What is the Lifecycle of a Startup?

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Table of Contents

• Founding Phase
• Bootstrapping
• Seed Round
• Reaching Product/Market Fit
• Venture Capital Round
• Exit
• Key Takeaways

Most startups don’t get through a full lifecycle – they’re out of business in less than a year. That’s just the way things are, but for those startups that are successful, there’s a pretty structured lifecycle. This involves the founding phase, bootstrapping, raising a seed round, reaching product market fit, and scaling while raising venture capital to fuel growth. Finally, most successful startups will provide a liquidity event to investors through a trade sale or IPO.

Founding Phase

Most startups start with an idea and a couple of founders. The founders will come together with an idea, and decide whether to launch a business. The founding phase can happen over a series of months or over a few days. This phase though isn’t really about anything other than commitment. Commitment to quit your well-paid job, commitment to risk the next year on an unproven concept. Commitment to yourself and your co-founder. Of course, it’s sensible to incorporate a company at this stage, and possibly enter into a Shareholders’ Agreement, but don’t get bogged down in overcomplicating your business structure – you need to try and get some traction!

Bootstrapping

Australian startups rarely raise capital before showing some momentum. For the first few months (or sometimes years!), startups go through a bootstrapping phase. This involves spending very small amounts of money to attract users or customers and then trying to refine your product or service with customer feedback. Obviously, the more money you can invest yourself into your business, along with your co-founder/s, the longer you’ll be able to keep going before raising external capital.

Seed Round

If you’ve managed to get some traction with the product or service your startup is providing, you might get to the stage where raising a seed round becomes a possibility. Your earliest seed investors are likely to be friends and family. Angel investors are usually the next port of call when a startup is looking to raise a seed round. Angel investors invest in a range of businesses, and some are members of angel groups such as Sydney Angels, or Melbourne Angels. If you’ve got a good enough story, team, traction (and the right angel investor wakes up on the right side of the bed the day you’re pitching), you’ll potentially be able to raise a seed round. This round is between $300k and $800k and should get your business to the stage where it’s got product/market fit and is ready to scale quickly.

Reaching Product/Market Fit

After raising your seed round, you’ll be in a position to hire some more team members and spend some more time or money on acquiring users to verify if your product or service is what they are looking for. You typically only get one opportunity to reach product/market fit and show venture capitalists (your next port of call on the fundraising path) that your startup is ready to scale quickly.

Venture Capital Round

Once you’ve shown an ability to attract customers or users, and keep them engaged and using your services, you must make a decision about your company’s direction. One option is not to raise any more money, and build a profitable, but smaller business. The other is to raise more external capital, this time from a venture capital fund, to push for scale and growth. This decision will depend on your risk appetite, the type of product or service your startup is selling, and, of course, your ability to attract VC investment (which is much harder than raising an angel round).

If you are successful in raising a Series A VC round, and your startup continues to grow quickly, you may reach the stage where raising another round (or more) makes sense. Of course, eventually, your VC investors will want to generate a capital return for their fund (this is how they make money), so you’ll need to start thinking about an exit.

Exit

Most startups either fail or generate a capital return for shareholders. If they don’t, they are more likely to have the characteristics of an SME. If you are successful, you’ll need to decide whether you want to keep running your startup long term. Many of the best founders choose to do this, but others do not. The most common exit strategy is a trade sale, where an established corporate or larger startup with more funding buys your startup. Some startups will IPO, although this is pretty rare, to be fair. As a founder, you may not personally focus on an exit, but if you’ve raised external capital, you will need to ensure your investors achieve a capital return. If you’ve reached this stage of the startup lifecycle, congratulations – you’ve done well! 

Key Takeaways

Most startups do fail early, but if you do manage to raise external capital, grow your business and put yourself in a position to achieve a successful exit you’ll need assistance along the way from experienced startup lawyers. Get in touch with any questions!