As a frequent advisor to new entrepreneurs and startups, I often hear your frustration with being treated differently from other startups by investors, on expectations for valuation, traction, and market size. Of course, it could be your level of experience, or the quality of your team, but the difference is often more related to the lifecycle stage of the market you are trying to enter.
For example, if your idea is so new and different that it implies real social or technological change is necessary before widespread acceptance, investors will define your market as nascent or unproven, and be very reluctant to fund you, no matter how convincing your projections may be. On the other hand, if the market is super-hot, many will be willing to jump in to make your case.
So rather than being stressed out by the seeming inequities, I recommend that you take a realistic look at where your startup fits in your market lifecycle, and adjust your expectations and arguments accordingly.
I found some good guidance that supports my own view in this regard in a new book, “Startup Myths and Models,” by Rizwan Virk, who has been there and done that. Both of us have found it very useful for you to first position your startup in one of the following market lifecycle stages, and then set your strategy and expectations accordingly:
1. Emerging technology stage with signs of future potential. The market at this point is largely unknown and untested. This is normally the domain of technologists and idea people, often using the term “disruptive innovation.” Valuations here are always low, and funding generally depends on friends and family, or a few forward-thinking angels.
For many years, startups featuring all-electric vehicles fell into this stage of the business lifecycle. Everyone knew these had potential, but had not demonstrated success to date due to infrastructure and support requirements, or cost constraints. Finally, Elon Musk and Tesla were able to break through, using their own funding and proven credibility.
Now the emergence of autonomous and driverless vehicles fits into this nascent future potential category. I don’t recommend an expectation of funding on that one just yet.
2. Market is recognized as real and growing by investors. Influencers are talking about this opportunity as one of the “next big things,” like the Internet of Things (Iot) or artificial intelligence (AI). Many investors and big companies are putting money into this space or adding it their product line today. Typical valuations range from 3x-5x revenues.
In the last couple of years, Nest's smart thermostat has put IoT in the “real” category and Amazon's Echo product accelerated the industry forward toward AI as able to deliver real value to consumers. Now is the time to fund your startups touting these capabilities.
3. Everyone feels behind the curve of a super-hot market. One or more startups here have already proven the market and achieved unicorn status, such as Uber and Airbnb. Investors are rushing to offer ridiculous valuations, even to pre-revenue startups, to keep from missing out. Your challenge is to get there quickly, before market saturation occurs.
Once Uber made the ride-hailing market hot, a whole host of competitors have jumped in with immediate high valuations, with or without traction, including Ola, Careem, Taxify, and many others you never heard of. Of course, getting money doesn’t assure success.
4. Market is maturing with consolidation as a key driver. There is still an opportunity to make money, but market leaders have already emerged. Very few new startups are getting funded at this stage, and existing ones are looking for strategic partners and being acquired to achieve continued growth. Valuations are back to 3x-5x revenues.
Amazon is a great example of continued growth through consolidation in the maturing ecommerce market, having acquired or invested heavily in over 100 companies and startups. If you are an ecommerce startup, this may be your path to fame and fortune.
5. Focus shifts from growth to profitability as a mature market. Established company process rules and metrics now characterize the leaders in this market stage. Outside investors may no longer are interested in this space, unless your startup brings a new technological innovation that can undermine the base, or attract a new market segment.
Because startup markets change quickly in today’s world, understanding the lifecycle stages will help you avoid frustration, and make more effective decisions on when to start, how much funding to expect, and the ideal way to exit your startup. I recommend it, since it is a lot more fun to enjoy the startup journey, as well as the destination.