How to spot a breakout startup
Signals to look for to identify a standout success
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Whenever you encounter a new company, you are presented with lots of information.
Information from their website. From their recruiter. From their founder or hiring manager. From the people you talk to about the company. From asking questions about the company and where it’s headed.
It is a LOT of information. And you only have so much time. So where should you spend your attention? What signals should you look for to inform your decision? How can you spot a breakout startup?
I went around and asked this question to several experienced investors and operators from the Next Play community. I also thought about it myself. To save you some time, and hopefully help you make a better decisions, I put together this essay detailing how to spot the most important factors that’ll help you identify a breakout startup.
There are no guarantees in startups but there are some key signals you can pay attention to to help you spot a breakout success. If you just want to skip to the TL;DR, you can go to the bottom of this article.
Signals to look for in a breakout startup
Whenever I find a new company, I like to play a sort of game, where I ask myself: “Is there a path here?” The question is basically trying to figure out: is there a path to this company reaching breakout success or do they seem to still be navigating the forest of ideas…still searching for a pull?
There comes a point in every breakout company’s success journey where the path forward to the next milestone becomes rather obvious. They end up with a sort of equation for their business: if they do X and add some Y then they’ll end up with Z. The next milestone, at that stage, will feel rather predictable, and if the company and team are really a force to be reckoned with, it’ll feel inevitable. Really just a matter of time.
This sensation is in stark contrast to the companies that are still searching for product-market-fit. The path forward for them will feel…murky? There will not be an obvious clear path forward. At least not yet. And the result is that everything is foggy. Priorities are confusing. There’s a lot more discovery to do.
When you talk to companies, ask them where they are on their journey.
There is no “correct” place to be on the journey. Some companies are just earlier stage and others are later stage—that’s all fine!
I try to more pay attention to the company’s awareness of where they are on that timeline.
Some companies seem to be very unaware of reality. Or maybe they are just very very optimistic in their future. They overspend and over-hire, thinking they have stronger product-market fit than they really do. This happens a lot more than you would think. I think it’s because it’s easy to get a lot of other external validation (from people like VCs and news reporters). Perhaps useful, but not nearly as useful as the ultimate feedback…from customers.
I then return to the question I started with: What is the path forward from here? How well does the company understand what is required to reach important milestones (like $1m ARR or $10m ARR or $100m+ ARR, etc.)?
And how crazy is actually reaching those milestones? Do you actually believe their plans? Do they? With how much confidence and clarity?
If you ask different people at the company, you may get different answers. At pre-product-market-fit companies, you’ll often hear answers that are very fuzzy. The real answer is they are not yet sure.
At post product-market-fit companies, you tend to get some semblance of clarity: “If we just scale this thing we’re already doing really well, we’ll reach this milestone in roughly this amount of time.”
Hearing that answer can be re-assuring (and promising). But I would not just accept it blindly. You should dig into the answers. Not that people are lying intentionally. More that there are levels to the understanding.
How confident can you be? When you say people like your product, how much do they actually like it? If the product stopped existing, how upset would they be? How do the alternatives compare? Are they referring more people? And again, I would ask how they know? What are they monitoring?
If people actually love the product, it will likely be pretty obvious. Customers will be begging for more features. It may feel a bit counterintuitive because some of those requests will come in the form of complaints. You may hear those and think: “wow these people may be pretty upset with the experience.” But people only complain when they care, at least a bit. And finding something people care about is a huge part of the journey.
I would also ask to personally use the product. I would talk to customers. I would try to get a grasp for how the company’s claims match with reality. Are the customers actually happy? Or are they just using the product because their boss told them to.
I would go on Reddit and HackerNews and look up the industry or space or company. What are people saying? I would put yourself in the shoes of the company: does this product actually seem compelling?
I would talk to investors, and if you can the people who invested in the company, and try to understand their thesis. I would not overweight this but it can be a useful input.
(By the way a useful hack would be to document your journey and share with the hiring manager!)
If you can find a company nearing or already at clarity over their equation—ideally before the rest of the world notices this—you may have spotted a breakout success.
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It’s easy to glaze over important details and therefore misunderstand underlying risks that still need to be solved.
A very common place this happens is with distribution. Has the company reached a point of repeatable distribution or is that a chasm that still needs to be crossed?
Oftentimes, companies start getting customers through what’s called founder-led sales. The founder uses their network to get the first customers. They are very hands-on and great salespeople. They are also very incentivized to do a great job (because of course they own a lot of the company!).
That’s great and all, doing things that don’t scale as they say!, but at some point the company may grow out of this motion. They’ll then need to hire, train, and manage growth and salespeople to actually sell the product at the needed scale.
Doing that is different from founder-led sales, so you should not expect the exact same results. Some companies underestimate this. They think that opening new channels will perform the same but this is rarely the case.
Being aware of the current status of things is helpful for some of the reasons mentioned above, and also because it helps you figure out a second relevant factor: speed.
Lots of companies talk about moving quickly. They write it on their internal culture docs and put it in their job descriptions. But what does speed actually mean? And which companies are actually fast?
