Duet Partners
Tel: +44 (0) 20 7416 6630 / Email: partners@duetpartners.com

Startups evolve through discrete stages of development. Successful entrepreneurs understand these stages and link them to funding milestones.

27th December 2018

Over the past decade, the movement to turn entrepreneurship into a science has gathered pace. As the economic importance of startups has grown, new startup ecosystems have been built up all over the world with the hopes of replicating the initial success of Silicon Valley. Many of today’s young people are now looking at entrepreneurship as a career path of choice, and VC investment levels are at decade highs.

Yet many startups fail.

We know from recent research by Dealroom [2] that in Europe only 19% startups make it to Series A within 3 years of Seed funding. Other observations from this study are that companies that raise $2-3M in total pre Series A funding have the highest conversion rate. Raising too little may impact the chances of converting to Series A: companies raising <$1.5M convert at much lower levels.

At Duet, we specialise in advising startup companies on the transition from Seed stage to Venture stage. Our own insights reveal a correlation between the amount raised during Seed rounds and the degree to which companies are truly prepared for Series A, and fully ready to scale.

However, it is apparent that many startups have only a limited understanding of the key stages of early company development and, most importantly, how they can be aligned with funding milestones to propel the business forward. Many founders are distracted with an almost perpetual funding loop; numerous small rounds often no more than 9-12 months apart. 18 month cycles would be much more desirable and give management time to focus on developing the business.

The Startup Genome Report

A seminal work by Max Marmer in 2011, ‘The Startup Genome Report’, researched over 3,000 high growth technology startups, primarily internet/mobile businesses. The goal of this report was to lay the foundation for a new framework for assessing startups more effectively by measuring the thresholds and milestones of development.

A follow-on report [3] by the same team took a deep dive into why most startups fail and the findings have had a major bearing on how the science of entrepreneurship has developed since. The 3 primary discoveries were:

  1. Founders that learn are more successful. Startups that have helpful mentors, track performance metrics effectively, and learn from startup thought leaders raise 7x more money and have 3.5x better user growth.
  2. Startups that pivot once or twice raise 2.5x more money, have 3.6x better user growth, and are 52% less likely to scale prematurely than startups that pivot more than 2 times or not at all. A pivot is when a startup decides to change a major part of its business.
  3. Premature scaling is the most common reason for startups to perform worse. 74% of startups fail for this reason alone. They tend to lose the battle early on by getting ahead of themselves. For example, they may prematurely scale their team, their customer acquisition strategies, or over-build the product.

Premature scaling often burns cash on the right things but in the wrong order. The classic mistake is ramping customer demand before the business model has been properly validated.

The Customer Development Process

One of the main collaborators on the Startup Genome Report was Steve Blank of Stanford University, who went on to write two business best sellers: ‘The Four Steps to the Ephiphany’ and ‘The Startup Owner’s Manual’ [4] together with Bob Dorf, which for the first time set out a detailed methodology for building a startup.

The foundation for this approach is the Customer Development Process. Over the years it has been implemented by thousands of entrepreneurs worldwide. Many have built upon it and it forms the basis of the Investment Analysis Process we use at Duet to help startups prepare for a capital raise.

Our particular take on the model is shown diagrammatically above; this aligns each stage with a particular funding event, together with detailed criteria for exiting each phase (which we capture in a scorecard). These criteria are tailored for specific sectors and business models, and are a key ingredient in assessing the investment proposition.

Note the phasing shown above is for a business where the primary risk is customer/market risk. There are other businesses where the primary risk is invention risk; here it might take 5 or more years to get a product out of the lab and into production (e.g. pharmaceuticals). In this case the risks are higher but the payoff potentially huge. This calls for a different version of the Customer Development and Funding model, which we will cover in a future article.

By far the most challenging step is from Seed to Venture stage, the moment of classic Series A funding. Here, the primary objective of a startup is to have validated the business model hypotheses (following various iterations and pivots) and be ready to scale.

No shortage of capital

VC investment in the UK has strengthened through 2018. A recent report by KPMG Enterprise [5] showed a total of £1.55B of Venture Capital was invested in UK businesses across 244 deals in 2Q18. However, later stage financings were responsible for the majority of capital invested as investors seek Growth rather than Venture stage opportunities.

At Venture stage, average deal sizes at Series A have also been increasing through 2017/18 [6] to around $6.6M (c. £5M), although deal count is down year on year: Institutional investors clearly have money to spend but are being even more discerning, only investing when they believe businesses are truly ready to scale.


After 9 years of advising early stage companies on fundraising strategy, especially for Series A, our most repeated advice is:

1. Understand the stages of the Customer Development Process and how they align with funding steps in your type of business. Startups that don’t move through the stages in order show less progress and often suffer from premature scaling.

2. Raise sufficient capital at the final pre Series A round (sometimes referred to as the bridge round) – companies often underestimate how long it will take to get though the Seed stage and validate their model. No business plan survives first contact with customers: There will be pivot points – this is not failure, it is normal and expected.

3. The overarching financial metric through Seed stage is cash burn rate and number of months’ worth of cash left in the bank. Make sure you have a financial model that allows you to easily see this and enables you to undertake quick scenario planning as you evolve and pivot.

About the author: John Hall is CEO and co-founder of Duet Partners, a corporate finance firm that provides specialist funding support to high growth technology companies. His 30 year tech career began with major US semiconductor and software companies, and was based in the Valley during the late '90's. Before Duet he was CEO of a VC-backed consumer electronics company, sold in 2009 following several rounds of capital raising. In the past 10 years he has advised dozens of founders on the startup to scaleup journey and is a retained Board advisor to a number of UK technology companies.

[1] https://pitchbook.com/news/articles/60-big-things-scandals-scooters-and-the-year-that-was-in-vc

[2] https://blog.dealroom.co/the-journey-to-series-a-in-europe/

[3] http://innovationfootprints.com/wp-content/uploads/2015/07/startup-genome-report-extra-on-premature-scaling.pdf

[4] https://steveblank.com/startup-owners-manual-1in/

[5] https://home.kpmg.com/uk/en/home/media/press-releases/2018/07/investment-surge-in-q2-puts-uk-back-on-top-of-venture-capital-ma.html

[6] https://www.forbes.com/sites/trevorclawson/2018/11/13/the-secret-to-making-it-to-series-a-secure-the-right-amount-of-seed-funding/#18115a4355a1

Subscribe to our mailing list

Stay informed. We will email you when a new blog post is published.

* indicates required

To subscribe to our Newsletter click here