What Is a Startup?
When we think of startups, we often think of new businesses, but not all new businesses are startups. When we talk about startups, we are referring to new and young businesses that solve real-life problems through innovative means and are created with rapid growth in mind.
Most often, innovation is at the core of the idea of a startup, whether it be technological innovation, innovation of the business model, innovation of the operating model, or innovation of the organizational structure.
Moreover, startups are adaptable. Mistakes are expected and can even be beneficial. The goal is to learn from mistakes as quickly and cheaply as possible and refine your product, service, software, or application to better solve the problem and meet your market’s needs.
Startups are also often scalable — able to grow quickly with huge market potential. Many times, startups are so innovative that they are disruptive to entire industries.
What Are the Stages of a Startup?
One way to think about where a startup is in its lifecycle is by tracking the progress it has made. While no two startup journeys are exactly alike, there are specific phases of progress that most startups experience.
Startups usually begin with an idea and hope to progress all the way through a successful exit. But, what happens in the middle can be a little messy. The order and way startups conquer each phase varies widely, but in one way or another, most startups will need to prevail through each of these specific stages of progress to grow and be successful.
Here are the 12 stages of progress most startups will have to conquer:
The Startup Idea
Everything starts with an idea. Some entrepreneurs spend weeks, months, or even years thinking about and developing their ideas until they find a startup idea worth pursuing.
Most startup founders find startup ideas by drawing from what they already know. This includes your capabilities, skills, interests, and passions. The most common sources of ideas come from people’s work experience, education, expertise, hobbies, personal interests, and technological knowledge and skills.
While everything starts with an idea, successful startups focus on solving a problem. Rather than focusing on the product or service that you think would make a great startup, shift your focus to the problem you are solving for your customer. Why do they need your product or service? How are you meeting their wants and needs?
By focusing on the problem, startup founders gain some understanding of who their customers or users are likely to be, take in their perspectives, and begin to understand their pain points and gain points.
After obtaining a better understanding of your idea and customers, next comes the research. Having a business idea is just the start. In order to turn an idea into a successful startup, you are going to have to research your idea and work out all of the details.
Before anything else, you are going to need to do an immense amount of research. One of the first things you will need to find out is ‘does your idea already exist?’ (Hint: It probably does).
You will also need to research the sector and industry, your market and potential customers, and your competitors. Understanding each of these helps startups to better understand the problem they are solving, the scope of the problem, how scalable their idea is, how to meet their market’s needs, and how to begin to develop ideas into an actual business.
Startups need to understand their industry. How new or old is the industry? What are the industry trends? What is the industry’s rate of growth? Ultimately, you need to be able to determine whether there is ample opportunity in the industry to support your goals and aspirations.
Pay attention to recent innovations in the industry, the challenges startups in the industry are currently facing, and how you could approach the problem from a different angle to set your startup apart.
Startup ideas need a market. Who are your customers? How many of them are there? How big is the market? It is critical to understand who your most likely customers are and the size of your market.
An effective analysis of your startup’s potential market makes it easier to assess the opportunity available (or lack of opportunity), to design your products and services to meet the market’s needs, and to plan more effective sales and marketing strategies to reach your most likely customers.
Startups also need to understand the competitive landscape. Understanding the competitive landscape gives you a better idea of your startup’s unique value proposition (UVP), allowing you to focus on pivoting the business model to make your startup stand out.
Start by identifying who your competitors will be, and find out everything you can about them. Think about their strengths and weaknesses, target markets, what their business models are, and the threat they could pose to your startup’s success.
With research in hand, startup founders need to use this information to develop their ideas and begin working out the details. Developing your startup idea involves analyzing the industry, market, and competitive landscape and using this information to design and model your startup to meet these needs.
There are several tools to help you start developing your startup idea, such as the Lean Canvas and the Business Model Canvas. Many startup founders use these tools to help envision and innovate their startup’s product or service, target market, business model, or organizational design.
One useful tool for beginning to develop a business idea is the Lean Canvas. The Lean Canvas takes a problem-solution approach to helping you plan your business, focusing on the problems you are solving for your customers.
The Lean Canvas helps you describe and visualize your problem, solution, customers, value proposition, key performance indicators, and competitive advantage.
