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Early Stage Startup

Updated on April 1, 2024
Article byShrestha Ghosal
Edited byShrestha Ghosal
Reviewed byDheeraj Vaidya, CFA, FRM

What Is An Early Stage Startup?

An early stage startup is a company that is in the early phases of development. The company’s founders have completed thorough research and received the funding they need to establish the firm. During this phase, the company introduces its minimum viable product (MVP) to some of its consumers.

Early Stage Startup

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These companies have just been recently created, have yet to raise considerable funding, and are making minimal expenditures in their operations. This stage is distinguished by its focus on business growth. It comprises obtaining venture capital investment or assembling a team to start operations.

Key Takeaways

  • Early-stage startups are companies where the company’s founders have only just completed sufficient research and acquired the necessary funding to establish the business.
  • During this phase, the company presents its minimum viable product to some of its customers. This phase comprises obtaining venture capital investment or forming a team to start operations.
  • Specific parameters demonstrate if the company is capable of sustaining itself in a competitive business environment. They include a business’s prospective client base, rate of growth, and market reaction.
  • The risk-reward ratio in these early-stage companies tends to be significantly higher. As a result, they can attract more investors.

Early Stage Startup Explained

An early-stage startup is a company in its initial stages of establishment. The company has only recently been created and has yet to raise substantial funding. It is making limited expenses in its activities. These startups generally possess fewer resources. They are constantly experimenting with new ideas and concepts, and they have yet to reach their full potential.

Early-stage organizations usually concentrate on generating new products or services instead of growing or sustaining existing ones. They are often more innovative and may be less profitable or successful initially. Startups in the early stages often lack institutional expertise from investors and customers. As a result, they are more likely to experience challenges and obstacles during their development and may require additional assistance from investors, staff, and partners to grow.

How To Evaluate?

Some ways to evaluate early stage startup companies are:

  • Some metrics indicate if the company is capable of establishing itself in the competitive business scenario. They include a company’s potential customer base, its growth rate, and the market response. Moreover, a startup gains value if it can prove that the business is profitable, viable, and scalable.
  • A startup with an experienced and competent workforce signifies a valuable venture. Such employees are crucial for the organization’s development and aid the business in standing out from its competitors.
  • A functional model, including a prototype or an MVP (minimum viable product), may help gain investors. These elements display the company’s future potential and its established customer base. Furthermore, if the business chooses an emerging industry, it may be able to attract more investors.
  • Businesses with high sales growth predictions and healthy profit margins may be a lucrative option for investors. As a result, such companies may secure higher funding.

Examples

Let us go through the following examples to understand this stage of startups:

Example #1

Suppose Amy decided to start her cloud kitchen. She established a website and a mobile application to receive orders from her customers. Additionally, Amy secured a few investors who agreed to fund her initiative. She also recruited a few employees who would help her in running the business. After setting up the initial structure, she started her operations among a small community of customers, who provided her with valuable feedback on her business. This is an example of a startup in an early stage.

Example #2

Antler, a globally recognized early-stage venture capital company, has made a substantial investment of US$5.1 million in early stage startup funding. It invested in 37 early-stage companies in Southeast Asia, making it the region’s largest deal in terms of number of investees. The 37 firms operate in 19 different sectors, including artificial intelligence (AI), SaaS (software as a service), fintech, and healthcare. Jussi Salovaara, Antler’s co-founder and managing partner in Asia, emphasized the company’s preference for early-stage Southeast Asian entrepreneurs, especially those working on vertical AI and Industry 4.0.

Challenges And How To Overcome Them?

The challenges are as follows:

  • Companies may find it challenging to find the appropriate investors. Recruiting the right employees may also be a challenge for the organizations.
  • The startups may find it difficult to offer suitable products and services. Surviving in a competitive market where established companies already have a strong foothold may be tedious for startup companies.
  • The organization may find the decision-making process challenging. Modifying existing strategies, developing new marketing and sales strategies, and managing the resources and finances effectively pose a challenge for the companies in their early stages.

The strategies that may help overcome the challenges are:

  • Setting up a strong leadership team may aid in ensuring that the company is operating seamlessly. It also ensures that the company is meeting its organizational goals. Efficient leaders can also offer proper guidance and support to the entire team.
  • The company must establish a clear mission and vision that will guide the organization and ensure that it is following the right track. The vision and mission must align with the organization’s core values and aims.
  • The organization must be open to changes. The company must recognize its strengths and weaknesses while moving forward. It will help the organization progress and adapt to the dynamic business environment.

Benefits Of Investing In An Early Stage Startup

Some benefits of early stage startup companies include the following:

  • Such startups have a high growth potential. They may become very successful in a short time. Moreover, there is low risk as the company is yet to become established.
  • These startup companies often incur lower expenses, which makes them easily affordable and accessible to investors.
  • Companies usually generate a higher rate of return on investment (ROI) in the early stages as there is more room for growth.
  • These companies usually are more innovative with their products or services. As a result, investors find them more exciting and engaging.
  • The risk and reward ratio in these startups is generally much higher. Thus, they can attract more investors.

Early Stage Startup vs Growth Stage Startup

The differences between the two are as follows:

Early Stage Startup

  • The early stage is when the company founders have conducted proper research and have secured the initial funding to launch the business.
  • In this phase, the company releases its minimum viable product to some of its customers. It allows the business to gather feedback on how the company can effectively meet its consumer needs.
  • This stage is characterized by the focus on the company development elements. It includes securing venture capital financing or creating a team to start the operations.

Growth Stage Startup

  • In the growth phase, a startup reaches the level where it has gained a consistent and loyal consumer base. Moreover, it secures a steady income source in this stage.
  • This phase comprises established teams, and the company focuses on recruiting more members to share the increasing workload.
  • In this stage, the company concentrates on constant improvement of its product or service offerings to meet customer demands and ensure consumer satisfaction.

Frequently Asked Questions (FAQs)

1. Is joining an early stage startup good?

Startups in this stage aim to create a transformation in the industry, and the initial employees play a crucial role in this mission. They get the opportunity to make autonomous decisions that are instrumental in shaping the company’s future and have a significant influence on how the organization functions. Furthermore, joining a company at this stage offers individuals with incredible learning opportunities.

2. What is the Rule of 40 for early stage startups?

The Rule of 40 suggests that the combined value of an organization’s revenue growth rate and its profit margin must exceed 40 percent. This Rule has become increasingly popular and widely accepted as a growth metric, especially by SaaS investors.

3. How many early stage startups fail?

Around 90 percent of such startups witness a failure, whereas about 10 percent of them fail within the first year. However, failing between two and five years is most common for startups, where almost 70% come under this category. The primary reason why startups fail is because they misread the market demand. The second most common reason is that they run out of funds and personal money.

This article has been a guide to what is an Early Stage Startup. We explain its examples, how to evaluate it, comparison with growth stage startup, and challenges. You may also find some useful articles here –

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