Stages of early stage tech investing

Typical amounts, progress and runway for web tech startups in Canada

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.

For reference, for the numbers below I am thinking of a B2B SaaS business model with founders working in key positions. I’m also trying to document what I am seeing in the market in Canada for the past 24 months, not necessarily saying that this is best practice. I mention that because ideally you want to be raising more than 12 months of runway, otherwise you’re in a continuous fundraising cycle and can’t focus on product. In Canada, at the Seed1 stage, I have seen companies struggle with the local fundraising environment. Seed2 is also the “cross over” point for instituational investors such as seed VCs to get involved.

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.

Accelerators used to actively fund in this stage (at typical accelerator ranges of $25K to $50K), but the trend is towards taking companies that are somewhere between this stage and a Seed1. The accelerator then helps prep for closing a solid Seed1 round.

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.

Testing at this point is more radical experiments, customer types, different industries and verticals. You are looking for problem / solution fit, not testing the colour of the CTA.

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 problem / solution 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. Instrumentation is beyond MAU, with early indicators of churn and a full cycle SaaS business model.

You have a number of positive signals, but you don’t yet have the velocity or full proof of product / market fit, and need more runway to get there.

Future of Venture

The angel investor and venture capital markets are changing rapidly, and future regulation changes around equity crowd-funding 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 pitch deck are over for software businesses.

There are starting to be venture creation / foundry models 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.

I am very interested in early-stage funding models that commit across these early stages, as it means that founding teams can be heads down on hitting their targets and can be insulated from some of the distractions of fundraising.

This article was originally posted to LinkedIn on June 4, 2014, and cross-posted to my personal blog in August 2014.

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