The steps to complete the Lean Canvas are:
- Define your target customers or users
- List the problems you are solving and how those problems are being solved now
- Describe your solution
- Explain your unique value proposition
- Describe your revenue streams
- Depict how you will reach customers
- Define the key metrics that will tell if you are doing well
- Detail your cost structure
- Explain your unfair advantage
Business Model Canvas
The Business Model Canvas helps you describe and visualize the key aspects of your venture, including your customers, value proposition, infrastructure, revenue models, and cost models.
You will notice that several of the steps of the Business Model Canvas overlap with those of the lean canvas. So, if you have completed a Lean Canvas, you will already have several of the central parts of the Business Model Canvas complete.
The steps to complete the Business Model Canvas are:
- Define your target customers or users
- Explain your value proposition
- Depict how you will reach customers
- Describe how you interact with customers
- Describe your revenue streams
- List the key activities that you will need to do to deliver on your value proposition
- List the key assets that you will need to deliver on your value proposition
- Describe the key partnerships that you will need to put in place
- Detail your cost structure
Another (ever ongoing) phase in a startup’s journey is business planning. Business planning, forecasting, and the process of writing a business plan will make you think through all of the key elements of your business.
Before committing to a startup idea, you need to determine if your startup idea is feasible and desirable. Can it be done, and do you want to do it? Is the risk vs. the reward worth it to you? In order to determine this, you need to put together a plan.
Forecasting Costs and Profitability
One of the first things startup founders consider is if the business is feasible and desirable. Will it be profitable? Thus, forecasting costs, revenues, and ultimately determining profitability is an essential part of your business planning.
For a startup to obtain a loan or secure funding from angel investors or venture capitalists, founders need to create accurate and well-researched startup financial models to persuade seed investors and get funded.
As it often takes time (i.e., years) for most startups to grow customers and revenue, we recommend starting with costs and expenses when preparing your startup’s financial forecasts.
A startup's expenses are easier to estimate than revenues. Expenses include both fixed costs such as overhead as well as variable costs such as materials and supplies.
With knowledge of expenses in hand, startup founders can then estimate revenues and profitability under conservative, expected, and aggressive growth scenarios.
Writing a Business Plan
At one point or another, most startups have written some kind of business plan — for themselves, for investors, or to apply for credit or loans.
Even if you do not need a formal business plan, the process of planning still reaps big rewards for many startup founders and their startups.
The process of writing a business plan pushes you to return to your research and take an in-depth look at your industry, market, and competitive position. It helps you set goals, determine your keys to success, and plan your strategies. It also allows you to explore your financial projections, manage cash, and understand your startup’s financial prospects.
Recommended: Read our full guide on how to write a business plan to learn more about the business planning process.
The commitment phase is when a startup’s founder(s) move from an idea to an action mindset. You have done the research, developed your idea, worked out the details, and have come up with a plan. During the commitment stage, the founder(s) commit to putting that plan into action.
In addition to your personal commitment, the commitment phase is the stage of a startup where a startup’s founders begin to take steps to form a company. This includes defining relationships between co-founders, registering your business, and incorporating your company.
During the commitment process, founders should consider drafting the appropriate agreements between the co-founders of your startup. This should be initiated in the earliest stages of forming your startup by drafting a founders’ agreement. The founders’ agreement lays out the roles, responsibilities, liabilities, ownership, and vesting schedules among the co-founders of a venture.
Founders’ agreements should address any possible issues that may arise concerning the ownership, contribution, and decision-making power of the founders. The ideal founders’ agreement should lay out:
- IP Ownership
- Issuance of Shares
- Founders’ Roles
- Decision Making
- Founders’ Exits
Consider hiring a startup lawyer to help draft or review your founders’ agreement. Read our guide on how to find a startup lawyer for information on finding the right attorney for your startup.
It is in the commitment stage of launching a startup that the startup’s founders begin to take steps toward building a company. One of these first steps is to incorporate your startup.
Incorporating your startup means establishing your business as a formal legal entity, separate from its founders or owners. When you incorporate your business, you register your business with your state, and it becomes its own legal entity, or “person.”
There are a number of benefits of incorporating your startup, including providing personal liability, sale and transferability of ownership, creating a corporate identity, and establishing credibility.
While there are several business structures that startups can choose from, for startups that have high growth aspirations and hope to raise capital, C corporations (C corps) are most often the best choice.
