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Startup stages

In this post I would like to propose an informal model for distinguishing between startup stages. We often hear of one being startup, but how does some can say for sure if there is no definition? Also understanding of conditions for closing pre-startup stages is important to me as a growth company owner wannabe.

Pre-seed stage

It always starts either with a great idea or with bunch of cool people and of course having high expectations.  I stipulate that to close this stage you are to have at least two of the following:

  • An idea or a market chosen;
  • Bunch of people you could work with;

What is more I believe that you should have answered yourself several important questions. Such as:

  • Why are we going to succeed?
  • What are our strength and weaknesses?
  • What threats should we mitigate and what opportunities to take?

It may be the time for raising money from FFF: friends, family and fools. Being lean and agile, you may start with no money. Nonetheless, each of the teammates or just you, if working alone, has to decide and commit to the minimum number of hours and money he will spend on the project.

Seed stage

As you already have something to work on or someone to work with, it is time for some more material results.

Personally, I would argue that this is the time to test your product/service and market assumptions:

  • Do you do what people want?
  • Will they pay for the services you are providing?
  • Are there as many potential customers, as you expected to be?

Some recipes to answer these questions could be:

  • build the prototype;
  • come up with the business plan;
  • make enough sales.

Besides, as the struggle to get funded is long and hard, you may start raising some money from Business Angels. This not only could help you get something to eat, but also help with verification of your assumptions and development of pitching skills.

On the seed investment stage, not only you can raise money from angels, but from VCs that do early stage/seeds as well. Participating in different “seed camps” can be a good opportunity to show your idea/product to potential investors. In Europe, the London Seed Camp is the best.

To my mind, first requirement to close this stage is to have the prototype build or the business plan verified (with users, experts or sales). Secondly, either impressive growth of usage indicators has to be achieved, or company has to secure sufficient money flow, or you’ve got an investment and can work on growth.

Startup

You must have confessed big guys into believing you and now finding ways to become really big is your daily job.  All the received money is invested to make your services or product even better: team grows, experienced and cool guys join the company.  I think no matter are you a first class web superstar or only a middle-size but prospective startup, you always test business model and monetization opportunities. However, as people say, if company really hits the roof with number of users, it doesn’t matter at all. Well, someday I will be able to tell you more.

Distinctive characteristics of startup:

  • rapid usage indicators growth;
  • big growth investments;

Although colleagues argue that startup has to be an independent company, I think it isn’t as important. Moreover, a VC would always put his people in the board and Angels are keen on joining. You will want them to so that they could help developing business. Also colleagues say if your investor is a company, you gain some kind of undesirable dependence. Put it another way, when rising large external funding, expect no longer be the one who takes decisions alone and I believe it to be fair.

The other option is to bootstrap your company on internal cash flow. However it seems more like having a lifestyle company with lower growth expectations. As Saul Klein pointed out, some may choose this (like Boxed Ice and 37signals)way to learn doing business. Even though, according to Saul, they still seek for attracting experienced guys like Jeff Bezos.

Startup usually raise millions from VC as GetJar or hits the roof with revenue growth as Unity.

It is typical for a startup to do multiple fundraising rounds. First investment is typically called “Series A”, then you could have “B”, “C” or even “D”. Uprounds (when company’s value increases from round to round, each new investment is greater than the previous) is a common thing, they indicate the company is growing and investors believe it will continue doing so. E.g. “Admob” had 4 rounds, totaling close to $60m, before it was sold to google for $750m. Downrounds are a nasty thing, company value actually decreases, each new investment is less than the previous, money is needed to survive, founders and previous investors experience great dilusion.

Growth company

This is simple: growing its employee or revenue numbers by 20% and more a year for at least 2 years. May have raised millions from VC. Growth companies are also called gazelles.

This is my summary of our discussion with startups.lt organizers based on several sources, talking to people, Connect Estonia public information, GetJar’s CEO Ilja Laurs presentations and “common sense”. The main goal of this post was to sort out thing and invite you for a discussion.

Updated:  2010-02-05 with Ilja Laurs comments.

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