When you go on any adventure it is a good idea to have a map! Sometimes a detailed map is important, particularly if you are heading off road and want to know the contours and gradients of the hills. Sometimes a simple map is all you need! To that end, in todays post I provide a treasure map of sorts that depicts a 'Route 1 Football' journey for a startup.
At the beginning there is an idea. "You are Here' kind of point. Through the MVP (Minimum Viable Product) phase the founders are trying to shape that idea into something that the market wants and needs. With enough credibility from this phase there is the potential to raise funds, a small amount - roughly speaking up to 500K.
Seed funds are typically used to round out the platform that was put together quickly and with limited scope for a specific set of target demographic. With this more robust platform the rest of the demographic can be reached. Then the credentials are needed to raise the next phase of capital -Series A.
With Series A cash, the typical drive is to expand from the first target demographic to another, perhaps more profitable set. Rarely is seed or Series A cash used to go international. It might however be to reach a different home state geography.
Over subsequent rounds (Series B, C, D, ...'N'), the capital is used to expand the team, the platform, the demographics, the geographies or the product lines until the point where there is a tangible exit available.
Exits principally take three positive forms, and one negative one - Death - which of course may happen at any time. Of the positive outcomes, the most commonly discussed is IPO (Initial Public Offering) where the equity of the company becomes publicly traded on somewhere like the NASDAQ. For this to be achieved there usually needs to be more than hype. There needs to be predictable revenues and robust management structures. With this kind of organisation another legitimate exit approach is to run it as a mature Private corporation, that pays dividends to its original founders and equity holders.
The third popular exit point is that of a trade sale, typically to a larger - probably publicly traded organisation. Such organisations seek the innovation, the team, the customers or sometimes just the revenues of the startup and are prepared to pay for them in the belief that they can make more in the long term through the acquisition.
From idea to exit is typically a horizon of 5 to 7 years. Any exit prior to that will be for reasons unique to that situation. Perhaps an acquihire or a spoiler purchase (to remove the idea from the market) or perhaps a purchase by another, better funded, startup looking to grow even quicker.
The use of growth funds is to accelerate the journey faster than could be achieved through revenues / profits. It is predicated on the notion that innovation can take a while to mature, and that to bring any meaningful innovation to market there has to be a period (of whatever size) where it cannot be supported by its own revenues.
The people and institutions who invest along the way do so knowing that the startup has a high chance of failure along the way. Within the first two years up to 90% of all startups will fail and the risk profile gets easier as the years go on. When balancing their portfolios the investors must therefore seek a multiple of their investment over time. A 10X return on seed investment is not unreasonable alongside such high failure rates, although it may seem a very high price to pay compared to debt or other alternative mechanisms.
Please keep in mind that I throw this simple map out there as a reference point. It's not designed to answer all questions or to be the only route for everyone to follow. It's more of a benchmark from which you can bring some context to your own journey. I hope you find it useful :)
S.
