Understanding Early Stage Venture Capital
All companies have to get their start somewhere. For many businesses, growing and developing a profitable business is a multi-stage process. Companies that are in the early stages of this process are typically known as early stage companies. To get an idea of what these terms mean, these are a few things to understand.
What Is An Early Stage Company?
Companies that are starting typically fall into the category of pre-seed, seed, growth, and early stage. Like its name suggests, a seed company is a company that’s at the beginning stage and are pre-revenue. They’re likely raising revenue to develop their product or concept. Investing in a seed company is considered risky as they are trying to answer the question if they have a viable product or service.
Early stage companies typically have a prototype or a service model that’s been tested and have developed a business plan to grow the business. The company may even be generating early stage revenue. It’s not common to be profitable at this stage but some businesses may be breaking even.
Finally, the growth stage is when businesses have gotten off the ground and are working on increasing their market share. They’re in a commercial operation and have solid traction with customers. They’re generating revenue and experiencing solid growth. This may seem like the success stage but companies in the growth stage may still be working on becoming profitable.
Related article: Startup Funding Stages
What is the Difference between an Early Stage and a Late Stage Company?
Early stage companies are typically focusing on custom acquisition. They’ve got a sales strategy in place and are trying to reach a breakeven cash flow state. They are generating revenue but they’re also interested in taking additional capitol from institutional investors. This will allow them to invest in customer acquisition and further business development. This could be thought of as being a process as companies transition from having a just a few customers to having a solid customer base. They have the tools in place but may be fine-tuning operations as they learn and develop.
A late stage company is one that is already established. These companies have typically already demonstrated that they are viable and have a well-known product. They have a strong market presence and have typically also reached a point of positive cash flow generation. Late stage companies are going to be acting more boldly. They will start to reach into tangential markets. Their investors may be seeking liquidity as the company starts to position themselves for an acquisition or an initial public offering.
What is Early Stage Capital?
Investors can be involved in companies from their inception onward but a common point where investors enter the market is with early-stage capital. This form of investing is provided to set up the initial operation and basic production. Early stage capital works by supporting the development of the product or service. The funds raised can also be used to market and commercially manufacture the product. The team may use the money for supporting sales as well.
Investors may want to wait until early stage to invest in companies as it may offer the greatest rewards while reducing some of the risks. Investors who invest in a company during the seed stage have a high rate of failure. The seed round is the company’s first official round of funding and investors are given equity, stock options, or convertible notes.
The early stage typically requires larger investments. As the company already has a product or service that’s being tested, they need funding in order to fully develop their product and operations. The investing during the early stage may even be broken up into series.
Late stage is for more mature companies that may be profitable but has proven that they can grow and maintain their business. Each stage of investing has its potential benefits and drawbacks.
Investing in Early Stage
Although investing in any startup comes with some risk, most of the investments are completed during the early stage of a company’s life. This is when they need the funding and will benefit from the cash flow.