The stages of a startup

Do you have a great new idea that may be the next startup success story? Do you have big dreams of following in the startup footsteps of Airbnb, Uber, and Instagram? Before you start calling yourself the next Elon Musk, it is vital to understand that it takes more than a good idea to be successful in the startup world. In fact, 90% of all startups fail. That said, don’t let the statistics discourage you. Armed with the right planning and knowledge, you’ll have a fighting chance of breaking through the competition.

So how can your startup be part of the illustrious 10%? One component is having an awareness of how the startup process works and what each of the startup stages entails — from idea to exit. 

When should you launch your product? How do you know if your product is ready for the market? When should you scale? When do you start talking to investors? Every stage has new milestones and requirements, and being aware of them can help keep your startup on track for success.

As you can see, there is a lot of careful planning that goes into launching a startup, so in this article, we have organized everything you need to know about the different startup stages, from the lightbulb moment to finding investors and even selling the company. Let’s get straight to it.

1. Pre-seed stage

One surefire way to find yourself part of the 90% failure stat is by not doing some due diligence before launching. Every startup addresses a specific problem, and the pre-seed phase is fundamental for analyzing and validating your business hypotheses. Unfortunately, 35% of startups fail because there is no market need for their products or services. 

The pre-seed stage is your opportunity to investigate the market and check if there a need for your product and if it has the potential for success. This startup stage is your chance to identify your startup’s potential success or failure by looking at existing challenges, competitors, and the feasibility of introducing a new product/service. Think of this stage as laying the foundation for your company. 

Here are some of the questions that every entrepreneur should be able to answer before moving to the next stage:

• Does my solution address a real problem?
• Is my solution similar to one that already exists?
• What is my ideal customer base?
• What similar products/services are they using?
• How will my product/service be different?
• What features are most important to customers?
• What is the minimum viable product for the product/service?
• What resources are needed to get the product/service ready for consumers?

What happens in the pre-seed stage?

Get an outside perspective. You obviously think your idea is great (it is your idea, after all). So, it’s always good practice to get some outside perspectives and feedback on your ideas for the product. The best way to do that is by going to the source — your potential customers. Interviewing potential customers and asking them questions that relate to your product will help you understand their needs, what they’re looking for, and how much they’re willing to pay for a solution. Investing time in conducting interviews will pay off tenfold when you can use responses from future customers rather than just guesses when developing products and marketing campaigns. Not to mention that those interview findings will be a huge help when you’re developing a unique pitch deck. 

Start seeking investment. Of course, market research isn’t cheap, so while you’ll be digging into your own pockets to get things going, you’ll likely be looking for some funds to help out. You’re not about to start pitching venture capitalists with little more to go on than an idea that you scribbled on the back of a napkin, which is why funding for the pre-seed stage is often known as the “friends and family” round.

Prepare documents and legal issues. It’s a good idea to sort out any necessary partnership agreements, copyrights, or other legalities as early as possible. Waiting until a later stage to deal with legal matters can get expensive and complicated. This is also a good opportunity to invest in a business owners policy to protect your newly minted company from lawsuits, business interruption, or financial liabilities.

2. Seed stage

Once you’ve done the analysis and laid the groundwork for your startup, it’s time to plant the seed and start building your business. The seed stage is one of the most important steps in forming a startup company and can define what the future will look like for you.

Imagine a startup at its seed stage like building the foundation of a house. The seed funding acts as the first layer of concrete, which acts as the base upon which everything else will be built. With a solid foundation, a clear blueprint, and the right team of builders — investors and founders — this initial stable structure will eventually allow you to build a thriving home (business).

This stage marks the official beginning of equity funding for your startup. This is crucial because even if you have the best idea your industry has ever seen, it means nothing if you don’t have the capital to support it. Money really does “make the world go round,” and when it comes to startups, this couldn’t be more true. In fact, running out of money or failing to raise new capital is the top reason that startups fail. In fact, more than 80% of businesses that went under did so due to cash flow issues.

What happens in the seed stage?

Test your vision. By now, you already have a minimum viable product (MVP), and you’re looking to turn the MVP into something ready to go on the market. It is time to start putting your MVP to the test with marketing strategies and continuing to test the results of the product in different markets.

