(EDITOR’S NOTE: The article that follows is the second in a two-part series describing the three-stage process that Tech 20/20’s Center for Entrepreneurial Growth uses to help start-ups in the Innovation Valley go from pre-revenue to growth.)
One-half of the active clients of Tech 20/20’s Center for Entrepreneurial Growth (CEG) are in Stage 1 which is characterized as pre-revenue. Those that graduate to the next level have developed a prototype, validated market opportunities, and started pursuing seed or angel investments.
The dozen that are in Stage 2 have gotten to that level in one of two ways – either graduating from Stage 1 or being admitted without going through the initial level.
“If you’ve managed to sell your product, we will bring you in at this stage and work on the other items as required,” said Shawn Carson, Director of Venture Development He cited local start-up StallTalk as a classic example. It has sold product, but became a CEG client through its selection by the East Tennessee Regional Accelerator Coalition (ETRAC) as a high growth company. CEG is a key partner in the TRAC initiative.
“The business model is the big thing in Stage 2,” Carson said. “It is the framework your company has to move money through the organization. It is the heart of the business plan.” The business model usually changes several times as the startup begins to get valuable market feedback from customers. “This is why startups need to be quick and nimble,” He explained.
As a company progresses through Stage 2, Carson said that the start-up will face a number of critical issues.
- Understand the value proposition from the perspective of customers.
- Understanding the customer segment more fully than was done in Stage 1.
- Defining the start-up’s core capabilities or competencies.
- Identifying partnerships that will be needed for success.
- Identifying key internal and external resources that are required.
- Determining the cost structure.
- Understanding the revenue stream.
Carson explains it simply as answering three questions – What do you do? What do you make? Who are the customers?
“They frequently don’t understand how they are going to make money at this stage,” Carson said. “Sometimes the end user is not the one making the buying decision.”
He added that key indicators for companies to graduate to Stage 3 include securing an initial paying customer in the start-up’s target market, having an advisory board in place, and being able to validate financial projections.
“They also have to think about sales,” Carson says. “We are turning them into sales managers.”
Companies that reach Stage 3 and are classified as growth start-ups are “starting to leave the nest,” he says in describing them as being run by a board.
Carson says they are growing and beginning to address issues like establishing more robust accounting systems, securing certifications such as ISO 9000, and determining strategies for addressing the inevitable “brick wall” crisis.
“It’s different for everybody,” he says in referring to the inflection point that will determine failure or success.
Another key question that an entrepreneur in a Stage 3 company has to face is whether or not he/she is the person best suited to grow the start-up. In Carson’s view, many start-ups will have as many as three Chief Executive Officers – one who starts the company, another who secures the early sales, and the third who is focused on growth. Sometimes, you find all three in one person but typically you do not.
“It’s a transition we try to prepare the founder for, either by developing the skills for the next level or being open to stepping aside when the time comes,” Carson said.
Companies that graduate from Stage 3 have a predictable and repeatable sales process generating at least $1 million in annual sales, a successful Series A funding round if needed, revenue from partnerships, and an identified exit strategy.