The three stages of a startup are early, Series A, and growth—knowing which stage your business is at can help inform your fundraising strategy and prepare you for what’s ahead. Laith Shukri, Director of Ecosystem Engagement, RBCx, breaks down the differences.
All successful startups begin with a great idea. Whether it’s an “a-ha” moment, a scientific breakthrough, or the familiarity of an industry in need of change, what sparks the idea is as varied as the founders themselves. But regardless of how an idea comes to light, it launches a startup journey comprising stages that most businesses in the tech ecosystem go through.
Several stages mark the progression of a business from its earliest beginnings in pre-seed to its exit. While there is no steadfast rule on how many stages each startup must go through, they’re commonly broken down into three main stages: early, Series A and growth. Knowing where your startup is along this trajectory can help gauge your progress toward the ultimate goal—usually an IPO (initial public offering) or sale, as well as help form your company’s fundraising and startup investment strategy. Other stakeholders, such as investors, often refer to startup stages to make informed investment decisions. In this article, we’ll describe:
- What a startup is
- How a startup differs from a traditional business
- The main characteristics of each startup stage.
What is a startup?
A startup is a recently launched business that is in the early stages of operations. Unlike a traditional business, a startup launches with the intention to disrupt the market and scale rapidly. Innovation, therefore, is often a hallmark trait of this type of business—whether its offering is a product or service.
“A startup has some form of underlying IP or competitive advantage that helps your business scale, as well as capture customers by addressing their needs better than the competitors.”
“A startup has some form of underlying IP or competitive advantage that helps your business scale, as well as capture customers by addressing their needs better than the competitors,” says Laith Shukri, Director of Ecosystem Engagement at RBCx. Founders may notice a stagnation in the market and discover a niche that’s ripe for change. “You see where it’s starting to fester and come in, break it down, disrupt it, and build something better.”
Startups are under tremendous pressure to expand rapidly and are typically cashburning through every stage (the typical lifespan of a startup is seven to 10 years, but can be much less). Raising enough capital to maintain momentum and fund the rapid growth of a startup is imperative, so most founders turn to venture capitalists (VCs) who can see potential in the business and its ability to provide a return. Where your business is along the spectrum of startup stages often influences your ability to attract VC or other startup funding.
What is the difference between a startup and a traditional business?
When an entrepreneur starts a traditional small business, there is no intention to disrupt or dominate the market. Earning a stable revenue is the goal, although some may have a plan to expand over time if the market allows. Owners of a traditional business may be driven by the desire to follow a passion or be their own boss. Some companies may even begin with big ambitions to follow the typical startup trajectory, but when they don’t meet the demands and expectations of one, continue operations as a traditional business, instead. This is sometimes referred to as a lifestyle business.
What are the stages of a startup?
The three stages of a startup are early, Series A, and growth. These stages can be further broken down into pre-seed, seed, growth, maturity, and exit, but it’s important to note that not every startup will progress through every stage. Some leap from early stage to exit and others may languish in one stage and get acquired or shut down operations without progressing further. The timing of each stage is also unique to every company and depends on a variety of factors such as market, economic climate, government, and industry.
1. Early stage
Startups in the early stage begin with an innovative idea and some semblance of a business plan. To progress, founders must develop the product more fully to determine whether it’s scalable and can achieve product market fit. This stage can be further broken down into pre-seed stage and seed stage.
The pre-seed stage begins with a product or service that is usually tech- or IP-based and has the potential to scale. This is the time to build a solid foundation to sustain the intense and rigorous startup path ahead. During this stage, founders define the company’s vision and mission, begin development of a prototype, and start to build a team that can bring the founder’s vision to life.
“The main differentiator between pre-seed and seed is probably product and pre-product,” says Laith. “You have an alpha product you’re still building out at this point or an idea of what it looks like.”
Funding in pre-seed
Most founders bootstrap in this stage, relying on their own financial resources and the generosity of family and friends to grow the company.
This stage is marked by idea validation. Startups focus on achieving product market fit and evolving the rough product developed in pre-seed into a working prototype. At this stage, the business also has early customers to test the product’s viability and generate revenue.
“You’ve got some paying customers, but they’re not paying at a consistent level because you probably accrued early adopters at a discount.”
“You likely don’t have a proper business model in place but have an idea of what it could look like,” says Laith. “You’ve got some paying customers, but they’re not paying at a consistent level because you probably accrued early adopters at a discount.” Through market research and negotiation, startups in seed stage solidify the correct asking price.
One of the challenges of this stage is determining readiness to go after large clients to close bigger deals. “At this point it’s usually very risky because by the time the larger client makes the decision, you may run out of cash,” says Laith who recommends startups focus on smaller customers at this stage to provide much-needed revenue to stay afloat.
