Stages of early stage tech investing

How much to raise and what stage your company is at is a constant question asked by founders and investors alike. Describing the stages of tech investing is my attempt to categorize what I am seeing in the market today. For any new business, traction will trump everything, with lots of customers using the product on a daily or monthly basis being a great indicator.

There are many "it depends" for these stages and dollar amounts, and they also reflect common numbers in Vancouver / Canada. For example, a business model that focuses on Enterprise sales is going to need more money and a longer runway in order to sell to and launch in production for its first 1 to 3 customers. It is also biased to a recurring revenue, SaaS B2B / B2D business model. A B2C or marketplace model would likely be much more focused on growth / usage, with limited monetization.

Pre-launch / pre-product: $150K

Typical runway: 6 months

At this stage, the founding team has done validation by interviewing and/or pre-signing up a number of potential customers. This is not an idea or PowerPoint only stage: I expect the founding team to have spent months interviewing users and honing their concept. 6 months of validation would not be an unreasonable time frame done part-time.

Pre-launch most often applies to mobile-first startups, as signing up users to a mobile app can be very difficult: you're going to need to spend marketing dollars to get your app installed. For a pre-product company, you should be very sure that you understand that the team can ship a product.

This first cash in is often to get the founding team working on the product full time or to hire a critical developer team member.

Seed1: $300K - $500K

Typical runway: 9 - 12 months

There is a software product that is up and running, and customers are using it. The product is instrumented to track user behaviour, and initial numbers around monthly active users (MAU) are available. There isn't enough incoming traffic to optimize conversion yet. The process for finding and signing up customers, and what type of customer that is, is quite unsophisticated / manual.

There is commitment to experimenting with sales & marketing techniques and different distribution channels. The product is instrumented and one of the primary goals is customer engagement: what customers are using the product? What do they like? What do they not like?

Seed2: $700K - $1.xM

Typical runway: 12months+

At this stage, the product has product/market fit with one large potential group of customers, and there is a known distribution strategy that is working. The team is adding sales & marketing members and spending more on marketing. Product development is adding features to unlock new customer segments, tuning retention and usability, and implementing integrations into large networks to help with growth.

The angel investor and venture capital markets are changing rapidly, and future regulation changes around equity crowdfunding and the rise of syndicates are likely to change it even further.

I try and explain that the days of $500K raises on nothing but a presentation are over for software businesses.

There are starting to be venture creation / foundry models¹ that optimize for working with founders from start to finish, but I don't think this is a good fit for individual angel investments that don't have other support structures in place.

This article was originally posted to LinkedIn on June 4, 2014.