We talk to companies at all stages of entrepreneurship, from a nascent idea to a full-fledged business plan. Sometimes, there’s a lot of speculation and discussion about what the company could be; other times, there’s a pretty clear idea of what to build, and the focus is on execution and marketshare acquisition.
I tend to think of four distinct phases that a new venture goes through, and this affects how I’ll screen a prospective investment or interview a founder. The following chart shows these four phases, and their areas of focus.
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How the four stages affect a pitch
When I speak to a founder, that founder has to do several things:
- Be aware of the stage they’re at now. A founder who talks about scaling the business, or moving into adjacent markets, without having proven that their product can be sold, is focusing prematurely on the wrong things. This is almost always a very bad sign. In a lean startup, self-awareness is everything.
- Prove to me that they’ve completed the previous stages. In many cases, a founder will say, “I’ve talked to five people who said they would buy it” and proceed to emphasize market-stage tasks, when in fact they need far more product validation. This is a bad sign, because it means they’re satisfied with weak proof and tend to look for the answers they want to hear.
- Prove to me that they understand the challenges of the stages that lie ahead. The other common discussion I have with people is their belief that because they’ve proven the technology, they’ll magically reach their market in a profitable manner. This is also a bad sign, and it’s common among technologists who don’t recognize that selling and scaling are hard.
That’s not to say founders don’t do this well. One team we met had done primary research, scouring their competitors’ sites for over five hundred data points that they used to prove the need for what they were doing. Another had set up a variety of tests using Google Adwords to narrow down the market. In a third case, the company had built a tool for themselves, and sold it to several other companies, but needed help reaching a global market and positioning what they did clearly.
In each case, we had the evidence we needed to focus on later stages. Our discussions quickly moved to the places where we could help them, rather than on second-guessing the ideas and products that they had taken for granted.
The role Year One Labs plays
These stages don’t just affect founder pitches. They also change how we get involved with companies.
If a founder comes to us with an idea, then we have tremendous latitude to shift what they’re working on. We talk about targeting different markets; offering a product versus a service; changing from direct to channel distribution; targeting the buyer or the seller in an ecosystem; modifying how it’s sold and marketed; applying the core technology to a narrower market; and so on.
On the other hand, if the idea has been validated, then we talk about turning it into a product that can be sold. This is about getting signatures on the page. We’re trying to understand why someone didn’t buy, enroll, retweet or share — and iterating as quickly as possible. We have a lot less wiggle room within the scope of the idea we’re exploring, but it’s always possible to throw out the idea and go back to an earlier stage.
Some entrepreneurs have already proven their idea and turned it into a product that they’ve been able to sell. At this point, what they need is help with positioning, market segmentation, and the ecosystem that surrounds them. They need to show that the product can be sold to a market, rather than just individuals. Marketing defines a market as a group that is “homogeneous within, and heterogeneous between.” That means a group with similar needs, that can be reached through specific media or channels, and for whom a particular message resonates. If you’re making diapers, then the market for the very young is completely different from the market for the very old, and nearly everything about your go-to-market strategy changes despite the fact that the product itself is identical.
We generally don’t talk with companies in the fourth stage, where the emphasis is on running a sustained business — they need too much money, and we’re not management consultants. They need to hire a CEO with management experience, and if they can demonstrate that they’re completed the first three steps, they should be able to do so fairly easily. We might use our network of advisors or investors to help them get the capital and leadership they need to grow.
The changing impact of founders
These four stages occur in nearly every company. And yet they’re painful for many founders to envision.
A technical founder is comfortable with learning, testing, building, and iterating — key parts of early-stage entrepreneurship — but often can’t sell or manage. Selling involves simplifying and distilling a complex message into a basic, repeatable soundbite that naturally omits many of the product’s features — something a proud creator is unwilling to do. And managing a business involves favoring predictable, repeatable processes over the kind of late-night, diving-catch heroism that produced the first products and early customers.
In later stages of a startup, it’s often wise to move the foundersinto innovation and disruption, since that’s where they’re most comfortable. But aspiring entrepreneurs hate this: they don’t want to take a back seat, and can’t conceive of a world where they’re no longer involved in every aspect of a business.