Startups: The Early Stage

Mar 18, 09 in Entrepreneurship, Startups

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This is the third in a series of articles that discusses the stages of a startup. Previously the concept stage and seed stage were covered.  Today the early stage is addressed.

As one may can surmise from the intro, the early stage is the third stage of a technology startup.

The key element being addressed in the early stage is market development.  Proving that the product is valuable.  That customers are willing to pay for it and/or use it. 

If you are proving that the product is valuable for the most part it is built (a product is never fully built and development is never "over", but that is a topic for another day).  Product development is focused on refining the product.  Creating a complete product.  A commercial grade product.

The business focus is on sales and marketing.  Getting sales and usage to trend upward.  Developing customer relationships.  Continuing to get user feedback.  Building a pipeline.  Traction.  Using word of mouth to spread the word about the company and product.  Focusing on key influencers.  Refining the go to market strategy.  Continuing to refine the business plan and replacing assumptions with what you are actually seeing as the business rolls out.  Some larger corporate infrastructure elements come into play for when the company hits the growth phase.

The team is growing.  A well rounded management team has joined the founders.  There are employees.  Maybe seven or so in the beginning of this stage.  Typically 20 - 30 people in total mid early stage.  More if the company continues to blossom. These employees enable a startup to accomplish much more, much faster then in earlier stages.  They also bring a new set of issues that need to be addressed. There is a real board of directors.  This means the CEO has a host of bosses that he or she needs to manage.

Revenues are growing.  More than the $500,000 in the seed stage.  Maybe a $1 million. Or there might not be any revenue at all.  A very rare breed.  Regardless, you are starting to see significant use traction.  Web plays have 1 million unique visitors or more.

Intellectual property protection activity is becoming more sophisticated.  The IP strategy developed in the seed stage is being implemented. 

Funding obtained during this stage is between $1 million and $5 million.  It could be more. The funding comes from serious angels, angel networks, or more often then not, VCs.  As always, bootstrapping remains an option, but if its "time to go" outside investment may be the best strategy.  The valuation range remains broad.  Say $2 million to $10 pre-money.  Funding most likely takes the form of preferred equity.  It's the first stage where VCs generally play.  The Series A.  To an entrepreneur that has been at it for two years things don't seem early at all.  To the VC it is.  This causes a great deal of frustration to entrepreneurs.  Potentially the most important point in this whole series is that first stage venture capital investments go to the type of startups at the operational stage described above the vast, vast majority of the time.  If a startup does not possess the characteristics of an early stage company it should think long and hard before attempting to raise funds from venture capitalists.  My advice is don't worry about venture capital.  Build your business. If you do that venture capital will find you.

The early stage lasts from one to two years.

Get to the point where you are generating $4 or $5 million in revenue at a 200% plus growth rate and things get exciting.  Did I just mention the word growth?  I did.  That is the next and final stage of a technology startup.