What Stage Are You In?
Understand the four stages of your business's development to get the cash you need.
By David Newton
| December 17, 2001
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How can you improve your chances of getting the capital you need
to make your business successful? Tied very closely to that
question is another concern that focuses on the current status of
the venture's development. So putting these two together, the
"stage" of your firm's life cycle definitely matters
when it comes to raising funds, and understanding this becomes one
of the best ways to improve your chances of securing a funding
deal. Here's how it works. Think of your venture as having four distinct stages in its
development: 1. The pre-launch. This is
actually made up of two subphases. The first subphase is referred
to as the "concept feasibility" phase. It's during
this time that research and development happens for a brand-new
product or service to determine all aspects of the ultimate
manufacturing, distribution and support processes. This is followed
by the "market test" subphase. Also a pre-launch
endeavor, the product or service feasibility is now established,
but surveys of end-users, field trials and focus groups need to be
executed in order to determine the price points and potential sales
volume. The key funding question asked here is, "What is the
venture's 'time to launch?' " In other words, how
long will it take for concept feasibility and market testing before
the business can actually begin regular operations? During this
stage, there is definitely no revenue, only development costs. No
regular staff has been hired. Everyone working for the firm is
involved in R&D and/or market research.
2. The launch. The enterprise has completed both aspects
of the pre-launch and is now open for business. Production has
begun, product/service demos are starting to happen, customers are
in the pipeline, and invoices are ready for signing. During this
stage, costs switch from R&D and market testing to production,
sales, shipping, accounting/billing, customer support and
front-office administration. The business is simply trying to
establish some distinct traction among potential end users. The key
funding question is now, "What is the venture's 'time
to revenue?' " Cash flow remains negative while initial
sales trickle in the door. Content Continues Below
3. The ramp-up stage. During this time frame, sales
growth is dramatic on a month-to-month, quarter-to-quarter basis,
as the enterprise establishes a foothold in the target market. The
business model has been validated by end users. The main funding
question is now, "What is the venture's 'time to
profitability?' " Negative cash flow is more a matter of
timing on payments and receipts, but generally speaking, sales
volume is approaching a clear point where the firm will pass
break-even and show a profit. 4. The viability stage. There are now enough regular
customers in the normal sales cycle, and sustainable growth in new
inquiries from a large target market, to qualify the business as
reasonably "viable" for the foreseeable intermediate
term. Profits are consistent, and the main funding question is now,
"What is the venture's long-term strategic
position"? If your firm is in either of the two phases at stage one,
funding from outside sources is very difficult to come by. The vast
majority of these deals are supported through friends and family,
personal savings, a second mortgage on the house, and/or credit
card debt and are generally a labor of love. Because the risk of
ultimate success is great, only a select few pre-launch deals can
attract outside investors. That's why it's so important to
understand your firm's development stage. A stage two deal is much easier to capitalize than a stage one,
because the business model has received preliminary validation in
the market, and risk is significantly lower. And a stage three deal
provides an even more solid track record of prior success from
which to attract investors. Not only is the model valid, but there
is identifiable growth in sales and a reasonable timeframe to
profitability. Finally, a stage-four deal is the easiest to attract
funding partners, as the venture can look to either expand internal
infrastructure, acquire additional capabilities, create a formal
alliance with another firm, or approach potential buyers about
purchasing the firm. So remember, the further along your venture stage, the more
likely it is that you'll be able to attract funding.
Early-stage proposals carry tremendous risk, but those risks can be
reduced as the business develops and matures over time.
David Newton is a professor of entrepreneurial finance and head
of the entrepreneurship program, which he founded in 1990, at
Westmont College in Santa Barbara, California. The author of four
books on both entrepreneurship and finance investments, David was
formerly a contributing editor on growth capital for Industry
Week Growing Companies magazine and has contributed to such
publications as Entrepreneur, Your Money,
Success, Red Herring, Business Week, Inc.
and Solutions. He's also consulted to nearly 100
emerging, fast-growth entrepreneurial ventures since 1984.
The opinions expressed in this column are those
of the author, not of Entrepreneur.com. All answers are intended to
be general in nature, without regard to specific geographical areas
or circumstances, and should only be relied upon after consulting
an appropriate expert, such as an attorney or
accountant.
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