Recommended: Read our guide on how to choose a business structure to learn more about choosing the right business structure for your startup.
Entrepreneurs can’t do everything themselves. At some point in their startup journey, startup founders are going to have to assemble a team. Founders may need to enlist co-founders, recruit senior managers and executives, and hire employees.
For many startup founders, the first team members they add are co-founders. Bringing on co-founders is all about filling important gaps to ensure all of the company’s needs are met, such as:
- Skills gaps
- Leadership experience
- Industry knowledge gaps
- Startup experience
- Fundraising experience
- Personality gaps
Acquiring capital is another ongoing part of launching a startup. Startups require funding. They need capital to research and develop an MVP, cover their initial expenses until they become profitable, and again to expand, grow, build inventory, and even get through slow seasons.
Startup founders should be completely aware of potential sources of funding, startup costs, additional financials, and financial projections before seeking outside funding.
When planning a startup, startup founders should determine what types of business funding options their company will need during different stages of development. For example, during the early stages, bootstrapping or friends and family loans may be the best funding choice. However, as your startup becomes more established and reaches the growth stage, venture capital or angel investors are more likely to want to invest.
Here are the most common types of business funding:
Another important stage for a startup is the minimum viable product (MVP). An MVP is a first or early version of a product, service, software, or application that has been designed with the fewest number of features to still be usable.
MVPs are used to test early versions of products with users, gather feedback, validate the idea, and improve the product. Many startups’ first MVP includes bare-minimum, must-have features to test your product or service with your target audience.
The purpose of the MVP approach is to collect feedback early and often, designing products and services with the features that customers want and need. The trick is to discover what the customer or client wants without becoming obsessed with creating your idea of the "perfect" product.
With an MVP created, startups are ready to keep building their product or service. The goal now is to get their product or service into the hands of users to find out if it does what it was built to do. This is known as product-market fit. Is there a fit between what you are creating and the market you hope to serve? Do your users like it? What features do they like? What is still missing?
By speaking with your customers — soliciting feedback, listening to your customers and users, and learning, startup founders begin to improve and refine on their MVP until it satisfies the market's wants and needs.
After creating an MVP and collecting feedback from their customers, many startups realize that they are on the wrong track and need to pivot. A pivot is when you shift your business model or strategies to adapt to feedback or changes in customer preference, technology, the industry, or sector, etc. The truth is that all startups pivot.
Pivoting is an essential part of lean startup methodology and the build-measure-learn feedback loop championed by Eric Ries in his book “The Lean Startup.”
Pivoting involves following opportunities. As startups collect feedback and learn, they pivot toward new product and service offerings. In doing this, they pivot toward new markets and new revenue streams. Before launching a startup, be prepared and willing to pivot.
As startups refine their product, service, software, or application, the next stage they hope to hit is gaining traction. Traction is when you start to put the word out about your product or service and begin to acquire users or customers. In other words, you are officially open for business.
At the traction stage, you may only have an MVP or an alpha or beta version of your product, service, software, or application, but it is out there and available in the world and can begin to build validation. Many startups begin building traction while still refining their final product, but it is at this stage that you find out if your idea is really viable.
When you find traction, this is the first sign that your product or service is viable, that there is product-market fit, that you're reaching from your target market, and that you are growing a brand. Traction acts as a signal of progress, both for the startup itself as well as for potential investors.
Once a startup gains traction, they then need to work toward scaling to a sustainable business model. Can the product or service be produced and distributed in a profitable way at scale? Scaling involves growing your customer or user base, your offerings, and your startup, sometimes all at once.
Once you have proven that your product or service is scalable, the startup’s primary goal is to develop and optimize the business model to grow and scale as quickly as possible. Startups build out their company — growing in employees and infrastructure.
During the scaling stage, startups also continue to work on refining and optimizing their product and services, processes, messaging, marketing, and sales strategies, among many others. At each successive stage, the organization, the ownership and management structure, the goals/challenges it faces, the operating model, and on some level, even the culture itself needs to grow and evolve.
The final stage, and the stage most startup founders ultimately hope to reach, is a successful exit. Although an exit is not the goal of every startup, for those who have taken on investment, an exit is eventually expected. This is how you cash in on all of your hard work and make money for yourself and your investors.
