From the origin of the business idea to the possible sale of the company, there are different stages of financing that every emerging company goes through. The short life cycle of startups is a common trait in the vast majority of these innovative, technological, and risky emerging companies. Even though only 2% survive after five years, throughout their life cycle they must pass a series of phases marked not only by their capacity for development and growth but also by their financing.
In this article, we will try to explain the different stages of financing a startup, in its daily search for new sources of financing with which to promote and develop its business model.
When an entrepreneur establishes a company, he must take into account the business idea, the team, and the market, among other aspects, but it is also essential to think about the financing necessary to make that project develop, grow and scale.
At this time you develop the idea you want to launch without having an established business plan. Since you do not have a minimum viable product, this stage is characterized by forming the work team, imposing legal agreements between partners (if there is more than one), studying the impact on the market, and looking for the best way to finance your startup. If you want to add money to the savings you plan to contribute, you can make use of the most common types of startup financing such as incubators or startup accelerators, business angels, or family & friends.
Regarding the above, it must be understood that, during the first year of life, your venture will only generate losses. This circumstance, known as the valley of death, is distinguished by ending 90% of its businesses. In fact, only 5% of startups manage to reach 2 years to continue with their evolution.
The second stage is known as seed capital. This phase aims to develop the product to launch it on the market and validate it with the first users. Therefore, the startup already has a product, a business project, and a team defined.
This phase is mainly focused on product development and relationship with the target audience.
The early stage of financing for startups manifests itself when you already have an MVP in the market, and you start to get clients/users. It is the point at which you receive the first comments about the good and bad of the product or service, which helps you to improve the functional aspects through repeated tests with the help of public opinion. It is time to establish which are the most outstanding aspects of the project, promote the viability of the idea, and seek alliances with other commercial partners. It is also important to prepare the possibilities for growth, refine marketing strategies, define the sales plan, and surround yourself with human talent with specialized skills.
This stage, as its name suggests, is a growth stage. Includes rounds of series C and later. The companies that are in this stage are in a mature phase: they have a fully cohesive team, they have an implanted business model, they have obtained benefits, and they need to compete, among others.
In this phase, the company experiences exponential growth. As they require a larger investment size, operations are usually led by investment banks or private equity companies.
In this stage, the company manages to overcome the hard business journey. Now, is the time to bet on the interest of other companies in your product or service to consider the sale via absorption or the merger of companies, maintaining both brands independently. The listing on the stock market through IPOs - Public Offering of Sale - is another of the options available once the last stage of the ideal life cycle of a successful business project has been reached.
Finally, we want to emphasize that not all startups complete this life cycle of 100%. As a warning, not every entrepreneur has the tools and skills to complete the financing stages of a startup. If you make it to the early stage and then transcend the growth stage, you could take it as a triumph. The journey from conceiving the idea to materializing it is usually very arduous. However, it is full of rewards for those involved.