Businesses are unique, with different needs at different times of development. For example, an eight-month-old, fifteen-person tech startup rarely gets advice based on a twenty-year-old, eighty-person manufacturing company.
Generally, business size and growth stage are the dimensions used to plot and track the trajectory of a business startup and the type of business funding it will need. There are various growth lifecycle models, and while these models are helpful, they do have some drawbacks:
1. They assume a business must grow through all these stages or fail to do so.
2. Some essential early stages in origin and growth are missing, like what happens before launch.
3. Usually, growth tracking is done by sales. Factors like value-add, geographic footprint and the nature and complexity of product lines are not considered.
4. Lastly, the business funding needed for startups doesn't seem to feature in most models.
A new model from the Harvard Business Review including business funding for startups
A Harvard Business Review article paints an astute picture of their reworked business lifecycle model for small and growing startups to gauge their growth more accurately. Each stage developed from their research is characterised by the business's size, diversity, and complexity. We have summarised their model and included the types of business funding a startup may need at each growth point.
The first stage is the existence of the startup business. In this stage, the biggest and most exciting challenges for entrepreneurs are client acquisition and delivery of goods and services.
Can a business get enough customers, deliver consistently to those customers, and create repeat purchases to become a viable company. If successful, the business can expand on its model and grow its client base while anticipating the type of business funding it will need as a startup.
1.1 Funding requirements at this stage: Seed capital
Entrepreneurs need to know if they have the business funding (capital) to cover the considerable cash demands for the startup phase. Systems and processes are minimal at this stage, and the owner wears many hats, with the primary goal being survival.
At this phase, the owner may be the only contributor of capital using savings or perhaps loans and donations from friends and family. The owner is bootstrapping the startup and is also contributing sweat equity. These are some of the things that make an entrepreneur tick [click here for more].
Further, business owners need to stabilise production and product quality, whether for a bricks and mortar business or a new tech company. The hard reality is that most never reach the point of wide customer acceptance and end up closing their doors when business funding for the startup runs dry.
Seed capital from a venture capital business is an option at this stage, and convincing potential venture capital partners of the startup's viability is paramount. Most seed capital rounds for business funding are small and used for product research and development, market research or adding human resources.
The second type of venture capital used in this stage is startup capital. This business funding is like seed capital, but the startup business seeking the funding has completed a market analysis, has business plans in place and is going to market to secure a customer base.
By reaching this stage, an entrepreneur has secured enough customers through product satisfaction and has proven their to be a viable business. The biggest challenge at this stage is the relationship between sales revenue, company expenses and securing further business funding for their startup.
A business must generate enough cash to break even and maintain or replace capital equipment as needed. Cash generation needs to be enough to stay in business and fund growth to become a larger entity.
2.1 Funding requirements: Early stage, first stage or second stage venture capital.
A viable option for funding the business startup at this stage is early, first or second stage venture capital. Venture capital gets used for manufacturing and production facilities (or software development) and more aggressive sales and marketing [click here for more].
The business may begin to produce marginal returns on its investment, but the startup may fail at this stage without business funding.
This stage is the dream stage. The business owner's decision is whether they want to continue to expand and pursue further business funding for their startup or keep the company stable and profitable while pursuing other interests. The Harvard report split this stage into two sub-stages of development.
The business is successful with sustainable market penetration and is earning above-average profits. At this stage, experienced managers get employed to lighten the load on the business owner. Basic financial, marketing and production systems are in place. As the business matures, the owner may become more distant due to a new focus and strong management, plans and strategies.
If the business can adapt to market changes, it can continue as is or be sold or merged at a profit. Similarly, business funding for the startup can stimulate it into another growth phase.
The owner can take the company's cash and established borrowing power and risk it in financing growth through further third-party business funding.
3.3 Business funding requirements: Expansion, second or third stage capital
Capital is fuel to add to the fire for the exponential growth of the business. Growth means new territories and diversification and differentiation of products.
Managers must get developed further to meet the needs of the growing business. Managers need to have a vision for the future and not just be concerned about the status quo. Deep strategic planning is paramount at this stage.
4. Take-off stage
The key in this stage is securing business funding for the startup for rapid growth. Also, the right team must be in place to manage the development and complexity of operations. Systems become more refined and extensive. If the owner can meet the challenges of this growth phase and secure the correct type of business funding for their startup, it can become a big business with an option to sell at a profit.
4.1 Capital requirements: Mezzanine, bridge or pre-public stage
The business funding opportunities are known as the mezzanine, bridge or pre-public stage. Funds secured at this stage can be used for mergers and acquisitions, price cuts to drive out competition or to finance the steps to an initial public offering.
Investors may sell their shares and end their engagement with the company, having made handsome returns.
5. Resource maturity stage
The final stage suggests that businesses must consolidate and control the financial benefits realised by the company's rapid growth. At the same time, it is crucial to retain the advantages of a small business startup-like flexibility and entrepreneurial spirit. The management team must be well developed to oust inefficiencies caused by rapid growth. Systems and staff are extensive and well developed.
The company has now arrived. The small startup that was battling to survive and secure business funding has reached a stage of prominence with a foothold in the market poised for future success.