The startup lifecycle spans idea generation to an eventual exit through an acquisition or initial public offering with several inflection points throughout.
Seed and Early Stage Investments
Seed and early stage companies are typically seeking capital to invest in product development, building a team of employees, and formalizing customer acquisition strategies. While seed stage companies are focused on product development, early stage companies typically have a handful of users testing a beta product while fine-tuning their go-to-market strategy and building out sales channels.
• Focused on product development and preparing for a broader market launch.
• Product is usually in use by early beta customers for testing and feedback.
• Typically cash-constrained and seeking its first outside investors through family, friends, and angel investors.
Investments within this stage typically take two forms: convertible notes and preferred equity. The form of investment is dependent on the company’s relative maturity with seed stage investments typically structured as convertible notes while early stage companies issue preferred equity in exchange for investor funds. In institutional venture capital terms these are known as Series Seed, Series A, and at times Series B.
• Officially launched and focused on customer acquisition.
• Implementing its sales channel strategy and attempting to reach breakeven cash flow.
• Generating revenue but pursing additional capital from institutional investors to invest in customer acquisition and business development.
Late Stage Investments
Late stage companies have typically demonstrated viability as a going concern and generally have a well-known product with a strong market presence. Late stage companies have generally reached a point of positive cash flow generation and begin to experiment with expanding into tangential markets.
• Well-known product which has successfully penetrated its initial market and learned where and how to move next.
• May be cash flow positive and introducing its product into tangential markets.
• Investors are seeking liquidity as the company begins to position itself for an acquisition or an initial public offering.
Investments made early in a company’s lifecycle typically require a long holding period and can be riskier relative to a late stage companies. Understanding the lifecycle stage at which an investment will be made is paramount in accurately capturing the risks and return characteristics associated with that investment.
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