Ask a venture investor about the phases of a startup lifecycle and you will more than likely hear an answer oriented around the fundraising lifecycle – angel, pre-seed, seed, series A, etc.
But what does this actually mean for the founder? What does the underlying business look like for a seed stage company? And where do the bold bootstrapping startups turn to understand where they are and what comes next?
MassChallenge has more than a decade of experience supporting high-growth startups accelerate their business. In fact, MassChallenge accelerates the growth of over 400 startups a year for no cost and for zero equity. Startups that participate in MassChallenge grow their teams faster and raise more capital than startups which do not.
We believe our success accelerating startup growth is attributable to our integrated approach to helping startups access the right resources, expertise, and network. This article previews a diagnostic framework MassChallenge has developed over the years to help startups understand the question – what do I focus on now in order to build a sustainable business – from the view of the founder not the funder.
It Starts with Knowing Which Startup Stage You're at
Research shows that a key reason startups fail is that they never reach product market fit – even more specifically, startups run out of time or money before identifying the intersection of market need and solution. Over-investment in the wrong part of the business prematurely can create a perilous drain of mental and financial capacity. Similarly, under-investment in the critical pathway at the right time for the business can grind startup growth to a halt.
The academic literature on entrepreneurial decision-making dovetails with the sound advice of seasoned entrepreneurs - focused “experimentation” or as Eric Reiss promotes in the Lean Startup “validated learning,” - encourages startups to conduct rapid hypothesis testing around the questions “should this product be built” and “what is the sustainable business model for this solution?”
However, the question that quickly follows from our founders is, “Sure, but how do I know what experiment I should be focused on right now?”
In our experience, before the popularized experimentation frameworks (such as Reiss’s build-measure-learn), a rarely mentioned step is diagnosis. Effective diagnosis helps founders build objective self-awareness about where they are in the development of their startups – and therefore test and validate the right hypothesis at the right time, prioritize resources and investments more effectively, ultimately accelerating their business growth.
The Four Ds
The Four Ds lays out the key stages of the early state lifecycle. While these lifecycles certainly correlate to funding stages, they are not defined by the funding stage but rather by a startup’s relative certainty and readiness along the dimensions of market, product, business model, marketing and sales, team and financing.
Discovery: You are validating your idea.
You are in the prototype stage, pre-revenue, pre- financing, you are highly moldable on both the solution and business model. Your primary focus is customer discovery as you work to clarify and confirm a repeatable customer pain point. Your experiments should be designed to confirm or reject your starting hypothesis about the customer pain point, the customer profile and your unique value proposition.
Based on our internal dataset, discovery stage startups have on average between 1 and 2 FTEs. While approximately 60% have taken steps to protect some IP, only 10% have a working minimum viable product (MVP) and 0% have active customers. The average amount of external funding raised is $16,000.
Development: You are validating your solution.
You have a minimally viable product you are piloting or planning to pilot with first customers. You may have some revenue, but you are still highly moldable both strategy (go-to-market, target customer, value proposition) and solution. This is an iterative stage in which you are laser focused on defining the intersection between customer paint point, solution and willingness to pay, aka product market fit. Your primary focus is rapid iteration towards the combination which generates repeatable customers with repeatable economics. Your experiments should be focused on target customer and usage, solution fundamentals, pricing and maybe early go to market.
Based on our internal dataset, development stage startups have on average between 5 and 7 FTEs. The vast majority (70%+) have taken steps to protect some IP and have a working minimum viable product. Additionally, a majority (approximately 60%) have active customers which includes 40% with at least one paying customer. The average amount of external funding raised is $300-400K.
Deployment: You are validating your business model.
You are specifically demonstrating the repeatable product-customer-sales-economics formula you identified in the Development stage. In general, you are focused on growing and retaining paying customers by iterating your solution and are less moldable on your strategy. You are likely focused on a primary sales channel strategy in order build traction and refine the economics of your go-to-market strategy. You may also be beginning to test and demonstrate ability to diversify (product or market) in advance of an institutional funding round. Your primary focus is understanding and driving growth through a go-to-market strategy. Your experiments should be focused on the business model including pricing, cost of goods, and cost to attract, service certain customers.
Based on our internal dataset, deployment stage startups have on average between 7 and 15 FTEs. Virtually all have taken steps to protect some IP and have an MVP or beyond fielded. All deployment stage startups have paying customers and the focus is on repeatable economics. The average amount of external funding raised is approaching $1M.
Distribution: You are scaling your business and beginning to diversify your offering.
In general, your startup has a demonstrated repeatable product and sales cycle, and you are focused on significant and fast paced growth. If not bootstrapping, you are likely raising a Series A or B to fund explosive growth. You are likely actively if not already diversifying in product offering and/or geography. You are also thinking constantly about team, culture and organizational design as you look to build an organization that can scale.
Note: the majority of MassChallenge supported startups are pre-distribution phase. As a result, our data is skewed by outliers at this stage and so not included here.
The Big Takeaway
Starting a company requires inspiration, grit and perseverance. Every day requires entrepreneurs to make an array of decisions in the face of uncertainty and to balance realism and optimism in the face of rejection. And while there is no linear roadmap – no fail safe, step by step guide to getting a startup from insight through to enterprise – our experience indicates that if founders first locate themselves within the topography of entrepreneurship, they can make smarter decisions about where to focus, routes, resource preservation, and pacing.