I recently gave a presentation to a Tulane undergrad class on venture capital investing.

One of the students asked me a question that made me think: "What makes a company good enough to invest in?"

My task was to give the small group of students some perspective on fundraising from the other side of the table. The operator's side of the table.

I went into the conversation prepared to talk about how venture capitalists should evaluate the go-to-market strategy and execution of an early stage company.

My slides were prepared with key points on unit economics, different methods for monetization, and sizing up the TAM for a product or service.

But this question - "what makes a good company?" - made me think hard about why some companies succeed and some companies don't.

‍What Makes a Good Company

Over the past few years, I have worked with an invested in dozens of early-stage software companies. I've seen the range of experiences across founders, markets, and products.

It's too early to know if any of them will be an obvious financial success, but you can clearly see which companies will have staying power in their market or industry.

All of the strongest companies are strong in similar ways.

I learned this from Ho Nam, one of our investors and board members at Levelset.

In a board meeting, Ho said that good companies have four things in common:

1. Happy customers

2. Reliable product

3. Good unit economics

4. Strong company culture

There are many other characteristics of successful businesses, but it's hard to really build a durable business if you don't have these four.

And if you do have these four, keep on building and you will find a way to scale.

Sizing Up A Good Company

When you are looking to invest in a company, or even if you are looking to work for the company, you should know whether the company is positioned to grow.

I'll focus on the company's go-to-market function and product-market-fit for now (assessing company culture is worthy of it's own essay, and I've written about sales culture before).

Here are the 6 questions I would ask of any founder before joining the company or making an investment:

1. Who is the customer?

Do they really understand their ideal customer profile? Do they understand the pain points and how to address those pain points to make the customer happy?

You have to know your customer at a detailed level. It impacts your demand generation, your messaging, your product development, and nearly everything else about the company.

2. How big is the market?

Big markets mean lots of room for growth.

Make sure there is a big enough market of ideal customers that you can reasonably sell the product to. You can read more about TAM, SAM, SOM right here.

3. How does the company make money?

There are many ways to monetize your audience and product.

You need to understand how the company charges its customers so you can wrap your mind around how to scale the customer acquisition.

How you package your product has a major influence on how you will retain and grow revenue from your customer base.

4. How do customers find out about the product?

I call it Demand Generation. The cool kids call it "distribution". It's the same thing.

The company needs a repeatable way to generate interest in the product.

You can build demand directly through advertising or through a sales team.

You can build demand organically through SEO and content marketing.

You can source customers indirectly through a channel partner.

Each path has advantages and disadvantages, and it's important to understand how the demand generation method fits the target market.

Beware of the sales funnel paradox.

5. How does the company support the customer experience?

Customer experience perhaps the most important piece of this equation.

Poor customer experience leads to high churn, and great customer experience comes at a cost. Your support function impacts your net margins.

Look closely at how the company supports customers at scale.

Even at $1m ARR, you should be able to find evidence of a great customer experience if it exists.

6. What are the alternatives to the product?

Big markets attract lots of competition. Get clear on how the company differentiates from the alternative solutions in the market.

The fancy word for this is "positioning". How does the company position itself against the other options that a customer might consider.

Choose Wisely

If you can answer all six of these questions with confidence, then you are looking at a company that is poised for growth.

There are 1,000 other things that can go wrong in the path to building a big business, but this is a good enough start.

And before you jump too far in, be aware of some red flags that signal risk for the business:

1. One HUGE customer

If one customer customer provides over 50% of the company's revenue, that's a big risk.

Too much exposure to one big account.

Signals that the sales process is not repeatable.

Look for a path to diversify away from the key customer risk.

2. Demand relies on Advertising

If nearly all of the demand comes from buying ads, the customer acquisition cost will get expensive at scale.

Many companies use advertising dollars in the early days to learn quickly, but relying on advertising will destroy the sales efficiency at scale. The acquisition costs are just too high.

3. High logo churn

This one is obvious. It's hard to fill a leaky bucket.

A company that has high churn probably doesn't have product-market fit.

You have to fix the churn issue before you fix any other issues.