In the early stages of an idea or product, entrepreneurs usually require external capital to finance their development. Generally, startup companies are categorized based on their progress; this often affects the amount and ease of financing they receive. There are three primary stages of startup companies:
Seed Stage – At the seed stage, companies are looking for investors to provide capital (or seed money) to further develop an idea. Seed stage companies are establishing a business model, financial plan and a pitch presentation to raise additional financing. Companies at the seed stage are viewed as high-risk for an investor because of the large degree of uncertainty for companies at this stage, and there is a greater chance of receiving little to no return on their investment.
Startup Stage – Companies at the startup stage have developed a prototype and are testing it to ensure results are consistent and it is performing as intended. A management team is beginning to form, and there is planning and consideration as to how the product or service will be produced and marketed. A business plan with projected cash flows has also been prepared at this stage. Companies at the startup stage are in the process of commercializing their product or service, and are establishing a customer base and market presence. The main challenge at this stage is managing and conserving scarce cash resources, while ensuring the active development of the product or service is in place.
Growth Stage – At the growth stage, companies have assembled a management team and are beginning to generate revenues from selling or licensing their product or service. Growth stage companies often are favored by venture capital investors because of lower investment risk. However, companies at this stage still face uncertainty in their ability to scale and grow in the marketplace.