As startups are getting older, staying private longer, and people speculate if the definition of a startup needs to change, does the line between an early-stage and late-stage startup also need to move? In this blog, learn more about early- vs late-stage startups, the characteristics that differentiate each, and explore if the definitions of early- and late-stage startups need to be adjusted for changing market conditions.

Early-Stage Vs Late-Stage Startups

When comparing an early-stage to a late-stage startup, there are generalized criteria that typically lend themselves to differentiating between each stage. These factors include:

Age
Funding History
Valuation
Company Size
Anticipated Exit Time Horizon

So, how are each of these factors used to define whether a startup is early- or late-stage?

Age

Historically, age has been a key differentiator between an early-stage and late-stage startup, even expanding to defining when a company is no longer a startup at all. Startups were generally considered to be newer companies, typically less than five to ten years old. Within this time frame, and early-stage startup may have only been 3-5 years old while a late-stage startup may have been 5-10 years old. An IPO, which generally came between ages 5-9, served as the definitive event where a company transitioned out a being a startup. As market conditions have changed over the years and startups are staying private longer, it is likely that age is no longer a useful factor for determining the stage of a startup.

Funding History and Valuation

Funding history and valuation are other criterion that have historically been used to mark the line between early- and late-stage startups. Early-stage startups are typically raising their first couple rounds of funding like Seed or Series A rounds. The amount of capital raised is generally smaller and intended to fund specific milestones like product development or initial market entry.

Alternatively, late-stage startups have typically completed multiple funding rounds. At MicroVentures for our Pre-IPO funds, we use a guideline based on companies that have raised at least $50 million in funding or achieved a valuation of at least $100 million are considered to be late-stage companies.

Company Size and Revenue

Another factor for defining startups is the size of the company and amount of revenue it has generated. While using a strict headcount rule to determine company stage is relatively outdated, a generalized range may be used to guide understanding of a company’s stage but not necessarily define whether a startup is early- or late-stage.

Revenue can be one of the better differentiators between an early- and late-stage company. Early-stage companies are frequently still trying to find product-market fit and thus, typically are pre-revenue or only have minimal revenue. Late-stage companies generally have a proven track record of generating revenue and may be in a more stable financial position than an early-stage company.

Anticipated Exit Time Horizon

Exit timelines are another factor used to differentiate startup stage. While startups are getting older and choosing to stay private instead of pursuing an IPO, exit timelines can be used to guide an understanding of a startup’s stage without serving as a hard and fast definition. At MicroVentures, generally we use the guideline a late-stage startup can have an anticipated exit time horizon of 5-7 years, while an early-stage startup typically has a longer anticipated exit time horizon.

Key Considerations

So, as companies are staying private longer, how should the definitions of early- and late-stage startups adjust to suit the current market conditions? One of the most confusing aspects, is a company can exhibit characteristics of both early- and late-stage companies at the same time. It might be operationally mature and generate substantial revenue, but be younger, have raised less capital, and have a small headcount. Therefore, investors may want to take a look at all the factors holistically and make their own determination of whether a startup is on the early-side of operating or on the later-side. This is one reason why developing a personal investment thesis can be important for an investor. Focusing on sector stage alone may contradict portfolio diversification best practices, so investors should take these criteria with a grain of salt when assessing startups.

Final Thoughts

For investors seeking startup opportunities, the complexity of company stage may directly impact investment decisions. For example, the risk profile of a 15 year old revenue-generating company is fundamentally different than a 2 year old pre-revenue startup with only 3 team members. Relying on one single metric can be misleading and misalign with investment thesis and personal goals. Ultimately, the line between an early- and late-stage startup is not truly a line, but rather a spectrum. Certain criteria may generalize buckets in which a startup might fall into, but investors should make their own assessments when deciding to invest in a startup.

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.

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Early-Stage and Late-Stage Companies