Understanding where a startup is in their lifecycle allows founders to assess their progress. The startup lifecycle is made of 4 major stages of development, where each stage is made up of levels of sub-stages.
Startup Stage 1:
Discovery Development Stage
(The IDEA Stage)
Typically this is done by one or more of the startup founders for no salary, since funding is unavailable.
Purpose: Startups are focused on validating whether they are solving a meaningful problem and whether anybody would hypothetically be interested in their solution.
The focus at this stage should be market research and gathering data that will allow the startup founders to steer the new business startup into a differentiated market niche where resistance to market entry will be the lowest and sales can be achieved most easily.
Events: Founding team is formed, many customer interviews are conducted, value proposition is found, minimally viable products are created, team joins an accelerator or incubator, Friends and Family financing round, first mentors & advisors come on board.
Startup Stage 1 summary:
- New business startup is a dream and a passion
- One or more startup founders working for no salary
- Business plan outline only
- No employees
- No revenue
Startup Stage 2:
Validation Development Stage
(The Real STARTUP Stage)
Purpose: Startups are looking to get early validation that people are interested in their product through the exchange of money or attention.
A different management style and focus must be implemented. This first shift in style is needed to begin following a plan, and dealing with other complexities that start to build with your product development efforts. It is not likely that you really have your “secret sauce” down yet, as you are still experimenting with what the market and customers want, how much they will pay for it and how to get to the customer for an efficient sales and marketing plan and process that can generate a profit.
Events: refinement of core features, initial user growth, metrics and analytics implementation, seed funding, first key hires, pivots (if necessary), first paying customers, product market fit.
Startup Stage 2 summary:
- Incorporate a business name
- Finalizing the business plan
- Doing product development
- Search and file patents
- Startup funding from personal resources, friends, and family
Startup stage 3:
Efficiency Development Stage
(the FUNDING stage)
The FUNDING Stage has arrived when it is clear there is an established revenue and/or customer base. At this point the business is arguably sustainable with a proven value proposition to customers, pricing and both sales and operations processes that work, albeit not necessarily very efficiently.
Purpose: Startups refine their business model and improve the efficiency of their customer acquisition process. Startups should be able to efficiently acquire customers in order to avoid scaling with a leaky bucket.
The business is likely not yet profitable, but there is a clear path to profitability with far fewer unknowns and big risks. There is still a lot to learn and many processes to optimize, and the management is usually still stretched too far executing, instead of managing.
Events: value proposition refined, user experienced overhauled, conversion funnel optimized, viral growth achieved, repeatable sales process and/or scalable customer acquisition channels found.
Startup Stage 3 summary:
- Preliminary product available
- One or more real customers
- Enough revenue to validate business model
- Business plan, financial model is the roadmap
- Spending time presenting to Angel investors
Startup stage 4:
Development Scale stage
(the GROWTH stage)
The GROWTH Stage is where the business is scaled – This is achieved when the company really has defined a business model that works, and expands this model to address the large opportunity, outside the local geography, nationally, or globally.
At this stage you have proven that $X invested in sales and marketing will generate $Y revenue and profit. So expansion can be done with little risk. With well documented proof of this you can usually attract large amounts of capital easily. It also becomes relatively easy to see exactly what is needed to reach a large size company and how large you can get.
During Stage 4 the management style and focus must once again change. Often “professional management” is brought in to replace founders who can’t adjust to this needed transition from an entrepreneurial high speed and risk style, to one of planning, management and fine-tuning of operations.
Events: Large A Round, massive customer acquisition, back-end scalability improvements, first executive hires, process implementation, establishment of departments.
Startup Stage 4 summary:
- Revenue of $5+ million
- 20 or more employees
- Ready to scale the business to be a market leader
- Large market opportunity validated
- Seeking expansion venture capital from professional VCs
Note: What happens at each stage can vary strongly based on the type of startup and the market segment. The estimated stage cycle timelines are as we say “estimates” and are considerably different for various business models and products/services or concepts.