Are we pre-seed, seed, or Series A? That’s precisely the question many young founders joining Go Global World in pursuit of networking and funding opportunities have trouble figuring out. Answering this question is not just a formality.
Every startup evolution stage has its own challenges, milestones, and objectives.
So how do you figure out where exactly you are in your business life cycle?
What are the stages of a startup?
The growth stages of a startup measure its progress from product development and market launch to the moment your company gains wide acceptance from the audience, and, eventually, the moment you complete your journey with a successful exit.
Every stage encompasses significant milestones acting as landmarks and telling signs of advancement. Ticking these boxes, you can easily figure out where you are at in startup development:
Is your startup more than just an idea on a napkin?
Have you launched your minimal viable product (MVP)?
Do you have at least 2-3 founders with complementary experience?
Have you gathered a team of qualified personnel (experts in key areas)?
Have you reached product market fit?
Is there traction & growth? Do you have the metrics to show for it?
What’s your monthly and yearly recurring revenue?
What’s your current valuation and the funding you're aiming for?
Is your product and business ready to scale?
Sometimes a company's lifecycle is mapped into three broad categories:
Early stage: a stage of intensive product development and growth.
Growth stage: a stage of product scaling and business evolution.
Late stage: further market penetration and business expansion.
And although you could categorize any startup accurately using those classifications, it's more typical to delineate the startup stages using a more intricate framework comprising five stages. This framework revolves around the sequential funding stages that numerous startups undergo.
The duration of each stage can fluctuate: some startups might linger in one phase for years, whereas others breeze through it in just a few months; some may even bypass certain stages altogether. However, startups within each phase exhibit common characteristics, rendering this framework valuable for obtaining a rapid, overarching comprehension of any startup. Below are the stages, outlining the focal points of startups in each:
Idea stage: from idea to your first prototype
Just kicked off your startup and think you are ready to rank yourself as a pre-seed or seed company?
Note this: if you lack an actual product (at least an early version), customers, and initial sales, most likely you’re still in the idea phase.
So, essentially, the prerequisites for an idea-stage company are:
You are just a couple of founders with an idea or concept.
You have a clear vision and draft of core features.
You’ve only begun recruiting a team for product development.
You are working on or just launched the development of your MVP (not deep tech).
You have very little to prove to investors your idea will actually work.
What is an MVP and its role in the idea stage?
An MVP (Minimum Viable Product) represents an initial product version developed with minimal effort and time. While it may lack extensive features, its purpose is to provide early users with a glimpse of the product, allowing them to explore, test it, and provide early feedback.
Working on your product via an MVP process, you follow an iterative approach of trial runs that help you discover what your users really want. You gain valuable insights into areas for improvement, product pain points, and user challenges.
The key benefit of an MVP is that it diminishes the need for extensive product redesigns. You roll out the basic features and test them with your early users, discarding anything that fails and improving on your achievements.
Do deep-tech R&D startups need an MVP at the idea or pre-seed stage?
When the startup aims to solve significant scientific and engineering challenges (BioTech, Healthcare, Semiconductor sectors, etc.), having built a working product prototype may require several rounds of large capital infusions.
At the outlet, startups are simply not going to have those resources available to them. Sometimes such businesses build their first real version of the product once they acquire Series A funding.
So what are the prerequisites of an R&D startup at the idea stage? Here are a few flagstones:
The team’s deep technical expertise is paramount.
Secured patents, clinical trials (for Bio and Healthcare), etc.
An execution plan with real proof that an MVP can be built.
An advanced AR/VR company focused on developing virtual headsets rivaling Apple’s Vision Pro technology, Magic Leap, is a good example of a deep tech startup that successfully raised more than a dozen rounds without an MVP.
Magic Leap launched its first product prototype 7 years after its inception in 2011, having already secured more than $2.3 billion. Since then, it has pivoted to target B2B enterprise customers, and recently garnered another impressive lump of $590 million in debt funding from Saudi Arabia’s Public Investment Fund, bringing its full tally up to $4.5 billion.
Obviously, R&D startups are an exception here, but anyone who is a step ahead will get special treatment and privileges.
Lessons learned from big-shot companies:
In the early days, YouTube started as a video dating site that didn’t quite take off. Similarly, Twitter began as a music service that didn’t find its groove. However, the teams did not give up. An MVP approach allowed these startups to pivot swiftly and, ultimately, achieve success.
These are not just one-offs. We can make many other justifying examples here:
Airbnb: Facing financial constraints, Airbnb’s founders leveraged their own apartment to validate their concept of an online platform for short-term, peer-to-peer rental housing. They developed a simple website, shared property photos, and quickly attracted paying guests.
