I’ve heard several very good pitches within the last several weeks, which prompted me to think about the differences between pitching companies at various stages of development.  The bulk of my personal experience, both in pitching and being pitched, comes at the earlier stages of Series A and B stage companies though I’m plenty familiar with later stages as well.

I decided to breakdown various stages of funding into the central theme of which entrepreneurs must convince potential VC investors.  I use the labels “Series X” simply as a guidepost here for stage of development.  We’ve all seen companies that might be raising their “Series A” round that have been boostrapped to a much later stage of development (post-revenue, etc).  Similarly there are plenty of startups that raise a small seed/angel Series A such that their B round is more akin to most companies Series A.  And once you get into much later rounds of funding it all becomes a blur… how do you distinguish a Series F from Series G?

But overall, both entrepreneurs and VCs often describe a startup’s stage of development to an approximate round of funding.  I find it striking how closely successful fundraising correlates to successfully communicating the central themes below.  Without further ado, here’s the framework as best I see it:

Entrepreneurs who succeed in raising a first round of VC funding have essentially established plausability of three things:  suitable market opportunity, some ability to differentiate, and a core team’s ability to get it launched.  The suitable market includes all the parameters that VCs want to see:  large addressable size, mkt dynamics which permit new entrants, etc.  Differentiation is the “special sauce” that a startup’s innovative technology, product, and/or business model provide.  And the founding team has to establish why they have a reasonably high chance of getting the startup off the ground (based on prior entrepreneurial experience, domain expertise, etc).  

The point here is that the standard of “proof” is a high degree of plausability on all these dimensions… not proven beyond all reasonable doubt.  And what I mean by plausability is a relatively high standard of potential, rather than a 1 in 1,000,000 chance of “if all possible stars align we might have a chance of succeeding”.  Startups that are unable to raise a first VC round have generally failed to establish high plausability along one or more of the market, differentiation, and team issues above.  

Proving a concept means different things in different sorts of industry sectors.  For a consumer-facing company it generally means product launch with some compelling, if early data on usage and often even initial revenue.  For companies with B2B software business models, it usually means an initial set of customer wins.  It might be design milestones for a semiconductor startup, or clinical trial data for a life sciences startup.  The point is that raising a 2nd round of VC financing almost always means that a company had proven it’s vision at least on a limited scale.

When you see startups raise “inside” Series B rounds from their existing investors, it could mean that the Ser A VC(s) are so overwhelmingly thrilled with the progress that they want to “keep” the round to themselves.  But more often than not, it means that the company may have progressed but either not to a full proof of concept or that the proof cannot easily be validated by an oustide investor.

Starups raising a 3rd round of instutitional funding have generally demonstrated certainty in their business at moderate scale.  This could mean a clear track record of revenue growth, possibly even reaching breakeven or beyond.  It might mean other things in other sectors, but ultimately it’s clearly more than proof at a conceptual level.  On the continuum between experimentation growth, a Series C startup is clearly closer to the latter than the former.  We’re talking pour gas on the fire, not keep striking the flints and praying.  

A majority of startups raising a Series D round could quite probably get away with not doing it if they absolutely had to.  They might have reached profitability in their core business, or even if they’re still funding burn they’re often sufficiently developed to have legitimate opportunities to be acquired.    You often hear of companies raising a later stage round (Ser D, E, etc) on an “opportunistic” basis… to pursue international expansion, acquisitions, entry into adjacent product categories, etc.  Late stage investors who play in these rounds typically emphasize historical growth metrics as much as the other facets (team, mkt oppty, etc).  

Like any framework, there’s always plenty of exceptions that fall outside this construct.  But it’s been my experience as both an entrepreneur and VC investor that the startups that do well in fundraising do so because they’ve honed their pitches to fit these broad themes.  

For what it’s worth, I believe the converse holds true for VC investors.  I’ll do a follow-up post on this sometime soon, but investors who focus on Series A companies typically have a different mindset and approach than those focused on Series D startups.  To do either well, VC investors have to be clear with themselves what they should be looking for in a startup at a given stage.