(Part 2 of a 2-part series, “Read Part 1 of From Big to Small)

By considering 5 fundamental criteria, say two tech professionals who left secure posts at big companies for professional success and personal satisfaction at a small one.

Red Canary talked to Todd DeLaughter, President of Opalis and Greg Twinney, VP of Finance and Administration at Opalis, to find out what they look for in an early stage company.

TOP 5 SMALL COMPANY QUALIFIERS
1. Gutcheck: Personal conviction
2. Decide: Market readiness
3. Evaluate: Quality of leadership
4. Investigate: Quality of financiers
5. Gauge: Growth & profit

GUTCHECK: DO YOU GET THAT TINGLY FEELING?
When DeLaughter first heard about Opalis and their product, something inside him lit up.

“It was the most interesting, most compelling thing out there,” he says.

As the vice president and general manager of the $1B OpenView Business Unit at Hewlett-Packard, he felt that the needs of his customers had not yet been met, and that Opalis’ IT process automation offered the market something unique.

“Customers were saying ‘Don’t just tell me something’s broken, tell me how to fix it.’ They were grappling with building something that could respond proactively,” says DeLaughter. “Opalis fit [that] space exactly.”

Even though DeLaughter struggled with the idea of moving to an early stage company, he couldn’t deny how passionate he was for the product and its potential.

“My heart was pulling me toward Opalis. Eventually I got my head to agree with it,”

DECIDE: IS THE MARKET READY FOR THE PRODUCT
Even if the company has an innovative and ground-breaking product, it’s useless if it’s not commercially viable. In other words, there has to be a market for the product.

“You have to pick the right categories and the right areas,” says DeLaughter.

Picking the right categories requires research. You need to determine if there is a niche in the market or whether a market segment can be created for the product. This means examining the competition and deciding if the company has something fresh to offer.

EVALUATE: THE STRENGTH OF THE MANAGEMENT TEAM
The management team is the driving force behind any organization, steering the direction of the company and building its vision.

Greg Twinney of Opalis

When Greg Twinney decided to join Opalis, he studied the executives to determine whether he agreed with their values, ideas and plans for the company.

“[You need] a strong leader with a vision…someone to expand [the company],”

Twinney also says that you need to look at the track record of the management team, to determine how successful they’ve been in the past. He suggests reading their bios, finding out what their core strengths are, and researching the companies they’ve worked for before.

They need experience not only as executives, but as leaders of small companies.

INVESTIGATE: WHO HOLDS THE PURSE STRINGS?
The way in which an early stage company is funded is the best indicator of whether they have the confidence and faith of those in the industry.

Venture capitalists fund a company on the basis that they will earn a return on their investment. So an early stage company with strong financial backing and a lot of venture capitalists shows that the company has a good chance for success.

“Opalis [was funded by] VenGrowth, BDC, Sierra Ventures and Roynat Capital,” says Twinney. “They were all invested in this company and they saw the potential for a lot of growth.”

But looking at the number of venture capitalists is not enough. It’s equally important to look into who the venture capitalists are and what their philosophy is.

Some VCs only get into a company in order to make a fast buck.

They’ll look at the market, figure out when a good time is to invest, and then make an exit. In this case, there’s no indication of whether the company has the potential for growth.

If VCs have a track record of staying their portfolio companies, it’s a sign that when they do invest, they (and others in the industry) have faith in the company and its long term success.

GAUGE: COMPANY GROWTH AND PROFIT
Although an early stage company doesn’t have an extensive record to examine, there should still be data available to indicate how much it has grown since it started.

For example, when Greg Twinney first started to work for Opalis in 2005, there were 35 employees. Today, the company has grown to more than 60. While Opalis is still a small company, its rapid growth suggests that the company is likely to develop further.

Joining an early stage company is still a gamble, but by taking the right steps and doing your due diligence, it can be one of the smartest bets you ever make.