Understanding the Stages of Entrepreneurial Development

When discussing how to finance your business it’s helpful to establish an understanding of the traditional stages of development for entrepreneurial companies.

These are: Seed or Concept, Startup, First, Second, Third, and Harvest.

Seed or Concept
This is the wild-eyed, perhaps incurable, inventor stage. There is an idea, a concept, no management team, no prototype, and patentability has not been determined. No business plan, timetable, or market research has been assembled.

Tasks: Now is the time to do the “hard research” to decide if writing a plan is worth the effort and if the business is really a dream or can be made into a profitable reality. To begin development of a prototype, assemble some key management, develop a business plan, assess market potential, structure the company, and assess the ‘protectability’ of the idea(s).
Finance options: Traditional venture capital firms have little interest in funding a company at this stage. The risk level is just too high, and the time for achieving a payout or harvest is not determinable. Personal savings or friend and family money funds this stage. It ends with the completion of a seed stage business plan and the formation of the company.

At least one principal person of the company is pursuing the project on a full-time basis. The prototype is being developed or the service is being discussed with potential users, the business plan is being refined, a management team is being identified, market analysis is being undertaking, and beta tests are being set up or initial customers are identified. More formal funding is being accomplished.

Tasks: Complete and test the prototype or beta test the service to obtain evidence of commercial interest. Assemble and identify an initial management team, finish the business and marketing plans, establish manufacturing and initiate sales.
Finance options: Traditional venture capital firms may show an interest at this stage but you are much more likely to interest Business Angels to fund this stage. Even Angels are savvy nowadays so you will still need a top-rated management team, patentability is proven, and marketability is demonstrated. Fund raising is a major effort at this stage and it may take from several months to a year or more.

First Stage
The company is now a going concern. The product has proven manufacturable and is selling. If it’s a service company, some customers have tried the service. The initial management team is in place, the company has experienced some setbacks, customers can confirm product usage, marketing is being refined, adjustments are being made in the business plan and the money raising efforts continue.

Tasks: To achieve market penetration and initial sales goals, reach close to break even, increase productivity, reduce unit costs, build the sales organization and distribution system.
Finance options: At this stage, traditional venture capital firms are interested in investment–in fact, it’s their most preferable stage. Financing is needed to get the production bugs worked out and to support initial marketing efforts.

Second Stage
Significant sales are developing as are assets and liabilities. The company is sporadically achieving break even, and cash flow management becomes critical. Second-level management is being identified and hired. Export marketing is being explored and more sophisticated management systems are being put into place.

Tasks: To obtain consistent profitability, add significant sales and back orders, expand sales from regional to national, identify international marketing plans, and obtain working capital to expand marketing, accounts receivable, and inventory.
Finance options: More sophisticated and second-round venture capital financing comes into play at this stage. The founders and investors are forming plans for the harvest.

Third Stage (also Mezzanine Stage)
All systems are really go and the potential for a major success is beginning to be apparent. Snags are being worked out in all areas from design and development of second-generation products; to marketing and distribution; to management and all its applied systems.

Tasks: To increase market reliability, begin export marketing, put second-level management in place, begin to “dress up” the company for harvest.
Finance options: At this stage, the company may need to obtain “bridge” or “mezzanine” financing to carry increased accounts receivable and inventory prior to harvest. There is a great amount of pressure to prove second- and third-generation products, increase profitability records, improve the balance sheet, and firmly establish market share and penetration.

Stage Four: Or is the Harvest Near?
The end may be near for entrepreneurial companies. The company is sifting and sorting out its options including going public, being acquired, selling out, or merging. What started out as a dream has become an entrepreneurial reality.

The next challenge is to start all over again, but this time with a pocketful of dollars or pounds/yen/euros!?.

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