In search of the early-stage startup, and why it’s important

By Editor October 14, 2013
SUB building

By Brian Kovalesky, StartUp Beat Editor

SUB buildingI have plans for a number of what I hope will be exciting new additions to StartUp Beat coming up between now and the end of the year; so I thought I’d delve into what is, essentially, the central question behind the site’s existence: What is an early-stage startup, and why is the distinction important?

First of all, in the media and in the general business vernacular, the ill-defined term ‘startup’ is used to refer to a broad range of ventures. Many of us are fascinated with visionary startups, entrepreneurs, new products and gadgets. In the mainstream media at least, startups have become an almost mythical representation of progress and innovation. Now, to what extent that is true is a can of worms that I won’t even touch in this piece, but suffice it to say that little attention is paid to a deeper analysis of what the word ‘startup’ means, and the various flavors of startup that actually exist.

Finding a way to more precisely define an ‘early-stage’ startup is difficult because ‘startups’ take on what can seem like an unlimited number of business types and forms; and founding teams bring wide-ranging growth plans and ambitions to the table. I’ve seen companies call themselves ‘startups’ that are ten years old, have a formidable employee base, and generate a solid and reliable revenue stream. And then there are ‘startups’ that are really rebranded reboots of older companies, or those that have spun out of big corporations or parent companies and try to take on the characterization of a new, agile ‘startup’—often for marketing purposes. I’m more interested in the upstarts—companies that are just getting off the ground, in many cases facing serious cash flow or funding limitations, and really innovating and challenging convention. For StartUp Beat, I’ve settled on a three-step approach to determining whether or not a company qualifies as an ‘early-stage’ startup:

1. It is no more than five years old: I know what some readers are thinking right now—five years old is a narrow definition and there are many instances where a business remains at its earliest stages well past the five-year mark. However, I’ve narrowed my definition to innovative companies with high-growth plans because most companies either have steady revenue streams or significant funding at five years—or they’re likely not around anymore. I’m sometimes approached by ventures that have a longer roadmap, a less ambitious long-term growth plan, and have been around far longer than five years that argue that they qualify as an early-stage startup. A limited definition is particularly important in this case because these companies are often categorized as (and often categorize themselves as) SMBs (small- to medium-sized businesses), and because SMBs serve limited markets, most often delimited by geography or niche, their ‘early-stage’ window is much shorter, in my view.

2. It has raised no more than Series A funding: A Series A raise is usually (but not always) a second significant round of outside investment and is likely in the millions of dollars. By this time, a company is more-often-than-not well on its way to steady growth or steady revenue—if its investors have done their due diligence, of course. In my mind, reliable growth and revenue are signs of maturity that provide the founders with a tremendous amount of stability, something I don’t associate with early-stage ventures.

3. Whether or not the founders/management consider it to still be an early-stage startup: For me, this is often the final measure of whether a venture qualifies. Beyond all of the complicated measures of a startup’s stage, the founding team carries the vision of what the company can become, and their sense of where it is in the context of this vision is perhaps the most important determinant as to whether or not their startup is ‘early-stage.’

I know that some entrepreneurs, investors, analysts and journalists believe that this distinction isn’t critically important. But I believe it is. Early-stage entrepreneurs are generally taking the biggest risks in the startup ecosystem. They’re the ones actually fulfilling the mythos of the tinkerer in the garage building something brand new and potentially transformative; and the hard truth is that most of them fail. At the same time, as opposed to investors focused on later-stage ventures, Angel investors and Seed-stage investors make huge financial bets on relatively low odds. As Angel investor Jim Eckstein recently wrote here on StartUp Beat: “I have news for people who want to get into Angel investing only for the money, in fact: go to Vegas instead. The odds are higher and value-add isn’t required.” These risk-takers are why I started StartUp Beat—to shine a spotlight on what these innovators are doing, at the earliest stages of their ventures.

That said, I’ll be at the DEMO Fall show this week in Santa Clara, an event that features early-stage startups debuting their products and services for the first time. I’ll report back next week on what I find there, along with some of the standout early-stage ventures I discover at the show.

What are your thoughts on defining early-stage startups?