One of the more common turn downs by Early Stage investors is to politely say that the deal under review "is too early for our fund."
“Early” is just one of those imprecise words that requires extra definition. If, for example, you ask several college students the definition of an early class you can bet the answers will range between 7 am and 11 am. You might even find a night owl or two who prefers to take a first class in early afternoon.
The same seems to be true for venture capital fund managers. Generally, most venture funds target companies by their stage of growth: Seed Stage, Early Stage, Expansion or Later Stage, etc. Occasionally you might come across a venture fund that is “stage agnostic” meaning that they review proposals in any stage of business development. And in an effort to further define early stage, some venture funds distinguish themselves as not Seed Stage, but “Early-Early Stage.”
The primary difference between a raw startup company and an Early Stage company is evidence of business progress. Early Stage companies can be characterized by the following attributes:
- Have a corporate organization in place, typically a “C” corporation
- Have developed a board of directors that meets at least four times a year consisting of respected independent representatives of the business community
- May have received one or more prior rounds of funding from company founders, their families or local angel investors
- May have filed patent applications, trademarks or taken other steps to protect the company's intellectual property
- May have developed a successful product or service prototype or tested a business model in an organized way
- Have impressive evidence that there are some highly interested first adopters or customers in place for the company’s technologies, products or services.
- Have progressed to the point where entrepreneurs can shift their talking points from what they “think” to what they “know”
- Have a clearly defined commercialization and sales strategy in place
Sometimes established Early Stage funds will selectively consider Seed Stage companies if their technologies are backed by a university or other strategic partner that will help accelerate the company's progress post-funding.
Fund managers may also be a little more lenient with Seed Stage companies that are located close to the venture fund’s headquarters. There are meaningful cost, time and communication benefits when fund managers can meet regularly with a portfolio company’s management to review results during the tricky trial and error period of product development.
Young companies may have the best chance of getting an easy pass to Early Stage funders if they are managed by an experienced CEO who previously led an investor-backed company to a successful sale. VCs prefer to invest in new technologies that are managed by experienced entrepreneurs than new technologies that are managed by first-time entrepreneurs. Being perceived as "too green” in terms of management experience will often lead to the dreaded "too early" investor turn down.
So what can "too early" entrepreneurs do to appeal to Early Stage funding sources? Here are two ideas. First, focus on regional or smaller size venture capital funds that may have lower financial return expectations than larger funds. And second, revisit the list of general criteria that tends to define Early Stage companies. Take six months or so to create some tangible progress, update the business plan and then circle back to the Early Stage venture funds once again.