Funding in seed stage
Early stage funding tends to come from angel investors, accelerators, and early stage VCs. This is the time to develop a persuasive pitch deck to raise seed money.
For first-time founders, getting funding in the pre-seed and seed stage can be especially challenging, whereas seasoned founders with experience under their belt are more likely to attract investors due past successes and established relationships.
“In Canada, there are very few institutional investors, like VCs, that look at seed stage companies. Getting early stage funding can be challenging,” says Laith.
2. Series A
When a startup has reached this phase, it’s ironed out most of the early hiccups around product market fit and customer acquisition. By now, the product is polished and has product market fit. Your startup has recurring customers, has reduced churn, and has established an effective customer acquisition strategy. Unlike previous stages, you have hard data to prove the viability of your business, which is necessary to secure VC funding.
“Your focus shifts away from product and toward sales and marketing to increase customer acquisition.”
“You’ve built up your business and you’ve scaled,” says Laith.“Your focus shifts away from product and toward sales and marketing to increase customer acquisition.” Far from slowing down, your startup needs capital to scale operations, expand your team, and enter new markets.
“You’ve now figured out exactly who you’re targeting and you’ve beat out the competition, or there’s very few of you left. And you’re becoming established in the market,” says Laith.
Funding in Series A
This is the stage to pitch investors for Series A financing. Startups often refine their pitch deck with metrics that prove to investors they have the right team and business model in place to build an enterprise that can dominate the market. Your first successful round has the potential to establish a foundation to attract future investments. The pressure to grow rapidly intensifies at this point, as well.
“There’s a high pressure on growth,” says Laith. “There’s an expectation from the VC side that you need to be growing constantly. You need to meet your valuation and exceed it for the next round.”
3. Growth & Maturity
At this stage, the company is well-established, has a substantial customer base, and is expanding geographically. The staff count is increasing in engineering, sales, and marketing to meet the growing demands of a rapidly scaling company.
“Companies at this stage are adding products, acquiring other companies, thinking about going public, and growing larger and larger,” says Laith.
Funding in growth & maturity stage
Each round of financing (starting with Series A) is approximately 12 to 18 months. Startups in this phase progress to the Series B round of VC funding, followed by series C, D, and so on. Sources include venture capital firms, corporate investors, and private equity firms. That’s not to say raising a round of Series B funding is easy—or guaranteed. The stakes are higher, as are the expectations. Investors want detailed financial proof of your company’s current performance, projected success, and confident signaling from the previous round of investors in the form of follow-on financing, so it’s time to upgrade that pitch deck to hold up to more scrutiny.
“There’s a lot more financial analytics needed now,” says Laith, adding investors will want to know specifics, such as year-over-year (YoY) growth, revenue run-rate (RRR), annual recurring revenue (ARR), and the customer lifetime value to customer acquisition cost ratio (LTV:CAC).
“Always do due diligence on your investors just as your investors are doing due diligence on your company.”
There is also more onus on founders to familiarize themselves with potential investors before signing. “Always do due diligence on your investors just as your investors are doing due diligence on your company,” says Laith. “Try to understand who these people are because once you’ve signed that shareholder agreement, you’re with them for the next five to seven years.”
Venture debt is another potential source of funding for venture-backed companies. Venture debt is a type of loan offered by select banks and non-bank lenders that can extend a startup’s cash runway after a venture capital equity raise.
4. Exit plan
The last stage for a startup is exit, and when the cycle of funding comes to a conclusion. For businesses that have successfully progressed through the startup stages, an IPO is what most founders envision when they first launched their company.
“At this point, you’ve probably raised $250+ million in capital with offices across the world,” says Laith. “You’re a major player within your market and you’re ready to go to the New York Stock Exchange and ring that bell.”
Statistically, Laith cautions, very few make it to this point. Many businesses sell at some point along the startup lifecycle, particularly if it becomes clear the company cannot scale at the rate or extent investors expect.
How to accelerate your startup’s growth with RBCx
As a lender in the tech ecosystem, RBCx brings a wealth of expertise to support and guide startups through its stages of growth. “What sets us apart from others is that we’re built from the ground up to service tech companies and startups,” says Laith. “We speak startup.”
The RBCx team brings together experts ranging from venture capitalists to seasoned founders. Clients can also glean valuable insights gained through RBCx Ventures that continue to evolve and grow.
RBCx backs some of Canada’s most daring innovators and idea generators. We turn our experience, networks, and capital into your competitive advantage to help drive lasting change. Speak with a Relationship Manager to learn more about how we can help your business grow.