The R&D community and the startup eco-system appear to have shared goals around solving problems via innovative approaches. This has resulted in many R&D organizations establishing outposts in cities with thriving startup cultures to tap into that energy. What are some of the connection points that exist between the world of R&D and the world of Startups?
I recently spent some time in San Francisco where everyone seems to be involved in some sort of a tech startup, and got fire-hosed with VC-speak on a regular basis.
In the majority of the conversations, there was the implicit assumption that the VC fueled startup was the primary path to success.
Going down that path requires the founders to either sell the company or go public - which is how the VC firms get their capital back. This blurs the development of a company with the VC funding fueled exit strategy.
Startup Development Phases
I did find it a bit disconcerting that the conversation was so one sided and rarely if ever touched upon companies that wanted to boot-strap their way into the marketplace without taking VC funding.
In looking to treat startup development and funding independently, Startup Commons provides an interesting framework that focuses on the first part.
It provides a progression for a startup across two dimensions:
- Product (“idea to business”)
- People (“founding team to organization”)
My sense is that the progression above can accommodate both a boot-strapped funding model and a VC fueled funding model. Additionally, I would call your attention to the following:
- There is a significant amount of work that needs to be done to get to a minimum viable product
- Break-even on the revenue (red line) does not happen until after the validation phase
Seed and Venture Capital Funding
A starting point is to understand the “commonly accepted” sources of startup funding:
- Friends and Family
- Angel Investors
- Seed Funding Firms (Accelerators, Incubators, etc.)
- Venture Capital Funds
In general, a startup that is going the VC route progresses through the following “funding rounds”:
- Seed Round (Source: F&F, Consulting, Angels, Seed Funding Firms)
- Series A (1st) Round (Source: VC)
- Series B (2nd) Round (Source: VC)
- Series C (3rd) Round (Source: VC)
- Mezzanine Round (Source: VC)
There are some important points to keep in mind regarding this path to VC funding:
- A VC firm will NOT fund a company unless it has successfully gotten to the point where it actually has a product and a market for it.
- There is a significant difference between Seed and VC funding e.g. Instagram (Seed round = $500K, VC Series A = $7M, VC Series B = $50M)
Seed funding appears to be very flexible term that describes the funding that gets a company to a minimum viable product and a minimal set of customers bringing in break-even revenue.
As such, seed funding is critical to getting the company to a point where a decision is made to either boot-strap or position the company to attract VC funding.
R&D Stages and Startup Development Phases
One thing I find interesting is that the Valley of Death in the above VC financing graphic is defined as the chasm between having a minimum viable product with no revenue, and having customers bringing in break-even revenue (which attracts VC investment).
That is radically different than what I have considered the Valley of Death, which is the chasm between R&D and Product Development.
Are the Startup and R&D communities using the same words but meaning different things?
I don’t know, but did highlight the differences below in mapping the Stages of R&D to the Startup Development Phases.
I will also note that, in general, Government as a source of startup funding is mentioned in the same breath as “Beware! Bureaucracy Ahead. A Job is Easier”.
While I think that does a disservice to both Government R&D organizations and the startup community, I do offer the following points:
- Government R&D organizations are not set up to provide VC type early or late stage funding, which means that their likely point of entry is as seed funding organizations
- A “standard deal” from an existing seed funding organization, like Y Combinator, is around $120K for 7% equity which I would argue could be easily matched or exceeded by a decent Government R&D organization
- However, good seed funding organizations are not just about the money, but about the training cohorts they set up, the mentoring they provide, and the access to the networks they make available to their portfolio companies
From what I can see, the challenge to Government R&D organizations establishing outposts in tech corridors is NOT the money/equity piece, but having credible answers to questions such as:
- Do you have a clear idea of where you fit in the startup eco-system?
- Which valley of death are you building a bridge over?
- What unique, non-monetary capabilities do you make available to your portfolio companies that differentiate you from other seed funding organizations?
I am very much looking forward to seeing how this plays out!
- Building a Bridge Across the Research Valley of Death
- Why Should Digital Service Delivery Organizations Conduct R&D?
- Startup Commons - Startup Development Phases
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This blog post first appeared on Anil John | Blog (https://blog.aniljohn.com). The opinions expressed here are my own and do not represent my employer’s view in any way.