What Are Seasons?
Seasons is a term used predominately among venture capitalists (VCs) to describe the current stage of a proposed business idea or concept. The seasons consist of spring (infancy), summer (adolescence), fall (maturing), and winter (mature).
- "Season" is a term used predominately among venture capitalists (VCs) to describe the current stage of a proposed business idea or concept.
- VCs are always trying to seek out the next hot investment before it appears on anyone else's radar, meaning they have to evaluate potential and risk early on in their investments.
- The seasons consist of spring (infancy), summer (adolescence), fall (maturing), and winter (mature).
- Timing is everything: Investing too early in the season can be reckless while investing too late generally generates insufficient returns.
- For example, a concept or idea would be considered to be in the spring phase if it's new and no one really understands it, making it a risky investment.
A VC is a private equity investor that provides capital to companies exhibiting high growth potential in exchange for an equity stake. The job of the VC is to pool investment funds from wealthy, high-net-worth individuals (HNWI), insurance companies, pension funds, and the like, then identify and invest in businesses capable of providing their investors with a high rate of return. This inevitably means seeking out the next hot investment before it appears on anyone else's radar.
A concept or idea would be considered to be in the spring phase if it's so new and fresh that no one, including other VCs, really knows about or understands it. Investing in the earlier season is fraught with risk. At that stage, the product is still probably being built and there may be no clear indication that people will even buy it, so the risk-return trade-off is often very high.
Only the bravest of investors would consider jumping on board so early. Most, such as VCs, generally prefer to wait and see if the idea being experimented with gains some traction and progresses through to the next season before investing.
It's important not to leave it too late, though. When others get wind of a great concept that is showing promising signs of succeeding, generating returns on investment of 25% or greater, a basic expectation among most VC firms, becomes more difficult to achieve.
Picking the Right Season
VCs have a lot of stakes when investing other people's money and cannot afford to make too many mistakes. Chasing high returns inevitably involves investing early and taking on plenty of risks, though these private equity investors will still want to do a lot of homework and receive some assurances before settling on an investment, mindful that too many blunders will put them out of business.
Most VCs come onto the scene when a startup has already displayed an ability to make money and is in the process of commercializing its idea—a process that can require quite a bit of external funding. Certain series A investors might buy in during the adolescent phase when a product has achieved some traction and attracted demand in a fairly big market, but management still lacks a solid business model and plan on how to consistently generate money from its operations.
Others will wait for the next cycle, preferring to take on slightly less risk in exchange for a little less return potential. At this stage, the startup is running a solid business and now needs to figure out how to propel itself to the next level to fulfill its full potential.
Execution risks remain as the scale is increased, although there is at least already a good indication that the basic structures are in place and that management has so far delivered on its promises.
Example of Seasons
In the late 20th century, there was lots of buzz surrounding new technologies like high-definition television (HDTV) and radio-frequency identification (RFID). Back then, these ideas were in their infancy and, as a result, would have been considered to be in the spring season.
With time, these concepts gradually become more widespread. They steadily gained traction, passing from the spring season to the summer season and beyond to become fully marketable, profitable products serving a reliable customer base.
Of course, not every big, exciting idea makes it through to the promised land. For every HDTV and RFID, there are thousands of other products that never make it to the production phase.