192 - Blue Ocean Funding Stages

The question of "What funding stage is your startup in?" is usually pretty straightforward, as most startups have relatively linear products and predictable development cycles. Where this ceases to be the case is usually whenever innovation is present. Take the following case for example:

Startup A:

  • Bootstrapped through over 10 years of R&D.

  • Demonstrated cutting-edge technology while operating on spare time and pocket change.

  • Established a wide and deep moat, rendering it unapproachable to tech giants.

  • Filed patents on the core technology and supporting infrastructure.

  • Raised only 100K to cover basic costs.

  • Requires funding to pay full-time staff for the engineering workload needed for commercial deployment, with product deployments in the first 6-12 months post-funding.

What funding stage would you call that? Post-seed? Series A?

"Deep Tech" rarely survives bootstrapping attempts, particularly on such time scales, leaving those that do survive such a process as a far lower risk subset. Most ordinary "AI" companies have virtually or precisely zero "moat", as their core technology is often wildly derivative, if not entirely stolen, making their respective cost-to-duplicate equally trivial. Likewise, most startups demonstrate no cutting-edge technology prior to funding, let alone any kind of "moat". For example, consider another:

Startup B:

  • Failed to demonstrate anything that could claim cutting-edge status within the first 5-7 years of operation, with investments starting at $30m and running over $1 billion of funding in that time period.

  • Had virtually no moat, only a large proprietary dataset, much of which was stolen and in violation of various laws around the world, leading to a flood of lawsuits.

  • Their chief competitor holds the patent on the primary architecture their technology is built upon and couldn't function without.

  • Didn't turn a profit in their first 7 years of operation, and may never.

Of course, Startup A is the one I work for, and Startup B is OpenAI. The funding stage question is one that we've debated and struggled with over the years, partly because it is usually the wrong question. The "Funding Stage" categories are an instance of Substitution Bias being applied, making it sometimes useful, but always wrong.

Categories are useful for "Red Ocean" companies in saturated markets but systematically fail when confronted with "Blue Ocean" markets where innovation carves new paths and paves over predecessors. Before asking the funding stage question, perhaps VCs and investors should determine the color of the "ocean" a company is in.