The document discusses the typical stages of growth for startup companies over their first 3-5 years: proof of concept, seed, startup, early, growth, and later stage to maturity. It notes that many startups fail to make it through the "Valley of Death" period when spending exceeds revenue. The document advises entrepreneurs to match their capital needs at each stage to the appropriate sources, such as founders, friends and family initially, then potentially banks, grants, bootstrapping, angels, and venture capital later on. It stresses developing a capital plan to only raise what is needed to hit business plan milestones.
2. The Path: Critical Milestones Required
to Succeed
Every startup company that continues to progress
will experience these stages of growth.
3. The Path: Critical Milestones
Required to Succeed
These stages typically span the first three to five years
of a company’s life.
• Proof of Concept: business concept developed
• Seed: Product or service in early stage
• Startup: Management team in place; business
functions created; prototype developed
• Early: Beta testing; approaching breakeven
• Growth: Approaching revenue and profitable
• Later Stage to Maturity: Product or service widely
available; continued operation as private company,
acquisition, or IPO
4. The Path: Match Sources of Capital
to Milestones
Successful Entrepreneurs target the right source of capital at the right stage.
5. The Path: The Valley of Death
• The Valley of Death is the time in the life of the startup when
the company is spending more money than it is taking in.
• Capital is used for critical milestones—usually to build
product and conduct market development.
• The Valley of Death is so named because many companies
don’t make it out of this stage.
6. The Path: Match Sources of Capital
to Milestones
Capital Requirements per
Stage
Proof of Concept: Funds incorporation, IP
protection, limited prototype
Seed: Capital to prove product feasibility and
quantify market
Startup: Funds pilot to market, verification of
business plan economics
Early: Funds product and market
development
Growth: Funds expansion and growth
Later Stage to Maturity: Support expansion
and growth, next generation product
development, market expansion
Sources of Capital
• Founders, Friends, Family and “Fools”:
Entrepreneur is first investor; individuals who
trust the entrepreneur and have interest invest
at the riskiest and most unpredictable stage.
• Banks: Lines of credit, traditional borrowing, or
convertible debt. The greater the entrepreneur’s
personal resources, the more likely this source.
• Grants: From public and private sector and not-
for-profit foundations. Typically used for
research. Do not require repayment.
• Bootstrap: The most interesting and creative
entrepreneurs figure out ways to pay as they go
without outside capital.
• Angel Investor: Private high net worth
individuals who invest their own capital
individually and in groups.
• Venture Capital: Institutional investors with
$2M threshold of $2M in exchange for equity.
7. The Path: Developing a Capital Plan
• “Starting a business can take twice as long and costs twice as much as
you think it will.”
• There are lots of ways to progress through the early stages of building a
business without raising large amounts of capital.
• The entrepreneur always takes the first financial risk.
• Never raise more capital than required to accomplish the milestones of the
business plan.
• Seek the advice and mentoring of business people, investors, and other
entrepreneurs.
• The SBA’s SBIR/STTR programs can be excellent sources of non-dilutive
capital.
• Stay tuned to state and local incentives for new company development.
• Angel investors who syndicate produce larger, more efficient capital
rounds.
• Very little seed and startup capital comes from venture capitalists.
• The investor controls the capital raising process.
8. The Path: Conclusion
• Every company and entrepreneur is unique.
• The milestones of the entrepreneur’s path are common
to all.
• Most startup companies do not survive the Valley of
Death.
• The best startup companies find ways to reduce their
seed and early stage requirements for external capital.
• Less than 2 percent of venture capital is invested in
early stage firms.
• Angel investors can be an entrepreneur’s best friends.
• Matching achievable milestones with the appropriate
capital source can simplify the raising capital.