Early-stage Startups: The Stages, Challenges and Whom to Seek Funding From?

One of the key clarity that every first-time founder seeks during the early days of their startup, is to identify what stage their startup currently is at, what should be their next steps to build an long-term enduring business, and whom to seek support from at each stage?


For this very purpose, I have created this brief road-map, which segregates the stages for early-stage startups, respective stakeholders to connect to at each stage for support as well as fundraising, and the subsequent steps to follow.


Note: This road-map is specific to the early-stage startups, till the Seed and Angel rounds.


Stages of the Early-stage Startups


1. Pre-seed (Ideation) Stage


  • This is the very first stage of a startup in which you've identified a clear idea (problem/pain you're solving), and for whom (your target customer persona).

  • You may/may not have an idea about your target market potential (or TAM).

  • Many of you would have crafted the idea on a PPT, while some of you may have built a wire frame (of the product/service i.e. how it'll work along with basic features/benefits) or better still might have even built the beta form of product/service.


Challenges at the Ideation Stage


One of the biggest hurdles to overcome at the ideation stage is having deep clarity on each of the factors, given below:

  • Why (vision i.e. what do you want to create and why?)

  • What (problem/pain you’re trying to solve, is this for real, and what are potential users/buyers doing to address this?)

  • Whom (who all are facing this problem/pain, and is this for real?)

  • How (how will your solution solve this problem/pain, why will users care about it, and will they pay for it?) As Paul Graham, Founder of Y Combinator quotes, "Make something people want!"

  • Who (who else is/or trying to solve this problem/pain i.e. your competitors, and what do they lack or whether they're solving it efficiently?), and finally ...

  • We (why are we the perfect team to build this?)


Who can help at the Ideation stage?


Incubators can help you with mentoring, offer co-working space and guide/nurture you to launch a startup and bootstrap it. Being a part of their cohorts, you also have the opportunity to network with like-minded entrepreneurs, and usually, it's a great place to look for your co-founders. Incubators usually charge monthly fees for their services, while few might also fund you, in lieu of equity.


Fundraising:

  • Your own contribution (skin in the game) and/or funding by your family and friends.

  • Keep applying to various hackathons/competition to win prizes and grants, to help you in keeping your startup floating.

  • Another great source of funding is the Crowdsourcing sites, such as Kickstarter, Indiegogo, Seedrs, etc.


What do incubators look for?

  • Team: Founder/s domain expertise, relevant work experience and their passion. Founder-Market Fit plays the very important role here.

  • Problem: What is the problem/pain being solved, who is facing it, and is it real?

  • Market: How big really is this market?


Seed stage (MVP)


  • At this stage, besides having clarity on the "problem/pain" you're addressing, you’re also being aware of "how you’re going to solve it."

  • To further refine the how part, you've also built a minimum viable product (MVP) along with the basic features that are needed to satisfy a demand from users/clients.

  • The key here is to learn what your user/client wants without getting obsessed over building a “perfect” product/service.

  • Usually, you’re at the pre-revenue stage here.


“As you consider building your own MVP, let this simple rule suffice: remove any feature, process, or effort that does not contribute directly to the learning you seek.” - The Lean Startup

Challenges:


  • Make sure you’ve validated your idea first and there are customers, who are/will be willing to pay for it, at a later stage.

  • Screw up at this stage, you might burn a lot of cash, and it often leads to startups' failure/bankruptcy.


Who can help you?



  • Startup Accelerators (Seed Accelerators), are a type of a business support program that provides you with seed funding (in lieu of equity), training, and mentor-ship thereby clearing all prevailing hurdles, so you can start building an enduring business.

  • You can apply to accelerators like Y Combinator, Techstars, 500 Startups, Sequoia Surge, Venture Catalysts, 100X.VC, and many more.

  • You could also explore Corporate Accelerators (operating in your industry/domain) offering mentoring, office space, and funding. At times, you might eventually be acquired by them.

Listen to my podcast, "How startups can make it to 100X.VC" by Ninad Karpe, Partner-100X.VC


Listen to my podcast, "How goDutch made it to Y Combinator W20 program?"


What do Accelerators look for?

  • Team: Founders' domain expertise, their passion, and perseverance to win BIG.

  • Problem: What is the problem/pain, who is facing it, is it real, and most importantly will the users/clients pay for it?

  • Market: How big is the market potential (is the target market over $1 billion)?


Fundraising:

Besides, your own contribution (skin in the game), accelerators would provide you with seed funding varying from $70K - $2M, and they demand equity from 6% - 20% (depending upon your venture's pre-valuation).



Early-stage (Traction)


  • Besides having an MVP, you also have some Traction to prove the Product-Market Fit.

  • Product-Market Fit (PMF) symbolizes that a product satisfies a strong market demand. It means that you’re solving a real pain point for enough people that your business is viable and has real growth prospects.

  • PMF helps you to define the business model (how will you sell and earn revenues).

  • The good news is that you’re ahead of most startups, who don’t ever reach this stage.


“Product/Market fit (PMF) means being in a good market with a product that can satisfy that market” - Marc Andreessen

Early-stage (Scaleup)


  • Besides Traction, your product/service can actually be distributed in a scalable and profitable way.

  • You've optimized your business model to quickly cater to a volume of clients, in the fastest time.


“Almost every failed startup has a product. What failed startups don’t have are enough customers.” - Gabriel Weinberg
“Think big, start small, then scale or fail fast.” Mats Lederhausen

Challenges:

  • Key challenges at this stage are first validating the Product/Market fit (PMF) and optimizing your business model to scale-up fast (getting more customers on board).

  • Another major hurdle here is to have a positive unit-economics, without which your startup is most likely to fail.


Listen to my podcast, "How can the early-stage startups scale-up globally?


Who can help you?

Angel Investors, Private Equity or Family Offices, Micro (Seed stage) Venture Capitalists.

They not only provide you with equity funding, but can also get you connections, anchor customers, mentoring, and even help you with follow-on funding.


What do investors (Angels/VCs) look for?

  • Team: Founders' domain expertise, their passion, and perseverance to win BIG.

  • Problem: What is the problem/pain, who is facing it, is it real, and most importantly will the users/clients pay for it?

  • Market: How big is the market potential (is the target market over $1 billion)?

  • Traction: Does the venture has sufficient Traction to prove it's PMF? Does it adheres to positive unit-economics?

  • Scalability: Is the idea/venture really scalable?

  • Value Proposition and Unfair Advantage: What is it's strong value proposition and unfair advantage (IP patented, others)?


Read, Why Investors Say No?


Need help in Fundraising?

Check out as to how "we help early-stage startups be investor-ready, thereby get funded."



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