Have you also noticed that many people started to refer to Startup businesses as Early stage businesses?
During the past year the word “startup” might have lost its shine and smart people have re-designed the concept. But they are wrong and it often misleads the market.
In general when we talk about business growth we define multiple stages in the life cycle of a business. This is a great thing because by categorising the different growth patterns we can offer a useful tool for the potential investors as well. However these indicators might be more important to the company leaders and owners, offering them a full understanding on the current challenges that their businesses is facing.
Let me summarise the differences of the first business development stages in a nutshell.
Stage 1: Grow-or-Fail
The very first phase in every business is the grow-or-fail. It effects every new business, (and also it can come back later in to the business life if the management is not competent enough to handle the market changes).
In this period the two main “enemies” are the Time and the Cash flow.
At this stage the main problem is to educate the market about the new product/service and to obtain more and more clients. In this period business owners have two main “enemies” called time and cash flow.
We also refer to this stage as the “Survival period” where our existence is essential and to overcome the obstacles is strongly time sensitive for the long term prosperity.
The keyword here is “Exsistence”.
Make no mistake working with a Startup business can be also exceptional because it is all about the excitement factors, whether you can prove the concept and break down the obstacle. This is a phase when you invest your time, energy, knowledge and money from passion and because you believe in the person behind the company.
A year ago I wrote a topic about the Top 6 mistakes with Angel investors which also stated:
When an idea is exciting and the concept is clean then Business Angels are willing to take the risk in the hope that the concept and a great execution will bring the desired success.
These are the businesses that are usually looking for crowdfunding to survive. Which is not a problem if they can do this parallel with their survival mode. The mistake that many Startups make is that they are not focusing enough to obtain costumers and to deliver products because they are convinced that all they need is an investor. However in reality, an investor seeks some kind of visible achievement as well to decide whether the idea and concept is viable or not.
In this stage one of the number one task for the Startups is to expand from their tiny key costumer base to a much broader, possible international sales base. This is the period where the owners do much more from their own (sometimes everything by their own).
The strategy: simply to remain alive.
To overcome any survival period Creating Business Value and utilising Social networks are of key importance.
Stage 2: Early stage
Businesses that have obtained enough costumers to become true businesses thanks to their hard working entrepreneurs, but their income is still just hardly enough to exist are the early stage businesses. These are the ventures where we can already observe some sort of proof of concept, however they still need to do significant efforts to stabilise their existence.
The keyword here is “Survival”.
By reaching this stage the early stage businesses already demonstrated that they have a market need. This is usually backed with enough and more importantly satisfied customers, therefore they are a workable business entity. However their key problem is to shift their focus from the question of existence to productivity and potential revenue. (I highly recommend the NO EXCUSE! in business book for these business owners.)
Their key problem is to shift their focus from the question of existence to productivity and potential revenue.
Usually this is the stage when pilot products and ideas have already moved (or are ready to move) into quality production. This is why investors are willing to invest into early stage businesses because they have objective marketing results to evaluate.
In this stage businesses are usually maintaining a simple organisation, supervised by the owners, still they have managed to get break even with their initial cash investments. They also generate just enough cash-flow to stay in business and might be able to finance their own growth in the future. Early stage businesses are in the doorstep to earn an economic return on their work.
For the above mentioned reasons Early stage businesses are usually targeted by Venture Capitalists because of their growth potential. A Venture Capitalist is usually seeking 10x of return on their investments in a 3 to 5 years of period. Since an early stage business has a proof of concept, investing early into these entities is often very attractive for the Venture Capitalists and private investors.
A real investor is not just “loaning” the funds but mentors and helps the business through his/her connections for the mutual benefits.
Obviously the risk is still there since after a strong start the business may fail completely and drop from sight. However with proper partnership when the investor is not just “loaning” the funds but mentors and helps the business through his/her connections for the mutual benefits, the early stage business has a much more likelihood of survival than a startup.
Stage 3: Small business
We usually refer to as small business to those businesses which can not reach the 10 million Euro annual income as manufacturers/service providers and the 20 million Euro as wholesales. The difference from an early stage business is that small businesses have usually already overcome their “existing” problems and are prospering well.
The keyword here is “Success”.
Small business owners usually face with the question of keeping their company small and stable or to try to expand for a bigger good. This bigger good is not always a financial motivation. Some owners aim to “retire” from their businesses, to leave the daily hassle over to their trusted employees.
Proper delegation of the daily operation tasks can ensure the owners a partially disengagement from their company. This can allow them more time with their family, their hobbies (such as sailing or playing golf on the field) or simply to focus on a new and exciting business venture.
When a company has attained its true economic health, the organisational rules are set, performance indicators are defined and the management is trusted then the owners have a great potential for a successful disengagement.
These companies focus more and more on the business, marketing and growth planning and the owners become board members, who monitor the strategy rather than being active daily executers. Their number one task is to make sure that the basic business stays profitable in the hands of the new management without their daily presence.
Stage IV: Take off
Probably no explanation is needed here. In this phase the company has a strong base for the developments because their marketing plan is fully developed from extensive research and market experience. In this stage usually new types of challenges will appear just as delegations, organisation behaviour, creation of sophisticated information and control systems as well as well developed standardised operating procedures.
All of these serve the international brand identification and the base of a stronger and revenue steady business base.
To summarise it
To summarise it Grow-or-Fail is the business period that I would define as a Startup business. An Early stage business is much more than a Startup venture, since it already has proved that the market is open for its product/service.
The confusion is coming from the fact that a Startup business is in its early stage of business life. However it is not an Early stage business. Startup businesses are also looking for funds to secure their existence, however they want to reduce the normal timeframe without proving first their concept of idea.
Any business with a proof of concept can be called as an Early stage business, but none of the businesses should be labelled as early stage if they do not even have solid information regarding the market reaction of their target groups. Those are the Startup businesses waiting to verify the potential of their dream and visions.