WHAT IS A STARTUP
Note: This text is no objective truth, but should be regarded as a highly personal opinion from me, Karsten, the initiator of this site. There is no universal accepted definition of what a startup is, and this definition below is highly influenced by people like entrepreneurs Daniel Marklund and Anton Johansson, and business angels such as Göran Tollstam. And atleast 20+ others, that I have had lengthy conversations on this theme with.
Update: a newer and more detailed version of how funding works and startups is available here – How does funding work in Nordic startups.
STARTUP = GROWTH
The best short definition of what a startup is, is Paul Grahams’s startup = growth. However, a longer answer, and an answer that is useful for people new to the world of building companies, is somewhat harder and more complex.
“A STARTUPS LIVESPAN”
A startups livespan, or the startup path, is a way that is a defacto thruth in the tech-startup world. Here in Scandinavia we have, unfortunatly, a lack of knowledge regarding what a startups livespan looks like, and what steps it includes. This leads to a lot of bad and unneccesery investments and conflicts. Something I hape to help minimize with this text.
THE SILICON VALLEY WAY
For those following the Silicon Valley model for startups, a startup can be divided into two categories:
- Bootstrapped
- Funded
A bootstrapped startups is a startups where the founders themselves, or the early costumers, fund the company and growth of the company. This is a company that uses it’s revenue to acquire further costumers, and thus grows. This is also referred to as growing organically sometimes.
A funded startup is a company where one or more investors put money into the company, and thus enable the company to develop it’s services or to acquire costumers, without the need to be cash-flow positive. The company has received the funding in order to grow quicker or to develop a new technology that takes time before it can earn money on a larger scale.
The funding process itself, can be divided into 3 different steps:
- Pre-seed
- Seed
- Series A
- Series B
- Series C
- Further series
And the “goal” of a startup is one of these three:
- IPO
- Being acquired
- Private Equity
PRE-SEED INVESTMENTS
Pre-seed is usually the very early stage investment, often done by either a business angel, or what is known as the FFF – friends, families and fools. However, for Swedish and Danish startups, this is not really the case. Unlike the U.S., an entrepreneur in Scandinavia relatively seldom has friends or family that has the € 15 000 – € 100 000 needed to get a startup going, because few people here are rich enough in that sense. However, in Scandinavia public grants often replace the FFF stage – be it Swedish Tillväxtverket or Danish Fonden for Entreprenørskab. These can often give grants in the required ranges – if your startup is working on a tech solution which is “hot” and fits into any of the numerous grant schemes.
Pre-seed is usually in the € 15 000 to € 100 000 range, and usually for 0 – 10% of the equity / shares in the company. The valuation is often around $ 1 000 000 (€ 700 000) if done correctly. A much lower valuation can cause serious problems later and actually be the bane of the startup in the long run.
Pre-seed is usually in the € 15 000 to € 100 000 range, and usually for 0 – 10% of the equity / shares in the company. The valuation is often around $ 1 000 000 (€ 700 000) if done correctly. A much lower valuation can cause serious problems later and actually be the bane of the startup in the long run.
SEED INVESTMENTS
The seed investment is the next stage. Seed investments are usually by business angels, or business angel syndicated (multiple business angels investing together), or by early seed stage VC funds.
At this point there is one very important detail: you need to have the right valuation of your startup, otherwise it will have a hard time to raise money in the next round!
Making a valuation of a company is always hard, and it is even harder for a young startup. For that reason, those business angels and VCs that know what they are doing will actually not do any fancy calculations on your valuaion. Rather, it is kept as simple as possible: a startup at an early stage for a seed investments, is deemed to be valued at $ 2 – 4 000 000. Often a rule of thumb is that if it is your first real startup, then the valuation is $ 2 000 000, while if the the second or later the valuation can be $ 3 000 000 or $ 4 000 000. Either that, or $ 0. This way, there is no need to argue over the exact valuation, and the amount of time wasted on negatiatons is reduced a lot. It also makes it rather simple to get a grip on how much equity the investor(s) should have – it totally depends on how much money you need to reach the next funding.
That the valuations are in U.S. dollars is because that is the standard internationally.
Seed investments are usually between 5 – 25 % of the shares, and usually € 50 000 – € 1 000 000.
At this point there is one very important detail: you need to have the right valuation of your startup, otherwise it will have a hard time to raise money in the next round!
