Joining a Startup? Look for These 3 Managerial Red Flags

All happy startups, like all happy families, might well be alike; but each unhappy startup, like each unhappy family, is unhappy in its own way.

If you're making a mid-career choice to leave your boring but stable job for the excitement of a startup, you should, at a minimum, look for the red flag of inadequate management. In its article, 92 of the Biggest, Costliest Startups of All Time, CB Insights suggested that a lack of organizational and industry expertise can sink even the most promising and well funded startup venture.

All Science, No Management

KiOR, a green energy biofuel company, was a case in point. It received more than $100 million in venture capital through its second round of B funding. Before it filed for bankruptcy, it spent more than $600 million, generating only $2.3 million in revenue and acquiring only $58.3 million in assets.

As Fortune Magazine explained,  KiOR's founders believed - as many do - that the company could thrive in an atmosphere of "guided chaos." In practical terms, that meant a "preponderance of lab researchers with Ph.D.s and a dearth of people with technical, operational experience running energy facilities."

Other factors, of course, played major roles in KiOR's failure, including the collapse in oil prices and a premature IPO. But a startup preference for flat, fast and flexible management structure after the first or second round of B funding is a red flag for failure.

Google's Verily is another case in point. A life sciences startup meant to revolutionize medicine in the same way Google harnessed the internet stumbled for lack of sensible business management by its CEO, Andrew Conrad. Described as "eloquent" about science, well-connected to the rich and powerful, charming and farsighted, Verily's biologist leader appears to be the reason its top employees left it in droves. As STAT reported, Conrad's former colleagues complained that he exaggerated what Verily could deliver, "launch[ing] big projects on a whim, and rashly divert[ing] resources from prior commitments to the next hot idea that might bring in revenue."  

But talent management and internal morale is not Verily's only donnybrook. STAT also reported that,

Beyond headquarters, people who have worked with Conrad said he has strained Verily’s relationships with important regulators in Washington, including officials at the Food and Drug Administration and the Department of Health and Human Services.

As one aerospace engineer told me, a new engineer drives only two percent of revenue. The rest is driven by management. If your prospective employer is short-changing management, beware.

And don’t even get me started on Theranos.

Look at the Org Chart

I asked a mid-career client on the brink of joining a startup to get me a copy of her prospective employer's org chart. Having spent a quarter century in corporate litigation, I've examined the org charts of more Fortune 500 companies than I care to remember.

I knew her development phase startup's management wouldn't look like Intel's, but I wasn't prepared to see an org chart with no management whatsoever. Sure, there were "administrative" positions like Human Resources and managers of sales, products and scientific labs, but there was no overarching organizational or strategic management at all.

And this was a company that was planning to expand its successful small operation by a function of ten. Because my client was being asked to accept a large part of her compensation in equity, this management vacuum was troubling. In the words of Eric Ries of The Lean Startup (please purchase this and read it now).

Building a startup is an exercise in institution building; thus it necessarily involves management.

Your potential employer's place of business might look more like a frat house than a business enterprise, but it shouldn't be run like one. The knowledge, experience and skills of building and sustaining a successful business simply cannot be acquired from a self-help book (even so great a self-help book as Ries').

There are entire schools of management teaching business strategy and operational efficiency, for goodness sakes! This is not knowledge nor skill that can be picked up on the fly and steered by low-level administrative personnel.

If your prospective employer is working too "lean" on the management side, the startup  is likely already faltering. Ask everyone with whom you interview what the company's greatest challenges are. No one is authorized to talk about "problems" even though everyone is dying to. A simple reframing of "problems" into "challenges" should open up a Pandora's box of demons you may not wish to fight.

Are the Founders Failing?

Ries recommends that founders, or key leaders, should think about firing themselves when the skills necessary to founding the company are insufficient to make it grow. Here's Ries' hypothetical Memo of Failure to Self.

Dear Eric, Congratulations! The job you used to do at this company is no longer available. However, you have been transferred to a new job in the company. Actually, it's not the same company anymore, even though it has the same name and many of the same people.  And although the job has the same title, too, and you used to be good at your old job, you're already failing at the new one. This transfer is effective as of six months ago, so this is to alert you that you've already been failing at it for quite some time. Best of luck!

No one can guarantee that the startup they're joining will be successful. Failure, however, typically takes place at points of radical structural change. You should, therefore, first ascertain where in the startup cycle your prospective employer is operating.

Craig Shimisaki, author of the pricey but excellent book Biotechnology Entrepreneurship, recommends complete leadership transition to a "delegate-and-inspect" management style by the time the company is product and field testing, meeting with regulatory agencies, examining scale-up options, and meeting with potential marketing partners. By this stage of development, the organization should already have in place an additional layer of management, the layer that was missing from the org chart my client sent me.

Shimisaki explains,

By this stage . . . the leader should be focused on articulating the important and strategic business goals to the senior management and provide the team with measurable goals to evaluate progress. The management team should consist of seasoned individuals having vast experience, but all must support identical goals for the product, the market and the organization.

If you don't feel comfortable posing questions about management during informational interviews, just ask for the slide deck that your potential employer is using to raise the next round of venture capital. You're sure to see the answers there.

In short, know your potential employer's industry and where it stands in relation to industry leaders. CB Insights is an excellent source  of information on industry analytics. Understand where in the development cycle the startup you're considering joining is and whether its management is sufficiently developed to reach its current goals. And pick up a book or two about startups in general and those in your industry. I've benefited not only from Ries' Lean Startup, but also Ash Maurya's Running Lean and Verne Harnish's Scaling Up.

Go. Do. Prosper.

Are you joining a startup? Book a consulting session with me to discover whether it’s dollar smart to hire an advisor before making the leap into one of the greatest opportunities or most perilous risks of your career.