In my days as a VC I noticed several patterns when meeting with founders and asking a basic question -- "At what stage is your startup?" The story was important -- what problem they were solving, backgrounds, etc., but I also tried to focus on where they were in their company's lifecycle to get an idea of progress and how I should be thinking about the risk/reward matrix around valuation.
As a founder of my own company, I've also experienced and been through identical stages. It has helped me gauge progress and set my sights on the next important milestone. Startups are never successful overnight and I think it's important to understand that running one is a process that requires patience, perseverance, and a realistic evaluation of its evolutionary stage. The stages below represent my experience as a B2B company founder, but many are transferrable to B2C companies as well.
STAGE 1: Quitting your Job
Is your idea good enough for you to quit your job? Is the idea good enough for you to get someone else to quit their job and join you?
As a VC, there were several times when an entrepreneur came to pitch and were still working another job full time. I heard many entrepreneurs use the line, "We'll quit once we raise the money." That was usually the end of the meeting.
If at least one of the founders wasn't working on the startup full time, this was an immediate pass. Founders should be calculating their own risk/reward payoff. If the potential upside is not large enough to offset the risk of quitting a job, the idea is probably not big enough for an investor. I'm not saying that you can't run a successful side business without quitting your day job, but if looking to raise capital, you should be willing to do it full-time.
A founder has to a passionate believer in what they are doing and must often be THE primary proponent for the idea. Startups are brutally difficult and founders need to be tough from the outset in order to weather the storm. If a founder can't even convince themselves to quit, it's probably never going to get off the ground.
STAGE 2: Building the Product
Can the team execute and build a working product?
With access to open-source code, APIs, and Amazon's affordable servers-on-the-fly infrastructure, it has become increasingly easier to build a minimum viable product. In fact, most institutional investors won't even take a meeting without a working product. For me, this was just the initial step after building the team. It's an important stage that exposes the big difference between having an idea and actually executing on that idea. Are you the Winklevii or Zuck?
STAGE 3: Customer Trial
Is there enough of a value proposition where you can convince a potential customer to actually invest resources (i.e. time) to try your product?
This phase is more important than most entrepreneurs think. It is absolutely critical to get potential customers to try the product. Call upon friends. Call in favors. Pay someone to try your product if need be.
This is an opportunity for learning about deficiencies in the product, critical features, and, most importantly, to get real-world feedback from someone not on your team. In many cases, the entrepreneur may learn that the potential customer uses the product in ways that they did not expect.
This is why many founders will simply give away the product for free for these valuable learnings. It also takes some of the pressure off in the event that your product falls over. It's happened to all of us, but it's better that it happens during a free trial with a small group of testers than a paid implementation in the critical path of a customer's business.
STAGE 4: Demonstrate Efficacy
During your trial, were you able to gather data and show any lift on key performance indicators?
This stage is always tricky as it requires a lot of back-and-forth with your trial customer. In some cases the KPIs may be a bit squishy and even moving targets. Thus, it's critical that you try to get your trial customer to agree in advance in writing the KPIs for you to track, and, more importantly, for which you can take credit in the event that you can show your product created lift. It's rare that the first attempt will show lift so it's critical that an early partner is ready and willing to experiment to try a few different options over a period of around 3 months so you can optimize. I think it's important to remember that at this phase, your key objective is to gather data that you can use for case studies as opposed to monetization.
STAGE 5: Paying Customer
Can you get your champion to actually pay or convince others at your customer's company to actually PAY for your product?
This is an incredibly important and difficult milestone to reach for a young company. It's the first indication that your product MAY have found the ever-elusive product market fit -- a term that VCs tend to overuse. This is also incredibly difficult to stage to reach because you are essentially asking your customer champion to put his career on the line for you. Too many bad purchase decisions can be a career limiting maneuver for your customer. Thus it's incredibly important to set him/her up for success -- i.e. what KPIs matter to their OWN career advancement?
STAGE 6: Scaling the Business
How do you repeat the customer acquisition strategy of your paying customer over and over again?
Once you can develop a recurring business model, you are on your way to building a successful company. This is where it starts getting fun. At this stage, you have clearly found product market fit and you can start focusing on arbitrage opportunities where (hopefully) the cost of customer acquisition is lower than the lifetime value of the customer less churn.
I have found that it's important to understand the actual stage of your company as it helps set your sights on attainable goals. It's not realistic to think you will get a paying customer if you haven't built a product. It IS realistic to ask and expect to obtain data from a trial partner to determine if your product actually works.
In addition, since many founders are always in the process of raising capital, it also provides good benchmarks for valuation and the type of investor that might be interested in your company. Unless you are a seasoned serial entrepreneur with a track record of successful exits, raising capital often entails multiple meetings and a series of rejections. Because time is your most precious asset, understanding the type of investor that would be interested in your stage may save you a wasted meeting. Going to a Series A investor for anything earlier than Stage 6 is probably a waste of time. Finding the right institutional seed player, angel, or even friends and family may be a more productive use of time.
Startups are hard and sometimes progress is difficult to see when your burgeoning idea is still so nascent that typical key performance indicators like revenue or increase in users don't apply. However, learning is progress. Even making mistakes is progress. Hopefully, the stages I've laid out will provide a good way to measure progress and set your sights for the next milestone in your efforts to transform your idea into a successful company.