From Spark To Fire: Understanding The Three Stages Of Raising Capital
Originally published in Forbes
There are stark differences between the launchpad, incubator and accelerator stages of raising capital. After going through a thousand pitch decks for our newest cohort of portfolio companies, as well as looking at the current landscape, I do not believe that this is a widely understood phenomenon. I’ve seen launchpads start calling themselves accelerators, which has led to me having to either call my company a late-stage accelerator — which is confusing for everyone — or having to reeducate entrepreneurs on the meaning of each. Instead of doing it for each entrepreneur one-by-one, we will define the stages here and hopefully fix the confusion.
I’ll describe the different attributes of each while giving you an easy way to remember, using the various stages of a fire. I’ll also give you a quick blurb on who your target for fundraising should be.
At this point, your fire is just a spark. Launchpads are used if you have an idea and you don’t know what to do with it. They help you with customer discovery, figuring out if the problem you are trying to solve is scalable, and start forming a plan of attack to recruit and go after your first customer. There is a lot of trial and error here, but maybe you’ll start to see some smoke, and where this is smoke, there is fire.
Unless you are a serial entrepreneur that already has relationships with angel investors or venture capitalists, your main source of funding will most likely be friends and family. You will need to bootstrap a small raise to get your idea off the ground. To get the next stages, you will need some type of traction, which can be solid partnerships or revenue.
Your kindling is now burning. At this stage, you have figured who your customers are and have gotten a few early adopters. You have a few go-to-market strategies to try and capitalize on the early traction you have but still need to work out the kinks of which one you should hone in on. Angels have taken some interested in you, and you very well might have raised some money.
You have gone through the process and shown that you can bring together a team and put together a functioning minimum viable product (MVP) or a product in beta testing, which gives angels confidence in funding you even if you eventually need to pivot.
You have a fire going, and now it’s time to pour gasoline onto it. Accelerators are used to ramp up your venture. Most pure accelerators are looking to double or triple your company’s value within the first six months of meeting you. They do this by de-risking you on the front end through connections to partners that can help scale your company and make sure you don’t fail during an inflection point.
They amplify you by connecting you with their startups or limited partners — people who have invested into their fund who are generally extremely high-net-worth individuals that have connections deep into the Fortune 500 and beyond.
At this point, funding is coming from early-stage venture capitalists. Once you are de-risked and have significantly increased your monthly recurring revenue (MRR), you are ready for the rocket fuel that venture capitalists provide.
Additional Types Of Programs
There are a few other types of programs worth mentioning as they are becoming increasingly popular: Pre-accelerator and post-accelerator. Do be wary though, as these are generally run by venture capitalists and cost money without funding.
Both of these programs are used mainly to fill a specific skills gap, such as enterprise sales. They can be useful and give you a way to fix or improve a skill you’ll need specifically for your venture type. They also provide another way to get an edge with whichever venture capital firm is running it, whether that be at the pre-seed stage, seed stage or pre-series A.
Lucas is the founder of Spark xyz, platform management software for incubators, accelerators, Angel groups, and VC’s.