Q&A: Early-Stage vs. Seed-Stage Companies

When I was looking at venture capital funds for my business, I found that some were for early-stage companies while others were for seed stage. What’s the difference?

Generally speaking, venture funds tend to target companies by their stage of growth, such as seed stage, early stage, later stage, or recapitalization and buyout stage. Occasionally, you might come across a venture fund that is “stage agnostic,” meaning that the fund will review business plans and funding proposals for companies in any stage of business development.

The primary difference between a raw startup (or seed-stage company) and an early-stage company is evidence of business progress. Early-stage companies can be characterized by the following attributes:

- They have a corporate organization in place, typically a C corporation with authorized preferred shares.

- They may have received one or more prior rounds of funding from company founders, friends or family members.

- They may have filed patent applications.

- They may have tested a product or service prototype.

- They may have launched a website labeled “beta.”

- They may be generating revenues.

- They may have some impressive evidence that there are highly interested first adopters or customers in place for the company’s technologies, products or services. Here, entrepreneurs have to prove that customers — preferably large numbers of them — will buy from the company.

- They may have a clearly defined commercialization and sales strategy in place.

Sometimes, established early-stage funds will selectively consider seed-stage companies if their technologies are backed by a university or other strategic partner that will help accelerate progress after funding.

Fund managers may also be a little more lenient with seed-stage companies that are located close to the venture fund’s headquarters. There are meaningful cost, time and communication benefits when fund managers can meet regularly with a portfolio company’s management to review results during the tricky trial-and-error period of startup product development.

Managers of early-stage companies tend to be more confident, realistic and factual than seed-stage entrepreneurs. Skilled investors notice subtle differences in how entrepreneurs present information about their companies to investors, with emphasis on what they now “know” rather than what they “think.”