I want to share the mental model I use to evaluate startups.
Think of it as due diligence, but focused more on employees. This model is straightforward and doesn't require any special financial or investor expertise.
If you're considering joining a startup as an employee, this approach will help you estimate its chances of success.
Understand the Ideal Customer Profile (ICP).
The ICP—Ideal Customer Profile—is the cornerstone of product development, sales, and marketing. It’s crucial to understand who the company is solving a problem for and how. Without this clarity, building a successful company is nearly impossible.
When interviewing with the company, the founders should be able to clearly describe the ICP. Additionally, anyone else interviewing you should describe the same persona consistently. This alignment among employees is a strong indicator that they understand the problem they’re solving.
A good ICP is specific and typically narrow, like "e-commerce business owners in the US with annual revenues up to $80M." If you hear something too broad or vague, consider it a red flag.
Assess the Problem’s Size.
Evaluate the size of the problem the company is trying to solve. While many assess this by estimating the Total Addressable Market (TAM), which can require extensive research, a simpler approach involves considering:
1. The severity of the customer’s pain.
2. The frequency of this pain.
3. The number of customers who experience it.
You can also do a quick Google search to identify existing alternatives customers use to address the same pain. A good problem size is one that affects many people on a daily basis.
It’s important to differentiate between a real problem and a hype-driven one. Significant technological shifts can lead to the creation of many companies (think Blockchain or GenAI), but not all of them solve real problems.
Evaluate the Founders.
Ask yourself: Are these founders the best people to tackle this problem, and why?
The answer usually involves two main factors: 1) Do they have deep knowledge and expertise in this space? 2) Have they successfully built a business before?
While it’s common to ask founders about their vision, I believe it’s not worth putting too much weight on it, as it’s likely to change over time. The founder's commitment to solving the problem and their resilience in the face of uncertainty are far more crucial.
Consider the Investors.
Strong investors indicate that the founders have effectively communicated the potential of the problem and its scale. These investors believe the problem is worth solving and that the founders are capable of doing so.
Identify the top-tier investors in the field and ask the founders who their investors are. Ideally, at least one of them should be on that list. The same applies to angel investors.
Top VC funds are pitched frequently, and if they choose to invest, they conduct thorough due diligence. You can trust their process.
If it’s an early-stage startup, consider asking to speak with their angel investor before making your decision. Ask about their perspective on the problem's size, why they chose to invest, and how they view the potential of the business.
Evaluate the Current Team.
Finally, assess the team. The goal here is to determine if this is the right team to build the product for the ICP. Identify key players and evaluate their backgrounds. Ideally, they should have experience in the domain and with the problem they’re solving.
Using this framework, you can assess different startups across various stages and industries.
Bonus: If you’ve read this far, you’re likely very interested. If you want to evaluate a specific offer you have, feel free to DM me, and we can go over it together.
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