Going from Concept to Exit
Developing a startup can be challenging, given that 90% of the entrepreneurs that start a new venture eventually fail. While the failure rate can be high, the largest companies in the world today such as Apple, Microsoft, Facebook, and Tesla, were all startups at some point over the last 50 years. Startups, which begin as just concepts and raise money from founders that bootstrap the business and grow steadily as a result of the generosity of friends and families. Over time, startups start to scale their distribution, expand to international markets and new ventures, resulting in a loyal customer base and large turnover. As a result, before long, the company has risen through the ranks in its industry to become highly valuable, opening the door to the possibility of future expansions or becoming a behemoth by going public through an IPO. There are six stages to a startup based on the business model and the level of financing, with qualitative and quantitative metrics that determine the stage. They are as follows :
Startups in the Pre-Seed Stage need to visualize the big picture to come up with an idea to execute. Startups involved in the Pre-Seed stage need to discover customers’ pain points, design a value proposition and create a concept of the product. Furthermore, founders also need to evaluate the severity of the problem to understand the total addressable market and understand how crowded the market is. A majority of the startups die in the first two years due to not solving a large enough problem, or trying to compete in a market that is too crowded. For instance, an entrepreneur looking to scale their home baking business will likely fail, as several alternatives already exist in the market, making investors reluctant to pile money into the business. Since startups don’t have fully functioning prototypes, founders need to convince investors.
The seed stage primarily validates the business model of a startup, by looking at the prototypes developed before the investment is made into the business. Startups look to verify the proposals made in their business plans, which are either confirmed or rejected. The rejection of the proposal would result in the company pivoting to a new strategy or model. Startups also evaluate all the risks that could potentially impact the business in the future including product risk, execution risk, market risk & engineering risk. PayPal first began developing a payment system for Users through PDAs (which was popular at the time), before pivoting to using email addresses to transfer money. A more extreme pivot was that of Social Media Platform Instagram, which originally began as a check-in app that included gaming and photo elements. Seed financing is the first official stage of equity funding, which is raised by bootstrapping, friends, family, angel investors, venture capital firms, and startup incubators.
The early stage is a phase where the business plan and the concept of the startup evolve to become a product/service in the market. Founders and teams test the product by building a Minimum Viable Product. A Minimum Viable Product is a product that has adequate functionality to attract enthusiasts and early adopters, thereby validating the idea of a product that is early in its development cycle. As the startup starts to receive valuable feedback from these customers, it can make vital changes and refinements with newer versions to improve customer satisfaction. Early Stage Startups are also involved in building out their teams, being in contact with their customers, and improving the product through testing. In addition to more funding from agencies, Early Stage Startups are expected to attract high-profile VCs and Accelerators. Product-based companies have also been using a crowdsourcing model over the past decade, with the promise of delivering products at scale to customers at a future date, in exchange for committing money upfront (thereby validating the size of the market).
The growth stage has the highest failure rate amongst startups, with the paramount requirement being the ability to scale products/services and staining profitability. By the time a startup reaches a growth stage, it has built the key team to attain growth including a skeleton engineering, sales, and support team. Furthermore, as the company begins to see its cash flow grow rapidly from operations, it needs to hire employees to transfer the burned of the world load. In this stage, the sales team plays a vital role, in meeting the target quota for the company. The management works with the engineering and sales teams to improve customer engagement metrics, increase conversions and reduce customer acquisition costs. At this stage, the CEO of the company is no longer involved in all of the new accounts, rather overseeing the managers of each team, to whom the tasks have been delegated.
The expansion phase signals that a startup is looking to scale up its proven model, by expanding to international markets, looking towards adjacent sectors to enter and hire new professionals to boost growth. Companies in this stage also look to Mergers & Acquisitions to solidify growth in the industry, both in terms of revenue and staff. By quantitive metrics, startups in the expansion stage are generally those that have achieved a Compound Annual Growth Rate (CAGR) of at least 20% in their turnover over the last three years. Companies looking to scale rapidly to the International market/other avenues during the expansion phase often look to raise large amounts of money through later rounds of financing from Private Equity/Venture Capital firms to expand their infrastructure/distribution capabilities.
When a company consistently generates growth over multiple years and achieves expansion in international markets/other businesses, entrepreneurs can choose to continue the expansion or look for an exit. While exits are not mandatory, it is common for late-stage startups to look to create value by selling either a part/the whole business. The three common options for an exit for a startup include the sale of the founders’ share to another company (Usually a Buyout firm/Venture Capitalist), an acquisition offer by a larger company, or an Initial Public Offering (IPO) or a Special Purpose Acquisition Company (SPAC) route to go public.