Making a valuation of a company is always hard, and it is even harder for a young startup. For that reason, those business angels and VCs that know what they are doing will actually not do any fancy calculations on your valuaion. Rather, it is kept as simple as possible: a startup at an early stage for a seed investments, is deemed to be valued at $ 2 – 4 000 000. Often a rule of thumb is that if it is your first real startup, then the valuation is $ 2 000 000, while if the the second or later the valuation can be $ 3 000 000 or $ 4 000 000. Either that, or $ 0. This way, there is no need to argue over the exact valuation, and the amount of time wasted on negatiatons is reduced a lot. It also makes it rather simple to get a grip on how much equity the investor(s) should have – it totally depends on how much money you need to reach the next funding.
That the valuations are in U.S. dollars is because that is the standard internationally.
Seed investments are usually between 5 – 25 % of the shares, and usually € 50 000 – € 1 000 000.
SERIES A INVESTMENT
A series A investment is the first investment most VCs will do. VCs are often limited in what the smallest amount they can invest in a company is, and that is often in the € 100 000 – € 200 000 range. Less then that they simply cannot invest without stretching their resources too thin.
As with the Seed round, a series A round also has somewhat of a fixed valuation. Usually it is between $ 4 000 000 and $ 15 000 000. This makes it relatively easy in negotiations as well. And this also makes it so important that earlier investments are done “right” – if a startup would have done a seed round where it would give away, say 40% of it’s shares for € 100 000 – a deal that for a first-time entrepreneur can seem like a lot of money even if it is a way to low valuation, then it will be very hard, if not outright impossible, for the startup to get to a further round of funding. Which might very well spell the doom for the startup.
Also for many VCs it is very important that the founders still retain 50% of the ownership in the company even after the Series A. It is important for everyone that there is a hard focus on making a successfull company, as it requires a lot of hard work. To little ownership often makes the founders not committed in the long run, which is bad for VCs as it is their money that is being invested.
Series A investment is usually around € 500 000 – € 5 00 000 for 15 – 20 % of the shares.
As with the Seed round, a series A round also has somewhat of a fixed valuation. Usually it is between $ 4 000 000 and $ 15 000 000. This makes it relatively easy in negotiations as well. And this also makes it so important that earlier investments are done “right” – if a startup would have done a seed round where it would give away, say 40% of it’s shares for € 100 000 – a deal that for a first-time entrepreneur can seem like a lot of money even if it is a way to low valuation, then it will be very hard, if not outright impossible, for the startup to get to a further round of funding. Which might very well spell the doom for the startup.
Also for many VCs it is very important that the founders still retain 50% of the ownership in the company even after the Series A. It is important for everyone that there is a hard focus on making a successfull company, as it requires a lot of hard work. To little ownership often makes the founders not committed in the long run, which is bad for VCs as it is their money that is being invested.
Series A investment is usually around € 500 000 – € 5 00 000 for 15 – 20 % of the shares.
SERIES B INVESTMENTS AND FURTHER
After series A it gets more complicated. Now there suddenly is no fixed measurements anymore, and by now the startups has dozens of employees and hopefully a fast growing costumer or user-base. Series B and onwards, with series C being relatively common but series D or E quiet rare, the entrepreneurs themselves are not that active in the deals and the valuations. Once you are here, you will have enough knowledge and know-how around you, to take you further on the startups path.
“THE END”: IPO OR ACQUISITION
If you take funding, then the investors wants a return on the investment sooner or later. This often comes either thru the startup being acquired by a bigger corporation, or by being listed on a public stock exchange, in an IPO – initial public offering. Some frown down upon acquisitions, saying that only IPO, or even better, private equity, is the only real way to build a world-changing company. However, that is a luxury few entrepreneurs can achieve, and an acquisition might do wonders for the entrepreneurs and investors, who get money to build or fund new startups.
BOOTSTRAPPED VS FUNDING
The above is true if you have received funding. However, there are entrepreneurs who view funding as something negative and to be avoided. Especially in Scandinavia. And as we can see above, a round of funding done the wrong way, can actually be the end of your startup. And it already has meant the end for many startups. Therefor it is not without reason that there is a mentality of scepticism against funding amongst some entrepreneurs.
This is by no means wrong. However, if a startup wants to continue to grow, it quite almost always takes some investment sooner or later – even if the founders are against VCs and funding in the beginning, the pure fact that the right investor can help any startup grow dramatically, often means that they change their minds a couple of years in.
However bootstrapped companies that receive funding later can often “skip” one or two steps in the investments path – a startup that has grown organically often has no need for a pre-seed, and maybe not even for a seed round. And if it has done really well, maybe not even a series A round.
Thus, the main difference between bootstrapped and funded startups is often only the first couple of years – in the long run, they follow the same path and the same funding challenges. That is if the ambition is to grow big.
