Funding history tells a story about compensation and your future.
By definition, working at a startup comes with risk. While any business can fail, startups are especially precarious. Reasons for demise range from never finding a market, to scaling so fast the company implodes. As you consider taking a job at a particular startup, there are a number of clues as to the risk level, and including the company’s funding history.
Admittedly, many exceptions exist to the following generalizations. However, the company’s funding history tells a story, and here are five truths that can be gleaned:
1. Whether product-market fit has been found
In general, companies do not gain Series A funding until they have found product market fit, which simply means having a minimum viable product that has demonstrated (through revenue) that it meets a market need. Unless product-market fit is established, a company is particularly vulnerable to failure. In fact, research shows this is the number one reason startups fail.
2. Where the near-term focus will be
Companies at different life stages generally have different goals. For the seed stage of funding, companies focus on product market fit. For Series A and B, scaling. Companies in Series C and beyond ultimately prepare for IPO.
3. The level of compensation/perks you can expect
The earlier you join in a company’s journey, the more likely you will be paid at below-market rates. That said, you’re taking on more risk, so you may also be awarded more equity than for later stage companies. And don’t expect extras like lunch provided daily. A plus side to early stage: You’ll find quickly expanding opportunities and roles as the company grows.
4. Likelihood equity will pay off
Equity can be awesome as compensation, but it only has value when you can sell it. And you can’t sell without a market and buyer. Which generally means the company IPOs or is acquired. The “older” a company is in its funding journey, the more likely this will happen. Only 42 percent of startups that raise seed funding are unable to raise Series A. Of these, about half are able to progress to Series B, and 16% to Series C and 6% to Series D. Full data is here.
5. The company’s momentum/velocity
The speed with which the company has moved through funding rounds gives a clue as to its future prospects. Investors are seeing something they like, and the company may develop something of a buzz. Negative momentum can be hard for a company to overcome. Of course, the startup graveyard is littered with companies that have had quick starts, only to flounder later.
Which brings us to the one thing that funding history does not indicate:
1. A guarantee of company success or failure
Anything can happen. Historically, companies that seemed poised for dominance have failed, and companies that have been down to their last dime have gone on to do great things. So take funding information as just one clue as you assess the total health and future of a company.