Force of Good

Startups: The Seed Stage

Feb 25, 2009

This is the second in a series of articles that discusses the stages of a startup. Previously the concept stage was covered.  Today the seed stage is addressed.

The seed stage is the second stage of a technology startup.

The key element being addressed in the seed stage is product development.  Building a prototype, demonstrating it in a controlled environment.  Getting to alpha with friendlies.  Beta testing with people that could become real customers.  Essentially testing and validating the ability to bring the concept to life.

The business focus is on researching the market and potential opportunity.  Refining the business plan and model.  Defining and validating the product offering with customer and expert surveys.  Then taking this information and refining the plan.

The team is growing.  In addition to the initial founder(s) one or two people are making their way on board.  Not all necessarily working full-time, but all increasing their commitment to the company.  There is most likely at least one person totally committed to the project at this stage, particularly if the company requires outside capital.  If you obtain funding the rest of the team comes on board in short order.

You are prospecting for potential customers and partners. Hopefully potential customers are starting to express interest.  Use the product.  Perhaps even pay for it. But revenues are small.  Say less than $500,000.  More often than not non existent.  Put you are starting to see significant use traction.

If there is the potential for intellectual property protection it is being pursued.  Patent strategy is discussed and formed.  Provisionals are filed.  Later in the seed stage patents could be pending.

Funding at this stage is between $100,000 and $1 million. More than $1 million for capital intensive startups.  The earlier the company is in development the less funding it will attract.  The funding may still come from founder(s), family, and friends (you need to have really good family and friends). Government and SBIR grants still can play a lead role.   The pros may show up in the form of Angels.  It is very rare for venture capitalists to play here.  It's too early.  The valuation range is broad.  Say $250,000 to $3 million pre-money.  Funding could take the form of common stock, convertible debt or preferred equity. 

The seed stage is a long haul.  It lasts from nine months to two years.  The big mistake I see made over and over again in the seed stage?  Not focusing on product dev, research, and refining the business model.  Focusing on raising money.  Too much money too soon.  It becomes the entire focus.  Poof!  End of startup. But some companies make it through this marathon and enter the growth early stage.

And the growth early stage is when things really get fun.

Posted in Entrepreneurship, Startups
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