Start raising money. Because capital starts to become very important in the seed stage, you’ll need to look beyond your family and friends for contributions. Potential investors for seed-stage startups include incubators, crowdfunding, and angel investors. Since investors are taking a significant risk by investing in your startup at this stage, they’ll expect an equity stake in the business in exchange for their financial contribution. And if you’re wondering what other companies often raise in this stage, in the first quarter of 2024, the median seed round investment was $3.5 million, and the median pre-money valuation was $14.8 million.

Validate the product-market fit. Test your product or service with early customers and gather feedback. Begin hiring people for key roles and conducting additional market research to help refine your product-market fit. Think of this as the development stage of your startup. 

Consider startup insurance. This is also the stage where you’ll want to think about insurance policies that will allow you to take risks to help your business thrive. Even though your startup may not be earning much at this stage, it is never too early to start putting protections in place. Startup insurance policies act as a risk transfer and can allow your business to take more risks and make you more attractive to potential partners and investors. Insurance is a major factor in putting your startup on a stable and secure growth path. (And remember that you’ll need workers compensation coverage once you start hiring employees.)

3. Series A stage

Few terms are more synonymous with the startup world than Series A. And with good reason. This stage is a major achievement and marks your company’s first round of venture capital financing. Your company has likely already seen some success if your startup has reached the series A stage. In fact, less than 10% of seed startups successfully raise series A funding.

Once your startup has developed its product or service, established a customer base, and has a steady revenue stream, you can opt to move to Series A funding to expand and optimize your offerings. Typically, the goal of Series A funding is to scale your business, increase market share, improve your product’s features, and build a bigger team. This is the startup stage that really starts to put some distance between your typical small business and a successful high-growth organization. Investors in the Series A funding stage are not just looking for a great idea, but a proven track record of growth and the potential for significant future returns.

What happens in the Series A stage?

Create a powerful pitch deck. In order to attract investors for the Series A stage, you need a pitch deck that proves you have a plan for generating long-term profits. You’ll need to create a powerful strategy for convincing investors to put money into your startup. Investors want to hear about more than just a great idea at this stage. They want a clear picture of whether or not your startup has a viable business strategy and a pathway to becoming profitable. All too often, an entrepreneur comes up with a great idea that garners a lot of excitement early on, but they don’t have a plan for monetizing it in the long run, leading to its demise. So, you’ll want to brush up on things like fundraising strategies and perfecting your pitch deck before you start calling up potential investors. Your Series A pitch deck should include things like your company’s market size, the growth potential, your revenue model, marketing strategies, and competitor analysis.

Get a valuation for your business. Before you can start receiving VC at any stage, your startup must provide investors with a pre-money valuation, which is the value of your business, prior to receiving a particular round of VC funding. This allows the investor to calculate the percentage or shares of the startup they own before their (likely sizeable) investment changes the company’s overall value.

Insure your growing business. Startups generally leap in total value significantly during the Series A stage. Business operations will also likely become more complex as you bring in more shareholders, partners, and staff. Due to this major growth, you’ll want to prioritize getting additional insurance coverage. Before finalizing an investment, venture capital firms often require startups to have directors and officers (D&O) insurance in place as part of the term sheet. Another important policy to consider at this point is fiduciary liability insurance.

If you aren’t quite sure what you need, check out our Startup Insurance Benchmarking Report to see what other companies are buying and paying for their insurance.

Listen, we won’t pretend that this stage is easy. The reality is that many startups with a successful seed round can’t generate interest from investors during the Series A round. It takes a lot of work, but your company will be well-positioned for future success and growth if you’re successful in this stage. In the second quarter of 2024, the median pre-money valuation for series A primary funding rounds was $40 million.

4. Growth stage (Series B/C)

The growth stage begins after receiving Series A funding and includes Series B and C investments. At this point, your company has grown beyond potential and has shown the ability and expectation to hit projected targets while bringing in revenue.

The median pre-money valuation for Series B startups was $116 million in 2024 and $130 million for Series C startups.

