As a precursor to a following post of startup valuations, this post is attempting to define the broad stages of evolution of a startup journey. While this categorization is most applicable to internet and mobile startups, the journey is somewhat similar for all kind of companies anywhere in the world.
First there was an idea
Perhaps the most important thing to know about startups is that purely as an idea, despite a large number of Excels and presentation, a startup is worth close to nothing. In the few cases where there’s a strong IP involved, one can assign a value because there is ‘something’ of value.
Ideas are essentially ‘a dime a dozen’!
Contrary to popular belief if you are idea or even the entire pitch/plan is stolen, nothing is lost because what is going to make or break your startup is you (and your team). Chances are that if you think that you have an original idea, you are kidding yourself!
Once a few people commit to an idea, the first thing they do is to build a prototype or an MVP. This typically requires a few weeks of dedicated work by 2 or more people. Since, a startup is typically attempting to create something that otherwise doesn’t exist, a lot of experiments are needs to figure out the needs of the customers.
Hence, an MVP usually only represents the willingness of the founding team to take the necessary risk. Those incubators/accelerators who accept startups at this stage understandably value the companies at a lowly ₹1–2Cr range ($150–300k) because the risks of startup not working are very high and a lot of work is needed to be done.
Finding the Product-Market Fit
The most important stage of any startup journey is the time they are figuring out their ‘Product-Market Fit’ (PMF). During this time, in a series of experiments the startup founders try to find who is looking to buy the product they are selling. More often than not, a startup starts with a product idea of a product, and founding team is not so sure if the target market is looking for this solution.
The only way to figure who is looking to buy your product is by speaking to a large number of customers and trying to cut a deal.
This stage can be divided into two salient phases — finding the first few customers and achieving the PMF. The implications of both are quite different. In case you have found first customer or first set of customers, it is surely a good sign but still doesn’t mean you can find more of these sustainably.
On the contrary, once you have achieved the PMF, it is implied you have not only figured a segment of customers who want to pay for your product, but also that you can reach them profitably and predictably.
Now, press the pedal
Once the PMF is achieved, the startup is understood to have figured their business model out and more money should give them predicable growth in revenue or other KPIs. As you can imagine, the startup has least amount of risk for investors at this stage and it is valued highly by the investors. In India, Series A investments (₹20–30Cr = $3–5M) are made at this stage of the startup journey.
Once into the growth stages, the startup has a low mortality rate, is able to attract top talent and investors rather easily and becomes somewhat of a ‘small company’ with departments, hierarchies and more and more processes. Still, if you think that the startup is out of the woods, it would come as a surprise to you that almost 40% startups fail even after they have raised a Series A round.