The Stages of an Early Stage Company and How to Think About the One Thing VCs Say Even More Often Than “No”

There’s going to be a second ‘Secret Math of Venture Capital’ post, but first I’m going to cover the stages that early stage companies progress through. Where you are in this evolution defines how much capital you can raise and the valuation that you’ll get.

Be warned: nothing below is profound. It’s even obvious. But that doesn’t mean entrepreneurs are conscious of it. We get so passionately obsessed with our vision and how we’re changing the world that we forget that the reality isn’t always keeping up. The entrepreneur who can remain aware of these stages and rationally pinpoint where the company is in its evolution is going to simplify the capital-raising process. It will change who you approach and what you expect.    

The stages are roughly as follows:

• Idea & Commitment: Ideas that have a committed entrepreneur behind them have value. If you can write it on a piece of paper and get other people excited about it, especially people with money, you’ve reached stage 1.
• Product:  The next big stage is a working product. You may, or may not, be able to do this without funding. If it’s a relatively simple consumer facing website, you probably should get it live without raising capital. If it’s a new electric car, you might line up component suppliers and other elements but you probably won’t be able to build the car.
• Revenue: Revenue may sound synonymous with the product, but it’s not at all. Building a product proves that you can execute (some people can not, some people can only talk). Building a product proves that it the thing can do what you said it would do. Generating revenue means that someone values what you do. That’s fundamentally different and very interesting. Lots of time is spent by venture capitalists understanding why people are paying for a new service & whether or not that’s likely to continue.
• Scalability and Profitability: After you start to generate revenue, the obvious next step is to grow and to grow quickly. You’re now leaving “early stage” and entering “growth stage.” Here the questions are all about how big and how profitable. You can definitely generate revenue if you buy Cokes for a dollar and resell them for $.50. But you can’t make a business out of it.

So what’s the one thing VCs say more than no? Something along the lines of, “Come back to me when….” It’s often just a softer way of saying, “no” but it can imply a respectful question about what stage you’re at. BTW, even though I’m an entrepreneur, I’m speaking with some authority here: I was a VC for four years and I probably said “come back to me when” over 1,000 times. I said it in my sleep. Cosmic justice ensured I heard it back 1,000 times when I moved to the other side of the table….

It’s a reflexive, loser comment but you should anticipate it & you should build off of it. Some ways to reply: “And what will that show?” “If we do that, will we be in the sweet spot of where you like to invest?” “Is that the only thing you think is left for us to reach y stage?” Or, if you’re feeling to moment is right to give a little back, try “and then what?”