For startups, a successful exit most often comes via merger, acquisition, or initial public offering (IPO). In order for a startup to reach a successful exit, it must grow into a fruitful company and appeal to another company or public investors at large.
The exit stage is the first chance a startup’s founders and investors have to cash out on their investments. This allows founders and investors to sell their stake in the startup and reap the rewards of building a successful company.
Startup Stages by Funding
Another way we often discuss startup stages is by their funding (or funding round). Most startups will go through numerous funding rounds, beginning with their own early investments into their startup through a merger, acquisition, or IPO.
In terms of funding, startups often go through several rounds of raising capital as they build their business, gain traction, and grow. While funding largely overlaps with a startup’s progress, the amount of capital that startups need and how quickly startups proceed through each stage varies widely from startup to startup.
Here are the six most common stages of startups by funding:
The earliest days of a startup, before much if any capital is raised, is known as the pre-seed stage. The pre-seed stage begins at the idea and includes the money you scrape together through your startup acquiring its first significant investment.
During the pre-seed stage, founders research and develop their idea, come up with a plan, and build a proof of concept or prototype. At these initial stages, founders are not trying to build a finished company but rather to build the foundation/architecture of what could one day become a great company.
Startups in the pre-seed stage are almost exclusively funded by a startup’s founders and their family and friends. But, there have recently been more startup incubators, accelerators, and angel investors willing to invest in pre-seed ventures that are still developing their ideas.
The seed stage begins when startups acquire their first significant investments. To raise seed capital, startups often need to have a proof of concept or working prototype. But with seed capital in hand, this is often the point where startup founders begin to put their plan into action and begin building the first version of their product, service, software, or application.
It is during the seed stage that startup founders commit to their idea and to their investors, build out their team, develop an MVP, and begin refining their product or services. At this stage, the goal of startup founders is to find their market and validate their business model.
Seed-stage startups are primarily funded by outside capital. Beyond the very earliest stages, founders seldom contribute significant capital of their own. The majority of seed-stage funding often comes from outside sources of early-stage capital, including family and friends, business loans, angel investors, startup incubators, startup accelerators, or crowdfunding.
Startups that demonstrate success in developing their business strategy and the ability to grow and earn revenue next look to Series A funding. This is often a startup’s first investment from institutional investors. “Series A” refers to the class of stock sold to investors. Series A funding is often used by startups to continue building out their team and product.
Series A funding rounds and beyond are primarily funded by angel investors, angel groups, private equity, and venture capital. In 2020, approximately 650 companies in the US raised an average of $15.6 million in Series A funding.
Following Series A funding, startups continue refining their product or service, gaining traction, and scaling their business. During this stage, startups should see growing numbers of customers or users and (hopefully) revenue, although it is not uncommon for startups in some industries to take years to produce significant revenue or profit.
Startups that continue to demonstrate success from their Series A funding may need to return to fundraising to raise capital to continue building their product or service, improving their team, and fueling growth.
Series B capital is typically funded by private equity and venture capital. In 2020, 38 companies in the US raised an average of $33 million in Series B funding.
Most startups that obtain Series B financing are generating stable revenues and are beginning to show profits; however, they require additional capital to expand and grow.
Series C, D, E, and Beyond
Following Series B funding, startups often continue to need additional capital to grow. For many startups, the time to achieve positive cash flow can be much longer than with most new businesses. In some cases, the expectation is that a startup will remain cash flow negative as it grows, often for upwards of four to five years. While they continue to grow, startups may seek continued funding through Series C, D, and E rounds and beyond.
Series C funding is also typically provided by private equity and venture capital. In 2020, 14 companies raised an average of $59 million in Series C funding rounds in the US.
By this point it would be difficult to call most of these companies startups. However, later stage capital is often required to continue funding growth and to move the company into a position to be acquired or going public.
Merger, Acquisition, or IPO
Finally, the last stage of a startup is its exit. Although an exit is not the goal of every startup, traditional exits such as mergers, acquisitions, and IPOs are how you cash in on all of your hard work and make money for yourself and your investors.
For a startup to reach a successful exit, it means that the startup has grown into a fruitful company and is appealing to another company or public investors at large.
The exit stage is the first opportunity for a startup's founders and investors to get their money back and profit from their investments. This allows founders and investors to sell their equity in the company and reap the rewards of building a successful business.