I would suggest paying attention to the company’s actions and outcomes, as opposed to just what they say. Are they happening quickly?
Velocity is speed plus direction.
Pay attention to speed, yes, but also see if things are moving in the important and useful direction.
Some things you can look at:
Ask them things the first time you meet with them. See what happens by the next time you meet with them. At a breakout startup, things may move uniquely fast.
Ask them what they got done last year. Ask them why they didn’t get more done. How aware are they of the bottlenecks? I tend to find companies that can self-reflect tend to learn from mistakes and eventually move faster.
Ask people about their day-to-day. Ask to join a meeting if they let you. Does the meeting seem like it’s productive or just filler content? Ask to see people’s calendars if they let you. Ask them what percentage of their day felt very useful.
These may be a bit pedantic but they often matter. How quickly do they follow up with you? How quickly do they send follow-ups? I tend to find really productive people can move quickly.
Great operators realize that startups are a long game. And so, while near-term getting stuff done is critical, it’s perhaps even more important to be able to operate at a high quality standard over a (very) long period of time.
This is when I look for factors related to consistency. How have things progressed over time?
Ask about the history of the company. Ask about when it was started, what has happened since then? How has the mission changed?
Ask about the people at the company. Who has left? Why? Were they fired or did they leave by choice? What types of people are not the right fit for the company?
Many of the best companies are pursuing ambitious missions. They say they are hoping to build a long-term enduring LEGENDARY business. While that sounds exciting, I would encourage you try to unpack that…push on questions like: “What does success actually look like? Would you sell right now for $XXX million? Would you raise $1 billion right now if you could? What is the actual objective for the company?”
Again there are no “right” answers but I think the specific answers can help you understand where the company is headed.
Ambitious missions tend to attract ambitious people. I think one of the most important things you can do to understand the state of the company is to dig into the people on the team. Who are they? What have they done in the past? Why did they join this company? What do they actually do at the company?
For early stage startups, I like to look at every person on their Linkedin. I do not just look at their titles or college experience; I try to figure out what types of people these are. If they have a blog, I read their blog. If I have the chance to speak with them, I like to ask them direct questions. Out of all the places they could be working, why are they working here? Try to get non salesy answers.
I think great companies can support a wide range of types of people. I don’t think everyone at the company needs to be mission driven. I don’t think nobody at the company can be motivated by money. I think motivations can be nuanced and I think the most important thing, the thing that unites all truly successful companies is their ability to achieve results.
I particularly admire companies and founders and leadership teams that are able to work backwards from “what would it take for us to succeed?” and build their cultures against that criteria (as opposed to some rigid set of requirements that they read about from some VC on X but do not actually lead to better results). Diversity can be good. So can uniformity. Results are what really matters in the world of startups.
This brings me to the last thing I look for: I look for unstoppable people. This is a fuzzy phrase. It’s a know it when you see it kind of phrase. It does not mean anything in particular, and that’s partially because I do not think words really do these people justice. Unstoppable people are the “Michael Jordan’s” of the business world. They are extremely rare. But when you find one, you’ll hopefully know it.
What makes them great and truly unstoppable is that they are ridiculously productive. To a degree that’s hard to really comprehend in the moment. They just get so much more done than anything else you’ve seen. That is what matters.
This is not to be confused with people who are just loud and quirky. There’s a lot of people like this. Who pretend to be unstoppable but in reality are just posing. They are not evil, just confused / cosplaying Michael Jordan.
The key thing to do to not get confused—which is easy to do—is to ruthlessly focus on outputs. Not how loud people are. Not how fast they talk. But what they actually get done. And what people say about actually working with them. Not mentioning that they went to a fancy school or raised money from fancy people—focus on what people actually get done. That’s how you’ll find someone unstoppable.
I understand that the above can be a lot. But it’s your WORK we’re talking about here. Your work can be a huge part of your life. You can end up spending more time with your colleagues than practically anyone else on earth. I know it sounds obvious but spending a bit of extra time to do your diligence can really make the world of a difference.
But if you don’t have the time for it, or the extra effort still does not feel worth it, I still want to be helpful.
So here’s the quick TL;DR of what I’d do to spot breakout companies:
Find 3-5 smart independent-minded people you really admire. Ask them what seems exciting to them in the world. Where are they working? Why? Go look into those companies?
Find a space you’re interested in. Go on Reddit and talk to potential companies. Who is everyone talking about? Go look into those companies.
Find a company that has a clear path to $100m ARR. Clear meaning you (and perhaps smart finance-oriented VCs) really believe that it’s likely to happen. Figure this out before the rest of the world.
Go talk to 20 companies today. Talk to them in 6 months. Who improved the most?
Find an unstoppable person. This is hard because these people are rare. You rarely meet these people. But I think you’ll know it when you see them. They are like Michael Jordan. They are not similar to other people you have met. They are not just loud or quirky. They actually get things done. And they get things done at a ridiculous pace. Go work with them.
Thanks for reading! Would be curious what signals you think we may be missing - send us an email: hi@nextplay.so.
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Amazing list. Especially love the trick: "Find an unstoppable person. This is hard because these people are rare."
Definitely sending this one around. Great post.