Start Up Companies
This article is compiled from two blog posts from Jeremey McCarthy's blog on the VentureLoop website. Jeremy also offers a newsletter. Interested subscribers can sign up by registering at the site.
You have just interview with two exciting companies. Company number one was founded by a couple of PhD students with limited work experience and no real startup company success. Company number two is well-funded, and they just landed a CEO from one of the most successful consulting companies in the world. Company One is targeting a market already dominated by a couple of monster players. Company Two is basically leading their market and expanding rapidly. Which offer do you take?
If you took an offer from Company One, you’re probably reading this article from your beach house in Maui since you were one of the first Google employees and worth many millions of dollars now. If you took an offer from Company Two, you are still to this day feeling burned that you didn’t see the imminent crash of Webvan.
Many of you feel a real challenge to identify the winning startup that will make it big and create financial stability for you along the way. How can it be done? What should you look for? How can you end up with the beach house in Maui instead of ten Webvan delivery cartons to store stuff in your garage?
Vegas, Baby, Vegas
The best way to select a startup is to first begin thinking like a professional gambler. No, I’m not talking about how most of us go to Vegas and imagine we’re professional gamblers who are making savvy and intelligent betting decisions. We get a vibe for the right slot machine that pays off a million dollars. Catch a hot streak at the craps tables. Bluff our way to winning a poker tournament. That’s the dream, but we usually go home with less money than when we arrived.
Professional gamblers calculate odds. They do research. They look for trends. In short, they do everything possible to find an edge in selecting a winner. For example, normally the Miami Dolphins with a 4-8 record would be a huge underdog to the New England Patriots at 10-2. But the professional gambler knows that the Patriots are 1-5 against the point spread on the road, with Tom Brady at quarterback, in day games, in December, against AFC teams. Sure, the Dolphins could still lose the game against the point spread, but the professional gambler has accumulated a significant amount of relevant information, analyzed trends, and looked at market timing, to make a decision that is educated and accounts for the odds.
Venture Capitalists are the professional gamblers of the startup world. Venture Capitalists know the players (entrepreneurs), track market trends, and do competitive analysis. But they also have more control than professional gamblers. VCs can actually step in and find a better quarterback for the Miami Dolphins before the big game or merge them with the New York Jets to field a team with the best possible players on the field. They could also be friends with running back Barry Sanders and know he’s ready to come back into the NFL. So they bet money on the Dolphins and add a superstar to the team that will make for a winning season.
Bet Like a Venture Capitalist
When selecting a startup company, begin with where the professional gamblers are putting their money. Who are some of the top venture or angel investors putting their money on? While this is certainly not a guarantee, it is one factor that can mitigate your risk in selecting a winning startup company. Sure, you could still end up at Webvan, but watching where the professionals are putting their money is the first place to start in evaluating a startup opportunity. In Vegas, you rarely know where the professional gamblers are putting their money. In the startup world, you know 90% of the time who the professional gamblers are betting on. If you see a trend in a particular area, then it’s time to take the next step in your startup evaluation process.
Remember, Google and Webvan had some of the same investors, so we've only just begun our evaluation.
