In thinking through the two most recent posts on 5 Ways to Identify Product/Market Fit and 5 Quick Steps to Go From Product/Market Fit Focused to Customer Acquisition Focused, it became clear to me that there’s value in organizing the startup lifecycle into generic stages. With simple stages, it’s easier to communicate and focus in on what’s important when talking with entrepreneurs (e.g. how often have you heard entrepreneurs worrying about scaling their product when they don’t have customers yet).
Here are the four stages of a B2B startup:
- Stage 1 – Search for Product/Market Fit (1 – 2 years)
This involves putting the core team together, building a simple version of the product, signing the first 20+ customers, and honing in on the needs of the market. Most startups fail in this stage. - Stage 2 – Build a Repeatable Customer Acquisition Process (1 – 2 years)
This involves experimenting with a number of different sales and marketing tactics to find as many channels as possible that work in a scalable, predictable fashion (e.g. if you can do something repeatedly but only sign one customer a month, it doesn’t count because it doesn’t have scalability). If the market timing is right, product / market fit is in place, and the team executes, the necessary inputs to achieve the desired outputs become clear and it’s time to step on the gas. - Stage 3 – Maximize Growth (indefinite)
Once it’s clear there’s a repeatable customer acquisition process with scale, it’s time to focus on growing the business as fast as possible. This involves ramping up sales, marketing, engineering, services, support, operations, etc, implementing more processes and procedures, and scaling the corporate culture. As long as the business is growing north of 20% per year, it’s full on maximize growth mode. - Stage 4 – Maximize Profitability (no longer a startup)
After the core growth engine of the business slows down it’s time to transition to maximizing profitability. Most businesses in this mode give some attention to growth and most attention to profitability (and profitable growth, where possible). When attention to profitability is valued over growth, and change has slowed down, it’s no longer a startup.
These are the four stages of a B2B startup. Between each stage there’s no clear line of demarcation, but it helps to know where the startup stands so as to focus on the most pressing issues. Each stage has it’s own nuances and entrepreneurs that have built a successful business can appreciate the differences.
What else? What are your thoughts on these four stages of a B2B startup?
Bonus: Read about the 4 Stages in 8 Words.
David Cummings on Startups 
Dave, in terms of a B2B SaaS company, what sort of revenues, head count and burn can you expect in each stage?
It really comes down to factors like average deal size, length of sales cycle, market dynamics, etc. As a rough ball park, I’d say:
Stage 1: 4 – 10 people
Stage 2: 11 – 25 people
Stage 3: 25+ people
For revenue, I’d say $150k/employee/year.
Dave-
With experienced entrepreneurs do you see any shortening of the first 1-2 stages?
I see experienced entrepreneurs doing a better job of staying super focused and not chasing non-core ideas so that they can shorten first two stages.
I definitely agree with your stages, David. What makes the stages particularly difficult is that venture backing typically does not come until Stage II. So you need to get significant angel financing or a Series A round and have a product that can produce revenue almost immediately in Stage I. Otherwise you set yourself up to fail. This is putting a lot of pressure on companies to get through Stage I in a much shorter period.
Generally speaking, is the beginning of stage 2 the time to seriously consider/seek seed capital and stage 3 for venture capital?
Stage one is dead-on. In 6 months my startup will have completed 2 years at stage one being self-funded and in that time I have put together a team and developed a customer acquisition process. I started with a simple product. I’ve read discussions of the “power law” effect in the customer acquisition process. Can you discuss elaborate?
Hi David.. just curious if you believe the cycle times are the same for a B2B service business v a B2B product based business?
Reblogged this on Flaviano Tarducci and commented:
You are never too old to learn. Thanks David Cummings.