From Conception to Commercial Success: The Innovation Lifecycle

It’s important to understand exactly how the venture capital market makes innovation possible. The path from startup to successful company can be a long and bumpy one. And young companies typically need help (and infusions of capital) at key inflection points along the way.

Each stage in this journey typically requires a different kind of investor. Some startups get off the ground with a mix of the founder’s own money (or credit), with additional help from friends and family. This bootstrapping phase will see the startup through initial research, prototype developing, and testing. Once there is some working prototype to confirm that the founders are on the right track, angel investors step to fund the next stage:arriving at a technically viable product. Angel investors often have experience in the area the startup is targeting, and will offer business advice as well. This stage of funding is commonly referred to as seed funding (with the money in the bootstrapping stage being pre-seed).

It'snot for another year or more that a startup recruits venture capital. This is a critical stage in the innovation lifecycle, and in the life of the startup. At this point they may well be ready to launch a product; but they are likely years away from being a profitable business, and will have minimal (if any) cash flow. New technology breaks into the market and consolidates market share through five discrete sets of customers: innovators, early adopters, early majority, late majority, and laggards. Making the leap from innovators and early adopters to the majority segments is difficult and may require several rounds of VC funding. The gulf between early and mainstream customers is called the “valley of death” for a reason. According to one study of 1,100 tech startups, roughly two-thirds stalled at some point in the VC process and failed to exit or raise the necessary additional funding. Less than half raised a second round of funding.

All of this underscores just how critical the venture capital market is to nurturing innovation and entrepreneurship. When venture capital firms become risk averse, fewer startups will successfully cross the valley of death. And fewer entrepreneurs, however brilliant their ideas, will dare to dream big in the first place.

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Read The virtuous cycle : innovation and investment

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