primeCROWD Blog | Invest in Start-Ups

The life cycle of a start-up

From the first investment to a successful company

Start-ups have to master several phases on their way to becoming a successful company, in which you successfully build and develop your concept and business model.

Starting with the first discovery phase, in which the founder still finances his idea himself, to Series A, via B to the end of the alphabet. Depending on the stage of development, a start-up generates stable sales or is already established on the market, thereby increasing the company valuations and making the start-up increasingly attractive not only for investors but also for customers.

However, before diving deeper into the life cycle of a start-up, it is helpful to briefly discuss the exact definition of a start-up at this point. Not every newly founded company is automatically a start-up!

A start-up is a young, not yet established company with an innovative idea and a lot of growth potential (scalability).

Especially when it comes to financing, start-ups have their own peculiarities and differ from conventional start-ups. Instead of raising money through traditional loans, the young, innovative companies are predominantly financed through funding from business angels, venture capital funds or family offices.

Once you have an innovative, scalable idea, a start-up can grow rapidly and achieve a successful exit, such as an IPO or sale, within a few years.

The transitions between the individual development stages of a start-up are usually fluid and their duration is individually long - so there is no secret recipe according to which every start-up development works.

However, a division into phases is quite useful for orientation, because each stage has its own challenges, requirements and opportunities.

From zero to a thousand - development phases of a start-up:

Pre-seed or orientation phase

The will to start a business is there and you already have a first idea in mind. In this first phase of orientation, the focus is on finding precise ideas and checking their feasibility. You take the idea that has been floating around in your head for a while to the next level and put it through its paces.

The founders think about the market potential, potential target groups and use this to carry out the first validation "Can the business idea theoretically exist?

Start-up phases

Once this has been achieved and the final result of the market and target group analysis is positive, the next goals, strategies and milestones of the start-up automatically result from this. The foundation stone for the start-up has been laid.

The capital requirement for early product development and start-up preparations is usually still rather low in this phase and the company is still in its infancy. As a rule, no own revenues are generated and from the start-up's perspective, no more than 15% of the shares should be given away in this phase.

Early stage investors can ask themselves here: "Do we believe that the founders can develop a successful product/service?"

Seed or development phase

In this phase, a first prototype or a Minimum Viable Product (MVP) already exists, i.e. a "minimally usable or viable product". The focus of product development here is on the further development and adaptation of the MVP. Furthermore, the main focus is on the optimisation of the business model and the further development of processes and company structures.

In terms of financing, start-ups should not give up more than 20% of the shares in this phase, but from an investor's perspective at least 10% is required. As always, the truth lies in the middle and depends on many factors such as negotiating strength, external circumstances, attractiveness of the market, previous success and experience of the founding team, etc.

The initial financial figures serve as the basis for calculating the valuation, but above all also the market and the founding team - the models used to calculate the valuation are rather subjective. As an investor, one should ask oneself the question here: "Do we believe that the team can successfully place the product on the market?"

Growth or Growth Phase (Series A & B)

In the growth phase, the product or service is already fully developed. Here, the focus is increasingly on the initial scaling of the business model to new markets, as well as the development and expansion of the sales and marketing strategy. Now it is time to pursue an aggressive expansion strategy. Although the start-up is usually already achieving rapidly increasing turnover here, the company is usually not yet in the profit zone at this stage.

Similar to the seed phase, no more than 20% should be ceded here in the financing from a start-up perspective.

For potential investors, the key criteria at this stage are primarily the team (founders and sales), growth, revenue and entering new markets: "Do we think the team can successfully scale the product to new markets?"

Later Stages or Maturity Phase (Series C,D.. )

The Later Stages require professional management, which sometimes cannot be provided by the original team. Here it is up to the founders themselves to consider whether they can successfully and professionally lead the company further into the future.

As a rule, start-ups that have successfully made it to these later stages have already matured into mature companies. These stages are characterised by further international growth, revenue growth and reorganisation, restructuring or further diversification of the product or service range.

In this phase, the sales strategy is aimed at sustainable, rather than aggressive growth. Competitiveness, possible acquisitions or cooperations with other companies are on the agenda in this stage of development. A possible IPO or sale of the company can also be prepared in these phases.

In our article, we have deliberately focused on the four largest phases of development, as these stages vary from start-up to start-up and ultimately every young, innovative company grows as individually as its business idea and the founding team itself.

Lin Liu

Investment Manager

Lin as Investment Associate and Product Manager is not only responsible for Deal Execution, but also for the development of the investment platform.

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