What are the stages of startup development?

What are the stages of startup development?

Different stages of startup mean different investment conditions, risks, and opportunities

code text hereIn the startup world, there is a term called stage, which refers to the relative age and level of a company's development. A startup can be young, mature, or somewhere in the middle. When you get to know a startup, you are bound to encounter its stage. Investors need to know the peculiarities of different stages, because each of them requires different capital, time to return the investment, different potential profit, and, of course, different risks.

In this material, we will tell you about the main stages of startups that you will encounter most often.

Pre-seed, or Angel

The very first, riskiest, and most promising startup stage. Typically, there is no finished product, but rather hypotheses and data that confirm the potential demand for the idea. The more evidence a startup can gather, the better its chances of attracting investment. The role of pre-seed is to demonstrate the ability of a startup idea to make money. This stage involves a lot of guesswork, testing, and theory in general. One of the most important assets of an early-stage startup is the team. These companies often look like [this].(https://sootora.com/de).

But practice is also present, albeit in a limited way. The point is that to test conjectures and hypotheses, the startup needs to create a prototype of its product. Next, the team tries to get initial feedback from real customers. What matters here is not so much whether they bought the product, but whether they would buy the product in the future.

One of the biggest advantages of pre-seed is the relatively small amount of capital required and the large profit if the startup is successful. However, there is a downside – it is in the early stages that the mortality rate of startups is the highest.

In most cases, the founders themselves invest the first money in the company in the pre-seed stage. They also turn to FFF – friends, family, and fools. They can also look for grants or funds from angel investors who understand their industry. The latter typically invest up to $50,000. Venture funds love the early stages because their capital allows for profitable portfolio diversification.

Seed

One of the most difficult stages of startup development, marking the transition from hypothesis testing to product-market fit. That is the product's ability to solve the real problem consumers are paying money for. Here, investors look at practice: customers and sales, which in local slang is called traction.

A startup should already have an MVP – a solution or product that can be launched into a real market and competition. The company needs funding to hire people for key roles, additional research, and marketing.

At this stage, one of the main goals of the startup is to get as many customers as possible. Therefore, if you want to, you should not focus on creating the perfect product. It should be enough for customers to see the value and for investors to see good traction.

Important: A common situation for the seed stage is to change the direction of the startup and its business model in order to keep the project viable. This is called a pivot. There may even be more than one such situation. The team's task is to find the direction that will eventually allow them to build a scalable business with an ever-growing number of customers.

At seed, the team's own capital or FFF is no longer sufficient, so it is necessary to attract outside investors. Incubators, crowdfunding and angels are possible. Amount of investment: $100,000-250,000.

Series A

It is known as the first stage of startup venture funding. However, this does not mean that VCs never get into the past stages. It all depends on the company.

Series A is usually brought in to improve the product, set up mass production, expand the team and scale up. Funding is also needed to promote and market the product or service and to retain and grow customers. The size of the round is $500,000 or more.

In this case, venture capital funds are not interested in ideas. Rather, they are looking for companies with a strong strategy for scaling and turning existing products into successful, profitable businesses.

Angel investors may also participate in this round. But they have much less influence in Series A, after the funds that will carry the bulk of the financial burden.

Series B

This stage is similar to the previous one in terms of processes and key players. The difference with Series A is the new wave of venture capital firms with a late-stage focus. At this stage, the company receives $1 million and more. Although, this “more” is very tentative. Series B is typically tens and sometimes hundreds of millions of dollars.

The round assumes that the company will scale up after achieving the goals defined in the previous stages. It is needed to expand the business in an occupied niche, increase profits, enter new markets, etc. The product is already in sufficient demand but needs further steps to increase its share. The Series B will also help the startup hire experienced employees and expand its infrastructure.

Series C

This round attracts successful companies that are already self-sustaining and able to grow without outside capital. So why invest? Additional funding will help them develop new products, enter new markets, or even acquire other companies. In other words, it will further accelerate their scaling and development. The size of a round can be measured in tens and hundreds of millions of dollars.

Series D

Series D is generally considered to be the last round of investment before going public. This round is raised to:

  • Hit growth targets and optimize performance before an IPO or M&A;
  • Acquire startups that can be useful for business expansion and create buzz around an IPO or M&A;
  • Continue to grow revenue and performance without selling or going public. But create an exit opportunity for investors.

In Series D, all metrics and financial statements must undergo a serious regulatory review. This is key to ensuring liquidity and healthy returns for the company's investors, founders, and team.

Series E

Series E is the second stage of raising investment, which they like to call the last stage before going public. In addition to the reasons described in the previous paragraph, there is one in special. This stage may be needed in case of force majeure. For example, an economic downturn or other market situations could force the company to raise additional funds to survive and stay afloat.

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