You are developing a “million-dollar” business idea or are in the process of expanding your business. As an entrepreneur, you must always be ready to adapt your goals, priorities, and business strategy to the growth and development phases of your company. You can prepare and anticipate potential challenges and obstacles in the business life cycle if you know what phase your startup is currently in. So do you know that?
There is currently a lot of information and definitions from various sources about the business phases, but no uniform and precise distinction. The reason for this is that the startup phases often interlock and are just as volatile as the startups themselves. For this reason, we have summarized the six main phases of a startup for you.
1. Idea
All unicorns are born from an idea. Some ideas are not realistic and not well received by the market. In contrast, some products or services are similar to other products and services on the market. So, to successfully turn your idea into reality, you need to do thorough research to ensure that your “million-dollar” idea is of real value, innovative, and groundbreaking.
Most founders do not need any external investments in the idea phase. They often invest their own money or borrow money from families and friends. In this phase, founders also need to create a clear business model that describes their target customers, unique product, cost structure, source of income, and much more. The canvas model is often used for this.
2. Pre-Seed
The pre-seed startup is a phase in which the startup develops a minimally viable product (MVP). MVP is a representation of your product with the features necessary to satisfy the first customer and validate the ideas. This helps startups in the pre-seed startup phase to answer many relevant questions:
Do your customers need or want the product?
What works well in terms of your product?
What should be changed, tweaked, or added?
Where is your startup going?
3. Seed
Startups should opt for the Seed Stage if they want to grow faster and larger and position themselves in the market. In the seed phase, startups often need more financial support and look for investment firms as individual investors, for example, VCs or venture capitalists. The investment companies not only provide startups with money but also valuable experience, personnel, office space, and even the next development stages of a startup. In return, they receive part of the startup’s equity.
4. Growth
In this phase, the startups should regularly generate income and win new customers. Cash flow should improve to cover ongoing expenses. This requires good customer service, dealing with the competition, etc. Above all, startups need an expanding and highly qualified startup team with complementary skills. The startup team will take on a large part of the tasks that the founders previously had firmly under control. Now it is up to the startup founder to take on the role of company boss and create good teamwork.
5. Expansion
In the expansion phase, companies often grow very quickly. If the company isn’t moving forward, it is moving backward. That is why companies must have a very clear and measured strategy and develop new markets and segments. A successful business model in the preceding phases is no guarantee that it will also work successfully in other markets or segments. It is the task of the founders to face new challenges and weigh up the risks to further expand the company.
This phase requires even more financial support. This can be done by investing in the company’s resources. Another possibility is the combination with large companies that are already successful in different countries or different industries.
6. Exit
After the expansion phase, startups usually have a good position in the market. Many companies struggle to maintain a high rate of growth. In this situation, the entrepreneur has two options: push for further expansion or go out of business.
With further expansion, the company is again facing new challenges. Because of this, many companies change management frequently and hire an experienced CEO. The same questions must be answered as in the expansion phase:
Can the company continue to grow?
Are there enough expansion options?
Is the company financially stable enough to cover an unsuccessful expansion attempt?
Are the executives ready for the task of further expansion?
Otherwise, the company can be sold in whole or in part, publicly or privately (exit). It’s the final stage of startup development. The public sale of the shares is known as an Initial Public Offering (IPO). This enables startups to receive long-term financial support from public investors, strengthen the company’s reputation and to sell shares on favorable terms, etc.
So, do you now know what phase your startup is in and what challenges it will face?
Source:
Entrepreneur Media Inc., 2021.
Litslink Startup Laboratory, 2020.
About the Entrepreneur’s Toolkit:
The Toolkit provides you an overview of a startup path and gives you clear, concise information to make smart business decisions. Through our Toolkit, you will have access to official documents, research, and information related to starting a business in the EU.