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How To Spot A Promising Start-up

Lecture 12 - Bonus Tracks -> Quick Intro -> How Much Technology Knowledge Must A Beginner Tester Have -> What To Do If You Are The First Test Engineer At A Software Start-Up -> What If You Are Asked To Do Test Automation As Your First Task -> What Are Stock Options -> How To Spot A Promising Start-up -> Afterword

Let’s be clear: “Promising” doesn’t mean “guaranteed to be successful.” “Promising” means that if:

– the company will keep its pace and popularity

– the founders are not only programming-smart but also business-smart

– no start-up killing legal matter emerges (e.g., Napster’s case)

– add another fifty “ifs”

then MAYBE this company will make some folks really rich. Maybe you’ll be one of them.

So, how do you identify a promising start-up?

Let me ask you this:

– Did you ever use the Google search before Google went public?

– Did you watch the videos of lonelygirl15 on YouTube before YouTube was acquired by Google?

– Did you ever hang out on MySpace before it was acquired by News Corp?

I bet you (or some of your friends) HAVE!

What do all these companies have in common? Their products are INSANELY popular.

So the answer is simple:

If a start-up is insanely popular, then it’s a promising start-up.

Here is some historic data about the indicators of insane popularity. Please note that at the end April of 2007 there were almost 114 million Web sites (according to netcraft.com).


Traffic Ranking*

Other indicators*




Most popular search engine





100 million videos viewed every day, with 65,000 new videos uploaded daily


Google Press Center


Top 30

8% of all ads on the Web were on MySpace

27 million unique users per month**

350,000 bands and artists


News Corporation press release

* before or at the moment of acquisition/IPO

**data for all Web sites of Intermix Network (the owner of MySpace.com)

What other factors are involved?

Well, sometimes a company is kind of … “pregnant.” When a woman is pregnant, she is expected to deliver a child; by analogy, when a company is pregnant, it’s expected to deliver some gold to the folks with stocks.

The tricky question is how to know if a start-up is “pregnant.”

Money is made through

– the private sale of the company (YouTube) or

– the IPO releasing company stock to the public (Google).

Private sale: Only insiders know for sure if and when a company will be bought or sold, and on what conditions. But there are some signs that outsiders can look for, like excitement about certain technologies (e.g., VoIP – Voice over Internet Protocol) with the big guys like Google or Yahoo shopping around.

IPO: A company goes public, i.e., starts to publicly trade its stocks through its IPO (Initial Public Offering). To make an IPO happen, the company must go through a number of formalities, like filing papers with the U.S. SEC (Securities and Exchange Commission). After all the papers are filed, but before the stock is publicly traded, the company is in pre-IPO stage.

Joining a company at pre-IPO stage is a smart thing, but you should remember that as a rule, the more confident the general public is about the pregnancy of the company, the less stock options you’ll be offered as an initial grant.

You can get a lot of information about “pregnancies” from public sources like news and articles. Stay informed! A very good source of tech rumors and news is Michael Arrington’s techcrunch.com.

Joining even a pregnant start-up with insane popularity cannot guarantee that you’ll make millions. I can give you a little example:


Imagine that you are a founder of a start-up and your stake in the company is 60%. Your company has millions of users, good publicity, and the prospect of enormous growth. One day you are approached by someone from a really big company who offers you $100 million for your company.

Will you be able to resist pocketing $60 million now?

– on the one hand, you have a real $60 million offered to you

– on the other hand, you have a company that in the future theoretically can bring you much more that $60 million.

It’s indeed a tough choice to make.

Another question: if you are offered $60 million, will you be thinking about the many employees of yours who have 0.01% or less in your company?

First, let’s calculate: 0.01% of $100 million comes to $100K. $100K is around $60K after taxes, and an employee would have to work for four years to get it, so that employee with 0.01% will get an extra $15K a year.

Don’t take this wrong. An extra $15K is good money, but it’s a joke compared to millions made by the employees of companies that don’t sell themselves cheap. (I’ll leave it up to you to answer the question, “Will you care about your employees?”)

Again: stay informed. And if you are employed at a promising start-up, keep your eyes and ears open.

I must add that I am impressed by the Google founders who took really good care of their employees. In August 2004, about 50% of all Google employees became millionaires, with the average value of the stock options being $4.2 million per employee! That statistic doesn’t account for the enormous value of stocks held by Google’s top officers and founders (source: salary.com).

In August 2004, it was reported that founders Sergey Brin and Larry Page, along with CEO Eric Schmidt, requested that their base salary be cut to $1.00 (Wikipedia). Of course, they are multibillionaires, but that gesture says a lot about their decency, honesty, and their faith in the company, especially in light of recent publicity about corporate corruption in US.

So, two more factors for you to consider are:

1. The personalities and past histories of the founders (and top officers)

2. How well existing employees are treated by the company

Another important thing to look at is which venture capital firm has funded the start-up. If it’s the top tier, like Menlo Ventures or Sequoia Capital, it means that the best brains in the VC world have put their hopes on the company. These guys only invest their money if they have good reason to expect hundreds of percent of potential returns.

As you can see, there are many ifs and zero guarantees here. One could write a book about the possibilities of start-up employees being screwed. I think that the best-case scenario is working for a promising start-up in whose product you PERSONALLY believe. In that case, your reward is in every working day.

If your start-up makes you rich, you are a double winner. If it doesn’t, you are still a winner, because working for the idea in which you believe is living a DREAM.


Next ->

Lecture 12 - Bonus Tracks -> Quick Intro -> How Much Technology Knowledge Must A Beginner Tester Have -> What To Do If You Are The First Test Engineer At A Software Start-Up -> What If You Are Asked To Do Test Automation As Your First Task -> What Are Stock Options -> How To Spot A Promising Start-up -> Afterword