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Startup stages: a comparison of 3 models

December 26, 2012 by     Email the Author

startup stages lifecycle funding stages venture capital stagesThere’s plenty of uncertainty when talking about funding and startup stages: What defines a growth stage startup as opposed to an early stage one? Do Series A rounds coincide with growth stage startups? How do we know if a company has graduated from one stage of the lifecycle to another?

Here, we take a quick look at three popular models that’s been bandied about: Funding stages (which venture capitalists talk about often), Steve Blank’s Customer Developmental Model, and Startup Genome’s Marmer Stages, a new entrant which adapts Steve Blank’s model and modifies it with self-reported data from thousands of startups.

Marmer Stages

Customer Developmental
Model

Funding Stages
  • Named after Startup Genome founder Max Marmer
  • Based loosely on Customer Developmental Model, but product-centric
  • Goals and activities drawn from self-reported data by thousands of startups worldwide
  • Developed by Steve Blank in his book Four Steps to the Epiphany
  • Focuses on understanding customers’ needs
  • Explains how funding at each stage can meet a startup’s needs.
DISCOVERY (5-7 MONTHS) CUSTOMER DISCOVERY SEED/ANGEL ROUND
Goal:
Validate whether you are solving a meaningful problem and whether anybody would hypothetically be interested in your solution. 		Goal:
Discover whether the problem, product and customer hypotheses in your business plan are correct. 		Goal:
Ensure you have enough money to build version one of the software and raise the next round of capital.
Activities:

  • Founding team is formed
  • Many customer interviews are conducted
  • Value proposition is found
  • Minimally viable products are created
  • Team joins an accelerator or incubator
  • First mentors and advisors come on board.
 Activities:

  • Get outside the building in order to learn what the high-value customer problems are.
  • Find out what it is about your product that solves these problems
  • Discover who specifically are your customer and users
  • With your findings, shape how you will describe your unique differences to potential customers
 Activities:

  • Set up the company and fund living expenses
  • Write a skeleton business plan addressing the five fundamental questions:
    1. what you’re going to do
    2. why users need it
    3. how large the market is
    4. how you’ll make money
    5. who your competitors are and why this company is going to beat them
     
    EARLY STAGE
    Goal:
Show some traction and possibly generate revenue
     
VALIDATION (3-5 MONTHS) CUSTOMER VALIDATION  
Goal:
Get early validation that people are interested in your product through the exchange of money or attention.

Activities:

  • Refinement of core features
  • Initial user growth
  • Metrics and analytics implementation
  • First key hires
  • Pivots (if necessary)
  • First paying customers
  • Product market fit
 Goal:
Build a repeatable sales road map for the sales and marketing teams that will follow later.

Activities:

  • Prepare sales materials, marketing strategies, sales roadmap
  • Land a few deals with “earlyvangelists”
  • Develop positioning statement to influence how the market perceives your product
  • If, and only if, you find a group of repeatable customers with a repeatable sales process, and then find that those customers yield a profitable business model, do you move to the next step.
 Activities:

  • Turn prototype into something releaseable to the public
  • Have solid core features ready
  • Gain a small but devoted following
  • Start generating revenue
  • Formulate an exit strategy — go public or exit.
  • Pay investors who will help the company in some way by letting them invest at low valuations.
  • Use other investors as leverage to prevent funding delays. Pursue alternatives.
  • Hire first employee and freelancers/part-timers/interns
     
EFFICIENCY (5-6 MONTHS) CUSTOMER CREATION  
Goal:
Refine your business model and improve the efficiency of your customer acquisition process. Efficiently acquire customers in order to avoid scaling with a leaky bucket. 		Goal:
Build on the success the company has had in its initial sales. 		 
Activities:

  • Value proposition refined
  • User experienced overhauled
  • Conversion funnel optimized
  • Viral growth achieved
  • Repeatable sales process and/or scalable customer acquisition channels found
 Activities:

  • Create end-user demand and drive that demand into the company’s sales channel.
  • Heavy marketing spending after the point where a startup acquires its first customers.
  
     
SCALE (7-9 MONTHS) COMPANY BUILDING SERIES A ROUND & BEYOND/GROWTH STAGE
Goal:
Step on the gas pedal and try to drive growth very aggressively.

Activities:

  • Massive customer acquisition
  • Back-end scalability improvements
  • First executive hires
  • Process implementation
  • Establishment of departments
 Goal:
Exploit the company’s early market success.

Activities:

  • Transition from informal, learning and discovery-oriented Customer Development team into formal departments with VPs of Sales, Marketing and Business Development. These executives now focus on building mission-oriented departments.
 Goal:
Go from revenue to profit. Grow aggressively.

Activities:

  • Spend more on marketing
  • Build infrastructure
  • Hire executives
  • Down-rounds can occur to struggling startups
   
    LATE STAGE
  Goal:
Go from profit to exit/IPO.
Source: Startup Compass Blog Source: Four Steps to the Epiphany Sources: Paul Graham’s blog, Meng Wong’s Map of the Money

Notes:
1. This comparison is not meant to go into the details. It is aimed at giving an overview.
2. As is always the case with the real world, there are exceptions to the norm. Some startups, for example, may choose to eschew venture funding.
3. Investment quantum varies across geographies. Seed funding and venture rounds in Silicon Valley are typically larger than those in Asia. For example, YCombinator company ZenPayroll raised USD6.1M in seed funding in December 2012.

Image credit: Torley

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About The Author

Terence LEE
Terence LEE - Editor

Terence writes mainly about technology trends and startups in Asia. He believes in crafting smart content: Not just a regurgitation of text, but well thought-out pieces that serve the reader using a combination of data, design, narratives, analysis, and visual impact. His articles have been published on Venturebeat, Yahoo!, Straits Times, Today, and The Online Citizen. He also co-founded NewNation.sg, a satirical news site covering Singapore affairs. Engage him on LinkedIn and Twitter.

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