Foursquare: In its early days, Foursquare built a location social network offering only a few features such as check-ins and gamified rewards. Starting small they allowed to gradually incorporate functionality liked by users and become a location data conglomerate.
Pre-seed stage: seeking product-market fit (PMF)
At this stage, you are much farther along in product development than at the idea stage. You are at the pre-seed stage, if:
You have a vision and a roadmap that details how you plan to reach your goals.
You've recruited a qualified team of experts.
You kicked off with an MVP (if not deep tech) and are still working on the main features and functionality.
Your MVP actually works and has paying customers.
You have mapped out a plan to reach PMF.
Your business shows early revenue growth or any other kind of traction.
Pre-seed metrics
These are commonplace metrics for SaaS and software startups (may be different for deep tech):
Monthly recurring revenue (MRR): 1k - $50k
Growth rate: 10% - 20% MoM
PMF: at least 25%, working on getting to 40%
Daily active users (DAU): 5000 and more.
For deep tech R&D startups, you should have:
A strong team of development experts and a proof of concept.
The Initial package of secured patents, IP rights, and trade secrets.
This is the stage where most founders start thinking about acquiring their first serious investment from VC capitalists. Having said that, being pre-seed means you now have to know how to value your company and also know the check size investors will be willing to give out to your startup.
Pre-seed funding:
Valuation: $1m - $5m
Cash raised: $25k - $1m.
Pre-seed investors: Accelerators, angels, pre-seed and micro VC funds. The investment deal is usually made via a SAFE or convertible note.
Raising your first capital: what founders should tout to investors at the pre-seed stage
Having these should do the trick:
Solid vision and goals
Functional MVP
Strong team of founders and executives
Early indications of traction and growth.
Gil Silberman, Managing Partner at Luca Ventures and investor to numerous unicorn companies provides his own perspective on what a pre-seed startup is:
A pre-seed company generally has a company setup, founders working or planning to work full time, a product or service it is building and prepare to sell, and various vendor relationships in place. There may be some self-funding too, or money from friends and family, but this is not generally considered pre-seed funding, which normally comes from outside angel investors or micro-venture capitalists. Pre-seed companies generally don’t have their product finished or their sales launched, and may or may not be paying salaries or hiring non-founder employees. But they are working on it, that is really the function of pre-seed funding, to get the company to the point it has a product to launch, and it can go out into the world to raise a larger amount of seed money.
Most pre-seed startups are still feeling out the ground in their market and have no real proof their business would be a success. So investing at this stage is inherently risky.
HOW THE PRE-SEED ROUND MADE A COMEBACK IN 2024 read more in Eze Vidra's article here.
Seed stage: from PMF to established business
In the seed stage, the startup treads beyond the Pre-Seed stage, having a product that sells with real metrics to show for it. The team becomes more and more confident in its vision and sets clear objectives to maximize the business's earning potential.
The seed stage means your startup has entered a phase when you have real proof your business is viable and worthy of investment. You are at the seed stage if you have:
Proven product-market fit with the target audience
Considerably high customer lifetime value
Fully equipped team of experts in key business areas
Clear signs of traction leading to increased sales
Increasing growth in customers and revenue.
Seed metrics
These metrics define SaaS and software startups at the seed stage (may be different for deep tech):
Monthly recurring revenue (MRR): $50k - $200k
Growth rate: 20% - 30% MoM
PMF: 40%
Daily active users (DAU): 25k - 100k.
LTV / CAC ratio: 3:1
NPS: over 50
CSAT: over 80%
For deep tech R&D startups, you should have:
A strong team of development experts and a prototype.
Secured patents, IP rights, and trade secrets.
Seed funding
Valuation: $5m - $15m
Cash raised: $1m - $5m.
Seed investors: Angel syndicates, Seed VC funds.
The investment deal is usually made via a priced round and investors get 20-25% equity.
What do investors say about Seed funding?
From a Techcrunch article Seed funding: Everything founders should know about fundraising, seed rounds and more for 2024.
"Beyond expectations about product-market fit, seed round milestones have been ramping up over the years. Recently, the seed round has started to resemble Series A rounds of yesterday.
“I’m advising our portfolio companies that $300,000 to $1 million in ARR is strong to go raise a seed round,” Maren Bannon said. Three years ago, the high end of that was enough to raise a solid Series A. There are some exceptions, such as deep tech companies or AI startups, she added, where an interesting story or compelling team can raise with less traction in the market. “But I think in general, investors are just looking for more traction than they were a couple of years ago.
