TL;DR: You can’t pick the winner, so don’t try. Pick a company whose product or service you believe in (ideally that you use), where your skills fit, where you will be able to grow and work with good people. Make sure it pays enough for you to live comfortably, and treat any stock as a lottery ticket. If the startup turns out to be a big success, that’s a bonus. If the stock is worthless, that’s life.

I am often asked by new graduates and people who are fairly early in their careers for advice on picking a good startup. Their definition of a “good startup” tends to be one that will be good for career development and will make them rich via a successful IPO.

I get these questions because I am one of the few people they know who joined a “successful” startup in its early stage. I have worked for six startups over the last 20 years. None was a “home run,” i.e., made me fabulously wealthy, but all but one were “strong base hits,” i.e., 2 moderately good IPOs, and profitable exits via acquisition by Google or Microsoft. Two companies ultimately”failed,” but I was long gone and was never laid off. They didn’t know I passed on several opportunities that could have been home runs (Cisco, Facebook, Netscape, Google when they were less than 200 people).

The following is my advice.

You Can’t Pick a Winner

Someone early in their career cannot pick a winner. If they do, it was luck, not skill.

Look at VCs. The most successful VCs firms in their heyday (Benchmark, Sequoia, Kleiner Perkins) had more than half their investments fall (they lost money). John Doerr reported 55% of their Investments failed. Between 5-10% of their investments were a big hits, e.g. return >5-10X.

It is pure hubris for someone new in their career to believe they will pick a big-win startup more successfully than the most successful and experienced VCs. This means that at best, you have a 1 out of 10 chance to make significant money from an IPO or successful acquisition.

But it’s actually even less likely for someone new in their career to equal the performance of successful VCs:

• VCs have access to information that you don’t: pitches and disclosures from the company seeking investment, due diligence investigation, and detailed knowledge of the competitive landscape.
• VCs are not working alone. They have other partners and associates who help them make assessments.
• VCs are in a better position to help startups succeed than an individual contributor working inside the company. Just a few examples: they can make introductions, which can lead to the company making deals. They can add more funding to help a company climb to the next level. They can close key employees the company needs to hire.

Related: I have given very similar advice when it comes to investing in the stock market.  You will do better by investing in a low overhead index fund which tracks the market, rather than trying to actively manage a portfolio.  See my notes about investing in stocks for more information.

How to Pick?

My first recommendation is to let go of the desire to “get rich.” I have written about how to have a healthy relationship with money. As Proverbs 30:8 succinctly advises, we should aim to be “neither poor nor rich.”

My advice is that you want a job that allows you to develop and have impact, and that pays enough for you to live.

I suggest that the most critical questions are:

• Do I believe in the product / service / mission? Don’t work for a company that you hate just because they will give you money. It will slowly kill your soul and steal your joy. So people say “I have no choice, but that’s almost never the case.
• Do I have the opportunity to use my skills and abilities? I often word this as “Do they have a hole that I can fill?” This isn’t an absolute rule. If you are just starting or pivoting careers, you might not bring particular skills or experience; you are just prepared to work hard.
• Do I have the opportunity to learn and grow? Are there challenging (at least for me) problems that I will get to work on that will grow my mastery?
• Do I see signs of a good team? I look for indications of a healthy culture, a good manager, and quality people. Don’t be the smartest or dumbest person in the room. More on this in a future post.
• Does the job pay enough for me “to live”? Don’t insist on increasing salary (though negotiate for the best pay you can get). Look for something that enables you to maintain your current lifestyle. (It’s rare, but there are some opportunities so compelling that it is worth taking a step back economically.) It’s desirable for the company to have moderate financial stability. In the case of a startup, that means at least one year, preferably two years, of “runway,” that is, cash in the bank versus expected burn rate.

Those questions apply to anyone. My personal criteria, which overlap are:

• Location: Is it a short commute from where I plan to live? I didn’t want to waste time commuting, and I had come to really enjoy a mostly carless existence.
• Product: Am I working on a product / service / mission that leads to human flourishing in a direct way? Universities, research institutes, and NGOs/nonprofits with missions I believe in are at the top of this list.
• Role: Will I be able to leverage my skills and experience (is there a Mark-shaped hole)? Most importantly, will I have the opportunity to advise, coach, and/or mentor?
• Team: Will I enjoy my coworkers, and will I have peers (i.e., I don’t want to be the sharpest knife in the drawer)?
• Size: Is my “defining” organization between 20 and 200 people? “Defining” is complicated. In a startup, it would be the size of the entire company, because the life of the startup deeply impacts everyone. In a large organization like a university or corporation, it is the grouping that sets objectives: department, college, or “business” unit.
• Pay: I have “retired,” i.e., I no longer need a salary to continue my lifestyle. I only care that my salary is “fair” and that the organization’s pay scale is sufficient to hire quality employees.
• Growth: I love to learn and grow, but at this stage of life, my criteria is focused on helping others grow and develop, not my opportunities.

Salary and Stock

Consider the salary and benefits. Is it enough for you to maintain your current lifestyle easily? Ideally, you want the offer to be what I refer to as “more than fair.” Not crazy high (this is unsustainable for the company). Ideally a bit higher than market, if you are bring real skills, 70-80% for your band. A company that pays well signals it wants quality staff. Sometime later I will write something up about how to get a sense of what a “fair” salary is.

Unless you are joining a successful, growing, public company that issues RSUs, you should think of your stock, especially if it is in the form of options, as a lottery ticket. It might be worth something someday, but it is just as likely to be worthless. Don’t factor the options into your financial calculus. Later I will write up how to deal with grants and options, especially in view of US tax policy. AMT can be a bitch when exercising options, especially if the company hasn’t gone public.

Come now, you who say, “Today or tomorrow we will go into such and such a town and spend a year there and trade and make a profit”— yet you do not know what tomorrow will bring. What is your life? For you are a mist that appears for a little time and then vanishes. Instead you ought to say, “If the Lord wills, we will live and do this or that.”  As it is, you boast in your arrogance. All such boasting is evil. – James 4:13-16 (ESV)