital by the ‘opportunities’ I’ve walked away from. Whether you join as an employee or investor, it is essential you perform your due diligence. Here are ten questions that if you don’t get absolutely great answers to each and every one, play smart and choose another situation for your time and money.
1. What is the company’s unique competitive advantage? Life is short in the start-up world, and even more so without a superior product, service, delivery system, etc. What can this company do that others can’t? Can it become ‘special’ soon?
2. How does the company figure its burn rate or net cash outflow? If they don’t share that or it doesn’t have a cushion for contingencies, that’s a bad sign. It’s better to know when the doors will close if income doesn’t materialize.
3. Has the company shipped any product, have any paying customers, or collected any revenue? If not, when? Why? Carefully listen to the answers.
4. How much money does the company actually have in the bank? I am talking about good, ole cash, not credit or promises. All the strategy and talent means nothing if the company runs out of cash.
5. Who are the investors? It’s quite all right to have the Founders bootstrap the company if the company is producing revenue. Otherwise, do the investors offer continuing commitment and do they bring any strategic advantage to the table or are they simply financial investors? And what is management’s ‘exit strategy.’
6. What is the value of the company following the last round of investment? If the company isn’t beginning to take off in terms of revenue, “hits,” patents, etc., raising more money will become increasingly difficult as expectations were already set too high, and it may die.
7. Who is on the board of directors? Beware the close-knit friends and family boards. You need someone who has some relevant operating experience and isn’t afraid to exercise their experience.
8. Has the company properly analyzed their competitors for what they can and can’t do? Optimism is good, but delusion, lack of due diligence or dishonesty is not.
9. What new technology or legislation could upset the company? Use your imagination because you can bet that someone else is. Is there a key person without whom the company could not function? In other words, what might surprise the company, and how are they prepared to respond?
10. Can you trust the people in the company? Trust your gut on this one. If the integrity and values don’t mix with yours, run don’t walk and hold onto your money with both hands.
Realizing that the vast majority of start-ups fail, don’t fret if you have to walk away from any special opportunity. There’s another one right around the corner, and savvy investors and job seekers don’t waste either their time or money.