”While revenue is not required for deep tech startups, “substantive traction on the business side” is, Pae Wu said.
That might include partnerships or collaborations with bigger companies. Investors also want to see a strong proof of concept along with a strong timeline to get to a pilot-scale demonstration. “These are not hard and fast rules, but having clear determination that your thing can work in the real world is where things are at these days,” she said.
Round size at the seed stage is highly variable. In December and January, median deal sizes were $2 million, according to a TechCrunch+ analysis of PitchBook data, with most falling between about $800,000 and $4 million. The median pre-money valuation was $10 million, and the majority spanned $5 million to $20 million.
Those valuations might be a holdover from previous years, Bannon said. She’s been seeing a lot of bridge rounds where the valuations aren’t updated. “You’re taking these inflated prices from two years ago, doing a bridge, and that’s kind of bolstering the market,” she said."
Late seed stage (second seed, seed plus, or seed extension)
Some startups go through an additional seed financing round before heading off to the next stage. This practice has become popular since the following, Series A stage investors have recently been setting extremely high acceptance criteria for financing.
Typically, a second seed round is used to help a startup grow, scale its products, and expand its market presence. This additional stage is also used to support new projects and initiatives.
Making the transition to Series A. Why and when should you do it?
Once you reach a certain level of entrepreneurial success there comes somewhat of a ceiling. Your company is growing in sales and revenue, but there’s no real advancement in terms of product development and business evolution.
Some founders may be okay with that while others always aim higher. To break the ceiling, you'll have to pursue scaling your operations and expand your presence to other markets. That means treading into Series A territory.
Note: It is very important to know and understand if your business is scalable. You can generally determine if your business model is scalable by analyzing its potential across these key vectors:
Customer Demand
Operational Efficiency
Technology Integration
Market Reach
Revenue Streams
Human Resources.
The timing here is paramount. If you are showing exponential traction and growth, enough to wow the investors with your market presence and potential to return tenfold their initial check, then go for it!
A capital infusion ensures you have enough money for expansion while maintaining your business and staying true to your vision.
Series A: from growth to scalable distribution
The Series A stage comes with a new challenge: finding a viable business strategy where the product can be distributed across markets in a scalable and profitable way.
So the primary goal is to refine and optimize the business model, aiming to rapidly scale while maintaining the same growth and revenue capability.
At the Series A stage, your company has a solid track record and all the proof needed to show investors it's a safe bet. You are at the Series A stage if you:
Have very impressive performance metrics.
Can supplement the metrics with a great story and pitch.
Have a scalable product and business model.
Show consistent growth in sales and revenue.
Demonstrate real potential to scale 10x current value.
Have a strategy set up for expansion and scalable distribution.
Series A metrics
These metrics define SaaS and software startups at the Series A stage (may be different for deep tech):
Monthly recurring revenue (MRR): $200k+
Growth rate: 25% MoM or higher
PMF: 40% and higher
Daily active users (DAU): 500k+.
Gross Margin: 70%-80%.
Runway: 24 months.
For deep tech R&D startups, you should have:
A strong team of product development experts.
Complete package of patents, IP rights, and trade secrets.
At least the first version of the product + commercial validation.
Series A funding
Valuation: $20m - $50m.
Cash raised: over $5m.
Series A investors: Series A / Growth VC Funds, investors from previous rounds.
Series A funding requires startups to undergo a complete process of valuation and due diligence. VC analysts will meticulously assess various aspects, including organizational statements, company metrics, financial status, track record, management, risks, and growth potential.
Christopher Brown, managing partner at The Lagoa Group, an advisory firm for venture capital projects, identifies Series A startups as:
Startups that are looking to raise Series A funding need to have a viable product and complete business model, a strong management team, and a clear vision for their company's future. They will also need to provide potential investors with detailed information on their financial projections and exit strategy. Series A funding can be a critical step for startups that are looking to scale their operations and grow their market share. Typically, the funds sought would be used to proceed with expansion plans (hire additional personnel, programmers, sales and support staff, new office space, pre-seed pay outs and the like).
To be more prepared, check out our guide on how to gear yourself for due diligence and negotiate attractive investment deal terms.
More about the Series A stage is read in the Carta's article.
Conclusion
Every startup's journey is different. You may take years to reach the Series A stage, or you may instantly hit the PMF mark and grow exponentially. Some founders might not even need outside funding to grow and scale their enterprises.
On the other hand, the primary objectives and milestones are the same for every startup and it's important to know and be able to identify them. We hope our guide helps entrepreneurs steer their businesses in the right direction at the right time.
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