Friday, August 14, 2009

A Matter of Stage

The terms seed stage, early stage, and startup are bantied about as if their definitions were self-evident (or more likely as if their use were intended to evoke an emotional response without regard to the precision of their meaning). But the meaning of these terms in context is crucial to understanding the availability of funding for innovation, and just why SBIR and similar resources are so critical to the well-being of our economy.

The following definitions come from PriceWaterhouseCooper's MoneyTree™ report:

Seed/Start-Up Stage: The initial stage. The company has a concept or product under development, but is probably not fully operational. Usually in existence less than 18 months.

Early Stage: The company has a product or service in testing or pilot production. In some cases, the product may be commercially available. May or may not be generating revenues. Usually in business less than three years.

Expansion Stage: Product or service is in production and commercially available. The company demonstrates significant revenue growth, but may or may not be showing a profit. Usually in business more than three years.

I attended a luncheon yesterday ostensibly addressing "The State of Angel Investing." Oddly, the speaker, Joe Kremer, director of the Wisconsin Angel Network, insisted against all evidence to the contrary (and providing none of his own) that "Venture Capital is entering into more and more earlier stage deals."

Um... what? He provided a chart of the "Financing Continuum" (which to his credit is a very clear and useful resource -- a larger version of the chart can be found on p. 4 of the Wisconsin Technology Council's report "Wisconsin Portfolio"). If you look at Kremer's version, you'll note a line running through the middle of "Product Development" and toward the end of "Start-Up Funding". To the left of that line is what Kremer called "early stage". Venture Capital is almost entirely above that line.

"Do you mean that VCs are funding more deals below that line, because my understanding and experience say that VCs have no interest, 0% in funding pre-prototype R&D." Uh... well, I consider prototype a pretty early stage event, was his reply.

Down at the earliest level of funding is SBIR/STTR. It rivals only the Four Fs. In other words, without SBIR for seed stage funding, only the wealthy can afford to enter the realm of innovation. Anyone can have a great idea, regardless of their present financial status.

If founders, family, and friends are simply not able to provide the seed capital to develop that idea into a proof-of-concept then a prototype, and no other source of funding is available, that idea will die. Period!

SBIR provides a means for open competition of ideas to gain such funding that is simply not otherwise available: no where, no how.

It's all about seed capital!

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