Startups go through a life cycle that's broken down into several stages. Stages may vary depending on the type of company and who you ask but the principles always remain the same. Startups begin in an early development stage, move to a growth stage, and finish in a late stage or with an exit. Knowing about each startup stage and where your company lands will help you adjust your strategy.
Also, startups don't always progress in a linear fashion. There's no need to rush from the early stages to the later stages. In fact, it's in your best interest to move at an appropriate pace for your company. At the start, you're competing with yourself the most.
What is an Early-Stage Startup?
Early-stage startups are companies that are in the development phase of the startup cycle. During the early stages, startups will research products, look into markets, develop a marketing plan, and more. Ultimately, early-stage startups are startup companies that haven't entered the growth stage.
Early-stage startups will also seek out investors but this depends on the founders. The rounds of funding that take place during the early stages of a startup include the pre-seed and seed rounds of funding. Investors that typically invest in startup companies during the early stages are known as angel investors.
What is an Early-Stage Investor?
An early-stage investor backs a startup before it has meaningful revenue. In practice that means angel investors and pre-seed or seed funds writing checks during the earliest rounds, when they're betting on the founding team and the idea rather than on metrics.
These investors take on the most risk of anyone in a startup's life. In exchange, they take the largest ownership stake per dollar invested, typically 5% to 15% at pre-seed and 15% to 25% at seed. Angel investors will usually write checks between $25,000 and $100,000, though angel groups pooling their capital together can go well beyond that.
What are the Challenges that Early-Stage Startups Face?
Startups in the early stages face numerous challenges. Early-stage startups typically don't have a lot of capital or sales, which makes revenue limited. It's for this reason that angel investors target early-stage startups; there's a big opportunity for rapid growth in the later stages. Other challenges include giving up shares of the company for capital, developing products with limited resources, and high staff turnover.
What do Early-Stage Startups Need to Be Successful?
Early-stage startups need a lot to go right in order for success to happen. Unfortunately, roughly one in five startups fails within the first year, often because the need for the product or service was overestimated. So, it's important to reflect on the startup and ask yourself a couple of important questions.
Ask yourself:
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Does my product or service solve a problem?
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Is the problem my company is addressing already solved but in another way?
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Who will I sell my goods or services to?
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Are business loans going to be used?
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Who do I need to hire?
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What does the tax situation look like?
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Is there a marketing plan?
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Can the product be tested?
These are only some of the questions you need to reflect on. Creating a startup is not easy, and about half of all new businesses close within the first five years. When creating a startup, make sure it's a calculated risk.
Early-Stage Startup Funding
Several types of funding are available for early-stage startups, and most founders end up combining two or three of them.
What Funding Types are Available?
- Bootstrapping
- Investments made by angel investors
- Crowdfunding
- Small business loans
- Grants
- Accelerators
- Incubators
- Venture Capital (in rare cases)
Depending on the startup, founders may choose to raise money through one or more of these avenues.
What Rounds of Funding Occur During the Early Stages?
The most common funding rounds for early-stage startups include the pre-seed and seed rounds of funding. Pre-seed funding rounds occur before the seed round and typically include capital from friends and family. However, some pre-seed funding will come from the founder or even angel investors.
On the other hand, the seed round of funding is more growth-focused. Therefore, seed-stage startups attract the attention of angel investors. Angel investors will invest somewhere between $25,000 and $100,000 during the seed round on average, with angel groups often deploying $250,000 or more together.
What's the Best Type of Funding?
There's no single best answer, but there is a most common one. Most early-stage startups combine bootstrapping with angel investment, because angels bring capital and experience at a point when a startup has neither traction nor collateral to show a bank.
Bootstrapping occurs when a founder invests personal money into the startup. It's also the practice of reinvesting revenue back into the business. Bootstrapping costs you nothing in equity, but it only carries you so far.
Angel investors, on the other hand, provide real capital in exchange for a stake in the company. Ultimately, the best funding method is whatever works for your business model, your capital needs, and how much ownership you're willing to give up. Still, we always recommend considering angel investors early on during the process.
What are the Other Startup Stages?
Early-stage startups are new and exciting but that doesn't mean they're the only stage. As startups continue to develop they enter new phases. Startups that clear the early stage move into the growth phase, then the late stage, and eventually an exit.
Keep in mind that stages aren't linear, so startups may move backward depending on market conditions. You can read about all six stages of a startup here.
Connect with Investors Today
The biggest problem that early-stage startups face is capital. Without capital, it's hard for early-stage startups to reach growth stages or late stages. Therefore, it's important to connect with the right investors early on.
Fortunately, AngelMatch has an investor database with more than 125,000 angel investors and VC firms, filterable by sector, check size, investment stage, and location. From there you can manage your outreach with a built-in fundraising CRM, host your pitch deck, share a data room, and send investor updates without leaving the platform. You can also export your target list straight to Google Sheets or Excel.
Frequently Asked Questions
What are early-stage startups?Early-stage startups are companies in the pre-seed and seed phases, before they've entered the growth stage. They're typically still developing the product, testing the market, and operating without meaningful revenue. Most are funded by founders, angel investors, or seed funds rather than by their own sales.
Is it true that 90% of startups fail?Not in the first five years. According to the U.S. Bureau of Labor Statistics, about 20% of new businesses fail within the first year and roughly half within five years. Keep in mind that this data covers all new businesses rather than venture-backed startups specifically, which carry more risk. That said, the 90% figure overstates the early risk considerably.
What is the 50/100/500 rule startup?The 50-100-500 rule is a shorthand for when a company stops being a startup. Under this rule, a company graduates once it passes any one of three thresholds: $50 million in revenue run rate, 100 employees, or a $500 million valuation.
How much equity do early-stage investors take?Between 5% and 15% at pre-seed for smaller checks, and between 15% and 25% at seed. The exact figure comes down to your valuation and how much you're raising.
