Last Updated on December 4, 2022 by Selina Parker
Business is challenging at every stage of the business life cycle. To make the business successful, the business owner needs to develop a business plan and decide which set of businesses they want to be in the future.
There are several stages that your company can go through as it grows from a startup into a more mature business with multiple revenue streams. A business may remain at one stage or move between stages several times.
There are different needs for capital at any business stage, and the business owner should know how to raise funds for their business growth that match their condition at each life cycle phase.
What is the Business Life Cycle?
The business life cycle is a company’s progression through various stages. There are usually five stages to business development: launch, growth, shake-out, maturity, and decline. The industry life cycle can be represented on graphs with time on the horizontal axis and dollars or other financial parameters on the vertical axis.
Phase One: Launch
A company begins its operation by launching a product or service. The small business focuses on getting the product or service to market during the launch phase. The sales generated in this phase are low, but the company is growing, depending on your business model.
Businesses concentrate on marketing to their targeted customers by promoting their unique advantages and value propositions. However, the company may incur some losses since the startup initial is high while the revenue is low.
The cash flow during this stage is negative, and the business owner will need to find ways to finance the business. It is because capitalized initial startup expenditures are not included in a company’s profit but are present in its cash flow.
Phase Two: Growth
In the growth phase, sales increase as the business attracts new customers. The firm is also growing its product line or service offerings. This increased revenue allows the company to reinvest in marketing and expand its operations.
In this phase, the business focuses on expanding its operations by increasing production, hiring more employees, and expanding its customer base. An existing business may have a sustainable cash flow during this stage, but it will need to raise money to finance the growth in operations. It could be through investment bankers, bank loans, or Small Business Administration (SBA) government programs.
Phase Three: Shake-out
The shake-out phase is typically when a business experiences a slowdown in sales or faces significant competition from other companies. In this phase, the industry focuses on cutting costs and becoming more efficient.
In this phase, the business experiences rapid growth, either good or bad. The company may not have the infrastructure to handle the increased demand and may not be able to produce or deliver products or services as quickly as customers want them.
Phase Four: Maturity
In the maturity phase, sales begin to decrease slowly. The cost of goods sold rises while the cost of operating expenses decreases. Cash flow, on the other hand, remains relatively steady. When businesses mature, significant capital expenditures are largely behind them, so cash generation is greater than the profit on the income statement.
After all, although this may seem like a stagnant period in the early days of your firm, many organizations continue to develop their business life cycle throughout this phase by re-inventing themselves and investing in new technologies and international markets. It allows firms to restructure themselves within dynamic industries and refresh their growth in the market.
Phase Five: Decline
In the conclusion of the business life cycle, sales, profit, and cash flow all fall. Companies accept their failure to extend their business life cycle by adjusting to the changing economic climate during this phase. Firms lose their competitive edge and eventually leave the marketplace.
One round of raising money is unlikely to enable the company to complete all of these stages. You can divide the fundraising rounds as a result.
The Three Stages of Business Funding
1. Concept Stage
The first stage of funding is called the Angel Round. The firm will have very few assets and no proof points. Angel investors are interested in the company’s objective and want to know that the correct founding team is in place to address that concern.
If you cannot convince the investors, the startup will unlikely get funded if the investors are not enticed with the company’s business idea or think the problem is not large enough. Early-stage investors want to know that the management team can find the correct product solution even if the final product isn’t yet in existence.
Suppose the firm can demonstrate that it has created a viable product prototype that solves the problem and has a solid management team to expand. You can have a higher angel round valuation.
Type of investors in this phase: Individual angel investors, family and friends, accelerators, and business incubators.
2. Foundation Stage
After the Seed round, the firm will have had to make significant progress from the planning stage. You’ll have a working product that shows positive results by this point. The company will still be in its early phases of product-market fit and will only have a few clients.
The commercial model will be in place, but it will be inefficient and unable to produce the margins needed for later-stage enterprises at this time. If the firm lacks commercial indicators or the capacity to display a sales pipeline and projected revenue development, it will be difficult for them to have any progress.
You can achieve high valuations with more substantial proof of concept and a clear business plan to allow the firm to grow into a prominent market position.
Type of investor you can select: Angel investors of high net worth, early-stage venture capital investors, and small family offices.
3. Growth Stage
The most challenging fundraising round entails that all firms who raise more money than the first one have achieved product-market fit or market needs, which is the cause of startup failure in the previous round.
Type of investor in this phase: Venture capital firms and venture capitalists, larger family offices, and early-stage private equity firms.
When raising capital for your business, you should note which stage you and the company are currently in. Doing so will help you focus on the correct type of investors and make the process much easier.
Knowing which stage your business is in will also give you a better idea of what milestones you need to hit to move on to the next round of funding.
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“What began as a life and career coaching services company to aide entrepreneurs through the early-stage challenges and tough transformations of starting a social venture has evolved over the years to include mergers and acquisitions, organizational consulting, and business growth advisory services to mission-driven organizations that strive to improve access to basic physiological, safety, and security needs while increasing their profit margin. Clients include founders and organizations with the purpose of addressing deficiencies in delivering quality healthcare and mental health services, sufficient employment, access to clean water and air, safe shelter, adequate food, and more.”