At Shasta our sweet spot is investing in series A companies, but we’ll also invest in seed stage companies and also in series B companies. Because we invest across various stages I’m often asked by entrepreneurs about the differences between these various financing rounds. Many investors define these differences in terms of round sizes or valuations, but I prefer to think about it more in terms relating to the key milestones associated with each financing round. A company’s capital requirements may vary from one sector to another, but all companies eventually need to achieve a similar set of milestones to build a valuable company. The framework below is admittedly oversimplified and there will always be exceptions, but I still find this to be useful rule of thumb for me when evaluating a company’s progress.

Pre-financing: define a hypothesis
Before a company raises any money they start with an idea. Identify a problem. Identify a target customer. Start building the product that you believe will effectively solve your target customer’s pain.

Seed round: build a product that someone wants
Often your original hypothesis will be wrong. Maybe the pain point isn’t as great as you thought. Maybe your product is too complex. Keep experimenting until you find something that your customers really want. I’ve often seen what was initially an afterthought feature prove to be the most valuable piece of software for customers. At this stage of development I’m less concerned about broad reach or absolute revenue. Focus on engagement. Prove that your early customers love and depend on your software.

Series A: find a repeatable, scalable, and economic customer acquisition model
Now that you’ve got a product that people want, figure out how to get more of them using it. How do you make them aware of your service? What is the right messaging to attract and convert them into customers? How much does it cost to acquire a new customer relative to the the lifetime value of that customer? Just like finding a product that people want, this is an iterative process. Test various channels and distribution partners. Measure efficacy and cost of each and every channel. Optimize your revenue model to increase lifetime value. Continue doing this until you’ve proven you’ve got a repeatable model ready to scale.

Series B: aggressively scale your business
If you’re on track at this stage you’ve now got a product that people want and you’ve got a repeatable, scalable, and economic customer acquisition model. The next step is to raise money to execute against your acquisition plan and scale the business. Invest in marketing. Invest in customer acquisition. Be aggressive. Focus on reach and market share.

Final note:
It’s worth noting that while I’ve described this as a linear process with discrete steps that’s not quite how I really think it works. In reality, you’ve got to continue achieving each milestone well into the future. Even after a seed round I’d like to see a company that never stops listening to its customers or stops investing in product innovation. And even after an A round I’d like to see a company that continues to iterate and optimize their customer acquisition funnel and their monetization model.