Early Stage - Definition
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What is an Early Stage Business?
Early-stage is a term used to characterize a startup business venture. It generally concerns the phase of startup development generally preceding the rapid growth phase. The early stage is characterized by activities such as research development, marketing research, and product business development.
This is considered by entrepreneurs, investors, and researchers to be the riskiest stage in the startup lifecycle. The probability of success of venture depends heavily upon actions taken during this stage. During this phase, consumers (or the customer market) will be called to evaluate and compare the price, quality and feasibility of the businesss value proposition.
This may include comparing the produce or service with the existing offerings already in the market. This task is known as a beta test. The purpose is to reach a minimum viable product or value offering into the market.
Company Conditions During the Early Stage
Early stage companies generally have limited revenue, sales, and market share. The company has generally identified a product-market fit. Early-stage investors search out and scrutinize these business for opportunities to invest and turn a profit. The prospect of rapid growth and potentially high future earnings attracts many potential investors. To pair with the high earning potential, there is also a high likelihood of business failure and total loss.
Challenges For Early stage companies
The early stage company faces numerous challenges in this stage. The company is new and it does not have ample resources to cover its operational and other related activities. Because of the lack of credit history and demonstrable revenue, traditional means of borrowing is generally out of the question. For this reason, early-stage ventures often depend upon investors to fund the business growth. These investment funds, however, come at a very high cost. The investors will demand a substantial percentage of business ownership in exchange for their investment funds. The amount of investment and the percentage of the business sold is based upon a company valuation. The methods for valuing a company at this stage are very imprecise. A true and accurate valuation is very difficult to determine.
References for Early-Stage Business Ventures
Academic Research on Early State Businesses
- Businessangelearly stagedecision making, Maxwell, A. L., Jeffrey, S. A., & Lvesque, M. (2011). Journal of Business Venturing,26(2), 212-225. Using 150 interactions between entrepreneurs and potential investors, we study early stage business angel decision making. This article proposes different hypothesis contrary to past claims about angel investors.
- Explaining the international intensity and global diversity ofearly-stagetechnology-based firms, Preece, S. B., Miles, G., & Baetz, M. C. (1999). Journal of Business Venturing,14(3), 259-281. This research analyses the problems faced by early-stage firms in relations to foreign markets and global competition. The objective of this paper is to evaluate the intensity of foreign sales and global diversity of markets on early-stage firms. Results show that the resources needed to pursue international sales has the biggest impact on foreign markets and diversity. It also shows that firms tend to increase their international intensity and diversity as they grow larger. More details and evidence supporting this claim can be found in the paper.
- Attitudes and behaviors of informal investors towardearly-stageinvestments, technology-based ventures, and coinvestors, Aram, J. D. (1989). Journal of Business Venturing,4(5), 333-347. This paper analyses the attitude of investors towards early-stage investments, tech-based ventures, and coinvestors. For emphasis, questionnaires were mailed to fifty-five investors, who gave their opinions on investing in firms. Results show that most high-profile investors prefer investing in late-stage risk ventures than early-stage firms. It also shows that investors in technology-based ventures tend to invest higher capitals than those in non-technology-based ventures, so large profit is promised. Also, it shows that coinvestors prefer making smaller profits to losing their investments, so they prefer to play it safe. More details are found in this paper.
- Tools for managingearly-stage businessmodel innovation, Evans, J. D., & Johnson, R. O. (2013). Research-Technology Management,56(5), 52-56. This article explores the problem faced by startups related to the absence of a metric for structuring business models. This article examines the Lockheed approach to creating a framework that would help structure business startups. Our major emphasis is on the ability of the created metric to calculate required investments and associated risks of startups.
- Crowdfunding and the revitalisation of theearly stagerisk capital market: catalyst or chimera?, Harrison, R. (2013). This article explores the rate of investment into early-stage companies before and after 2008. This paper aims to show the different factors which resulted in the steady decline of investors' interests in early-stage companies.
- Theearly-stageequity market in the USA, Sohl, J. E. (1999). Venture Capital: An international journal of entrepreneurial finance,1(2), 101-120. This article explores the early-stage equity market in the USA, and its impact (especially the negative ones) it on high-level firms.
- Improving access toearly stageventure capital in regional economies: a new approach to investment readiness, Mason, C. M., & Harrison, R. T. (2004). Local economy,19(2), 159-173. This study examines the introduction of various investment-ready programmes for startups interested in raising equity finance. Emphasis is placed on the UK, where these programmes are aimed at teaching businesses on the necessary steps for obtaining equity finance, and creating investment plans. This article investigates the claim that these programmes are necessary but not sufficient conditions to get a business investment ready due to various reasons.
- Firm-level implications ofearly stageventure capital investmentAn empirical investigation, Engel, D., & Keilbach, M. (2007). Journal of Empirical Finance,14(2), 150-167. This paper analyses the impact of venture capital finance on growth and innovation of young German firms. After various studies, we clearly see that venture capitalists are more involved in already established firms. This suggests that firms might find it harder to get investors in their early stage.
- New venture support: an analysis of mentoring support for new andearly stageentrepreneurs, Deakins, D., Graham, L., Sullivan, R., & Whittam, G. (1998). Journal of small business and enterprise development,5(2), 151-161. This paper analyses the provision of support for new and small firm entrepreneurs. Its aim is to show that support for new firms and entrepreneurs on a mentoring basis would be very beneficial.
- Management control systems inearly-stagestartup companies, Davila, A., & Foster, G. (2007).The Accounting Review,82(4), 907-937. This paper uses a multi-method, multi-case field research design to study the evolving portfolio of the management control systems (MCSs) of 78 early-stage startup companies. This article aims to show the importance of MCSs to an early-stage startup company.