It’s no secret that scaling can be tricky to figure out, and you’ll likely find yourself back on that roller coaster ride. But, being ready and willing to pivot and adapt can help avoid potentially catastrophic situations and take advantage of opportunities. That said, as eager as you may be to grow your business, don’t rush into scaling too fast, as overextending can cause your company to fail.

What happens in the growth stage?

Secure more major investments. All startup stages involve securing investment, but during the growth stage, your company will work to get significantly more than at any other part of the process. To push a startup to become a unicorn, you’ll need to heavily expand and scale, which requires a lot of money. Investors at this stage are usually larger venture capital firms, private equity investors, or even corporate investors, and they look for established companies with a proven business model and strong potential for significant future returns.

Expand your operation. As the name suggests, the growth stage is all about expanding your business and scaling your operations. Like most founders, you’ve probably been wearing 14 different hats up until this point. But you can no longer be the company’s CEO, CMO, HR department, and tech support — you’ll need to offload some tasks to other team members so that you can focus on guiding the company through this crucial phase.

Part of scaling operations means that your team will have to grow. You’ll need to start expanding your team beyond just the necessary roles with more specialized talent coming on board. Fortunately, you now have the means (and reputation) to recruit talented individuals who will help take your company to the next level. During the growth stage, your startup will start exploring new markets while simultaneously creating new products and improving existing ones.

Prepare to go public. While you may not quite be at the finish line, during the growth stage, your startup will likely see the possibility of an initial public offering (IPO) on the horizon. To prepare for an IPO, you’ll need to focus on strengthening your financial reporting and making sure your startup complies with regulatory requirements. This is also a good opportunity to build relationships with investment banks and legal advisors.

5. Late stage

Congratulations! If you’ve reached this phase, your startup is an established and profitable company.

Undoubtedly, things look a lot different now from your seed stage years, and there’s a good chance that people will no longer view your company as a startup. At this point, your business is well-known within the industry, with a proven track record for products or services, a loyal customer base, and a fully staffed team. Basically, the late stage of a startup is every founder’s dream.

What happens in the late stage?

Final VC funding rounds. You may have already gone through three rounds of funding, but around 5% of startups also move on to Series D funding. This funding stage is generally the final step before going public. There are a couple of reasons your company may need Series D funding. The first is that you have an opportunity to increase your company’s value before going public. The second is that the startup failed to meet the revenue expectations after the Series C funding round.

Determine where the company goes next. This stage puts founders at a crossroads in terms of the next step. You could push for further expansion by introducing new products or services, entering new locales, or through acquisitions. But first, you’ll have to consider whether the business can sustain more growth and where you’ll get the funds to fuel the expansion. 

6. Exit stage

Not every startup will progress to the exit stage. But after the immense success your startup has seen throughout the other five stages, it may be time to decide what to do with your company. After all of the blood, sweat, and tears (though hopefully not literally) you’ve put into building your business from the ground up, it may be worth benefiting from the value of your creation.

Is it time to go public? 

It is generally at this stage that founders consider going public to help raise more capital to fuel further growth. For many founders, going public is the ideal endgame for their startup. Of course, that’s just one route to take, and many startups never reach the IPO phase. However, if an IPO is on the table, you’ll want to carefully consider all of the implications of going public (which definitely won’t be a cakewalk) to decide if it’s the right decision for your company at this point. And forgoing an IPO doesn’t mean your company is doomed — just look at Cargill, the largest private company in the U.S. that had $177 billion in annual revenue in 2023.

Or should you sell? 

Even if your company isn’t ready for an IPO, you may find yourself eager for a change and interested in moving on. Other options include selling the company to a larger corporation or merging with one.

Strap in and embrace the process

It’s important to remember that there’s no set timeline for progressing through the various stages. Some startups may never go beyond the seed funding stage, others may spend years trying to grow beyond Series A, some may get bought early by other companies, and a select few — the “unicorns” of the bunch — may see exponential growth that catapults them through the stages. There is no one-size-fits-all approach to growing a startup. However, regardless of the timing your company’s journey takes, being aware of the different stages of a startup’s lifecycle can help you capitalize on opportunities to optimize your chances of success. 

For more business tips and advice, check out Embroker’s Startup Newsletter.