In my experience, for an early startup, all this careful analysis goes out the window as soon as you have two or more VCs interested in your deal and competing with each other. At that point it becomes little more than an auction and you realize that it’s just gambling with post-facto justification. Nobody knows what they’re doing.
Another phrase that describes that VC behavior is "herd mindset."
Loved watching the VC implosions over funding "green tech" and "social media" startups.
During "green tech" I remember thinking, "it'll take 20 years just to invent the science for this field, let alone productize it." Yup. Love driving by the Solyndra buildings, now an office for Seagate.
It's painfully obvious this article was written by an investor for several reasons:
1) They define "growth" as a stage that goes AFTER raising money. As a founder, growth (planning, executing) should come before you ask for a single dollar (unless you're something like a hardware startup that needs bigger upfront investment). I write about this topic extensively [1] and one of the main differences I found between successful vs. failed founders is whether or not they found viable acquisition channels from the moment they started. Also, in many cases, raising money (too fast) was associated with a bigger chance of failure.
2) They associate a "startup" with getting financing rounds. 0 mentions for bootstrapped founders. Last time I checked [2], a startup is "a company or project undertaken by an entrepreneur to seek, develop, and validate a scalable economic model."
A better title for this article would be would be: "There are only 3 startup stages for funded startups requiring bigger upfront investment".
> It's painfully obvious this article was written by an investor for several reasons
This seems a bit churlish as an observation. The first paragraph makes it clear the piece was written by an investor, or at least with an investor mindset: "When you meet startups and VCs these days, there’s usually a lot of verbiage spent on defining stage (pre-seed, seed, post-seed, pre-A, Early A, A, Late A, B, C…). As a venture eco-system, we continue to struggle with this."
I don't see why this is painful or worthy of criticism, at least not on this point.
This is an ASSUMPTION that all startups are VC funded startups or the goal of building a company is to get VC funding
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That shows a very VC centric viewpoint, as opposed to a more balanced viewpoint
2nd wrong assumption -> That you can break it into 3 stages
That everyone else is wrong, and you are somehow right
3rd wrong assumption -> Growth is a stage, as opposed to something that has to be there from Day 1 until forever basically. Even if building hardware or Enterprise. You have to have a growth strategy from Day 1
Funding for growth is not limited to h/w. SaaS also have similar behaviour, for enterprise sales you burn ~a year of revenue as acquisition cost, so first few you can do as PoC, but beyond that you need sales team and runway which may require funding.
Lot of time you have a viral idea, but not very sure of revenue model. You'll have a choice of getting revenue model right first or take VC money get customers and then fix the revenue model.
It's convenient for a VC who only gets to touch several points of a founder's journey label it as having only 3 stages just to make their lives easier. Bucketing them into these limiting categories is a gross oversimplification. The different pre-A stages have come about to make it more accessible for founders to start companies.
YC started in such a capacity to give smaller checks to more people so that more founders can try something (the seed round). That has honestly democratized the whole game, and I think constricting the different stages to make it seem like there's some sort of golden standard is exactly the kind of old guard mentality preventing new founders from getting started even if just with a little bit of money.
The funding rounds are not a good way to describe the embryology of a company. Different kinds of companies, like different species, develop in different ways.
Look at a company like si5 that's making hardware: it had several rounds before getting into revenue, each one reducing risk for new (and existing) investors.
When I worked in pharma I thought of company stages from a tech perspective. I once characterised them as "pre revenue -> pre profit -> profit". Our chief scientist asked, "what's pre profit?" In her experience you went from pre revenue either straight to profit or dead. No ramp up in the tech sense.
Even if you think of startups within these stages, no two startups is going to have the exact same journey. Each startup has an incredibly different experience and timeframe flowing from one transitory phase to another. This is why bridge rounds exist, and how companies like Slack come into existence after offering to return money to investors.
>I see myself and my work as being an “early venture investor.” I work to carefully and selectively build a concentrated portfolio of companies that are clearly “pre A” in terms of stage, but where I believe the likelihood of “getting to A” is high and where I will intend to work hard with each one of them in order to get there.
Why should one take investments from an investor with a portfolio that is limited to 'pre A'? Doesn't investor selection come down to finding a network that can give you access to early customers and industry experts? Where is that access when they hand over the successful companies to others?
Doesn't investor selection come down to finding a network that can give you access to early customers and industry experts?
For some companies it does, but if you're pre-series A there's probably work to do before you have anything to put in front of a customer or an expert. If that work needs money then this is the sort of investor you approach.
Back when I was doing startup stuff (about 10 years ago) we called this a seed round. You could raise with literally just an idea on paper - you might have had no prototypes or traction or customers at all. These days you need all those things just to get on to an accelerator. It's a bit sad. There were more fun and crazy ideas being worked on when it was easier to get initial funding.
