Startup Development Stages
What are the stages in the development of a startup?
There are six main stages in the development of a successful startup company. They are the pre-seed stage, the seed stage, Series A funding, Series B funding, Series C funding and the IPO.
Are you interested in finding out what each stage of development means from a legal and practical perspective? This article, by corporate law attorney Michael Decker, will explain in detail.
The Pre-Seed stage
The Pre-Seed stage is the incipient step towards establishing a startup At this stage, the founders have an idea and they wish to test the feasibility of building this idea into a viable product or service. This stage is characterized by market testing and the development of a plan for the marketing and selling of the product towards its launch.
During this stage, the investors generally fund the company from their own resources or those of friends and family, amounting to somewhere between $10,000 and $100,000 dollars. Early stage venture funds, known as Micro VCs, may also get involved
Seed Funding is the first official equity stage, during which investors receive shares in the company. This is the stage when venture capital firms get involved and crowdfunding comes into play. Crowdfunding is when small amounts of money are raised from many sources, usually via the internet. “Angel Investors” are commonly found in this stage. These are investors who invest in riskier enterprises, such as start ups lacking a proven track record, in exchange for an equity stake in the company.
At this stage, the valuation of the company may range anywhere from $3 to $6 million dollars. This is the stage when the company further develops its product, expands its market research, plots its demographics, recruits and launches its product.
Series A round
In the Series A round, more traditional venture capital firms enter the picture. Crowdsourcing is also prevalent at this stage. In this stage a company raises anywhere from $10 million to $30 million dollars. In rarer cases, you will find “Unicorns”, which are privately held startup companies valued in excess of $1 billion dollars.
The Series A round is the stage in which a company must demonstrate a plan for developing a business model that will generate long term profits. Alongside a working business model, it will devote its energies to further developing its products or services.
Series B round
By the Series B stage a company has a proven track record. It has met certain milestones and has passed the initial startup stage and the company has increased its valuation. This stage may range from $30 million to $60 million, although the figure can be much higher. In February 2019, Nuro, a California-based robotics company, raised $940 million in the Series B stage, giving it a valuation of $2.7 billion. Another example is Devoted Health, which raised $300 million in the Series B stage in 2018. Private equity investors are common in this stage.
By the Series B stage, the company has shown it can generate revenue and it will focus on scaling its activities upwards, expanding the scope of its activities.
Equity in the company will sell for a higher price per share than in the previous stage. This is to compensate Series A investors who assumed increased risk over the Series B stage.
Series C round
By the Series C stage, a company has shown itself to be quite successful. It is at this stage that, in addition to private equity firms and established venture capital firms, hedge funds and banks will enter the picture. The raised capital may exceed $100 million dollars. Large institutional investors will be attracted to the company’s proven business model.
It is in this stage that a company seeks to expand its existing market share, develop new markets and even acquire existing companies.
At this stage, most companies will opt for an IPO, or Initial Public Offering. In rarer cases, a company will offer a Series D or even a Series E round for the purpose of generating funds towards this end.
An IPO is the final stage in a company’s development, during which it offers its shares to the general public for the first time. At this stage a company will usually be generating revenues of upwards of $100 million, will have a solid record of corporate governance and a sound financial process. In addition to lawyers and accountants, underwriters are a feature of this stage. For an IPO, the company must file with the SEC, or Securities and Exchange Commission, or its Israeli equivalent.
It is not uncommon for companies to reward its executives with stock at the IPO stage. A growing startup may sell its shares through an IPO for the purpose of raising additional funds. More established startups will see its owners exiting the company by offering its shares to the public.
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