The Wind, the Cliff, and the Plane — Understanding Early Stage Tech Startups and Rounds

When I worked at LinkedIn in 2015, I remember attending a Reid Hoffman talk about startups, and there was a metaphor that he spoke of that I never forgot — a startup is like jumping off of a cliff and building an airplane as you plummet to the earth. You either build the airplane and pull up or dramatically crash into the ground. Another metaphor I am quite fond of comes from Sumon Sadhu, a global angel investor, and Chairman of Uiflow. Sumon sees startups as surfers who catch a wave (emerging market condition) and ride that wave with a surfboard (innovative new product). Throughout my own entrepreneurial journey, I have started to develop an extension of these two metaphors — the wind, the cliff, and the plane.

The Wind

All successful startups begin with an observation and an idea. You, the founder, must first recognize an opportunity, typically surfaced by an emerging market condition, or as Sumon puts it, the “wave”, followed by an idea for a product to ride that wave. Some examples of emerging market conditions are reduction of battery costs, changes in social behavior created by the 2020 pandemic, the emergence of cryptocurrency, etc.

When companies are built at just the right time, i.e. when there’s a sudden gust of wind near the cliff (emerging market condition), you have a real chance of leveraging that wind to carry whatever aircraft that you build through the air. Without a strong gust of wind to boost an unwieldy aircraft, the chances of success drastically diminish.

The Cliff

Everyone has ideas. But only a thin slice of the population has the guts and willpower to take action on those ideas. The first step is always the hardest one, which may be quitting a job, turning down a job, dropping out of school, etc. This is the moment when you intentionally (and hopefully in a calculated manner!) step off the cliff, knowing very well it could result in disaster. Typically, founders will step off the cliff with no funding at all (bootstrapped company), or they will have a small amount of funding from an angel, i.e. pre-seed investment, which gives them a very short runway, say 6 months to a year.

According to Investopedia, As of 2019, startup failure rates are around 90%. 21.5% of startups fail in the first year, 30% in the second year, 50% in the fifth year, and 70% in their 10th year.

The Plane

Your company is the plane. You are the pilot. To build the plane and pull it up, you’ll need to assemble very specific parts in the right order. Your goal is to eventually achieve escape velocity (where the plane flies on its own power).

Pre-seed

In order to reach the pre-seed stage (i.e. get pre-seed funding from an angel), you will need to prove that:

1. There is a market
2. The opportunity is $1B+
3. You can build an MVP (ideally you already have a prototype)

Expect to raise between $100k — $500k. Once you make it to the pre-seed stage, you are mostly focused on building an MVP. This is the stage where your plane is falling straight to the ground, and you are desperately attaching the wings and controls in order to pull up before crashing.

Since pre-seed stages are relatively short, the immediate goal is to set yourself up to raise a seed round from an established VC (venture capitalist). You might hire a couple of contractors or full-timers as well.

Seed

In order to reach the seed stage (i.e. get seed funding from a VC), you will need to prove that:

1. Your MVP delivers real value
2. You have revenue or at least have meaningful contracts underway
3. You are able to operate the company

Expect to raise between $1M — $5M. This is the stage where you pull the plane up just enough to avoid a crash and glide horizontally for a bit. Once in the seed stage, you are now focused on validating PMF and building a production-quality product.

You now have enough capital to give yourself at least two years of runway to continue building, and you can also hire a small team to turn your MVP into a production-ready, reliable product. At this stage, if PMF were an equation, the market term is now constant. The product term is variable. It is quite possible that your product will greatly evolve in this stage in order to obtain product-market-fit. Financially, your next immediate goal is to raise a series A.

Series A

In order to reach the series A stage, you will need to prove that:

1. You can build a production-quality product
2. You have PMF (product-market fit)
3. You have serious annual revenue
4. You are able to build and lead the team

Expect to raise between $10M and $20M. This is the stage where your plane begins to fly and starts to ascend, fully leveraging the gust of wind (market condition). Once in this stage, you are now focused on product building and company building.

The series A stage is all about scale. While pre-seed and seed are focused on zero to one, the series A stage is focused on one to n. Now is the time to create a fully fleshed-out company, including HR, full-time recruiters, marketing, a repeatable sales process, support, multi-team R&D, leaders for each function, etc.

Later Stages and Outcomes

From here, the possibilities start to branch pretty quickly. So long as the company traction and revenue continue to grow, additional funding rounds are common next steps to position the company for a successful IPO (initial public offering), in which case all of the company shares that had been distributed up until that point become liquid (you can sell them).

There are, however, other scenarios that could occur. For companies that are close to running out of runway, without a clear path to profitability or future fundraising rounds, a soft landing acquisition is fairly common, where the company is bought at a fairly low price, at least enabling the investors to get their money back with small profits, the founders and execs to make some money, and the rest of the company to keep their jobs. Not ideal, but better than crashing and burning.

In a better acquisition scenario, the company has tremendous value and is not running out of runway. These companies could be bought at a really high value, enabling the investors, founders, execs, and everyone at the company to make a lot of money from their shares.

Also, never forget that death is always around the corner. A critical misstep at any of these stages, including pre-seed, seed, series A, B+, etc., can stall or nose-dive the company.

Good luck!