Startups are born out of an idea with the potential for significant business opportunity and impact.
Sometimes, these ideas are a flash of insight, but more often, it begins with the development of an idea or solution to a meaningful problem that has an identifiable market value.
For a business to be called a startup, it should meet all or some of the criteria
- Grows fast,
- Disrupts the market or industry it’s operating,
- Solves a problem, and
- Operates under extreme uncertainty.
It’s well known that 20% of startups fail in their first year partly because due to misreading market demand and understanding how a startup works.
How Do Startups Work?
Just like every other business, Startups either create, manufacture, and/or sell products or services for revenue.
But there are some differences in how startups works compared to other traditional businesses,
- Startups innovate how people live and do tasks: Startups are usually set up to help solve problems that people don’t know they have.
For example, before Uber, people take taxis, and they never thought they needed a better way to book a cab from anywhere.
In Nigeria people never thought they would need to seek and book a hotel even before getting to their destination but Hotels.ng came with an innovative idea where you can book your hotel rooms ahead.
Startups generally look for a way to create a new market for themselves.
- Startups operate on lean principles: startups, unlike traditional companies, work on lean principles(lean means creating more value for customers with fewer resources.).
This is because startups have a limited amount of resources at their disposal to achieve their goals in an uncertain market. They have limited access to capital, employees, and often just an idea that they are trying to validate in the market.
- Startups are built to scale: Startups grow rapidly because they are built to get as many customers as possible in the shortest time possible period.
- Startups grow at a very remarkable speed: Most startups are usually the first in the market or a particular niche, so they tend to startups to grow rapidly. They can grow from nothing to a multi-billion dollar market within a very short period.
- Startups look for business model validation: For traditional businesses, it’s easy to validate demand for a product by simply looking at its sales numbers. This is not the same when it comes to startups. Startups are continuously experimenting with different business models to see how they can acquire and retain customers.
- Startups can take years before making a profit: It can take several years before a startup start to record a significant cash inflow.
This is because they tend to spend most of their revenue to grow further and increase the demand for their product.
Moreover, creating a new market requires a lot of time and effort. For quite some time, startups need to spend more than what they can potentially generate as revenue.
A startup only exists and makes sense if it solves at least one pain point in the industry in which it operates, although the failure rate is high, it is important to understand each stage of a startup, so it helps you identify what stage you re as a startup founder.
Here are the 6 stages of a startup lifecycle
1. The Pre-Seed Stage
As for every project, market analysis is crucial to detect a real problem in the niche market in which the startup wants to act. The challenge it solves for the industry will be key in determining the success or failure of the proposed solution afterwards.
However, it is not enough to identify this pain point; it’s also necessary to assess the cost of the opportunity, other alternatives and any existing competitors.
As a startup founder or potential founder, you should be able to provide answers to the following questions
- Is this solution a real answer to the problem to be solved?
- Can this solution affect other pain points in the industry by aggravating them and/or reducing the acceptance of the target market?
- Is there an existing solution similar to what I’m proposing?
All this analysis takes place in the pre-seed phase, This state helps you to validate your idea and let you see clearly what problem you are trying to solve with your solution.
2. The Seed Stage
This phase is usually used to validate the business model. This phase also seeks the first materializations of a startup by developing prototypes, which are small experiments carried out to help validate the whole product/startup idea.
The main objective of the prototype is to validate the initial value hypothesis. It is important not to confuse a prototype with an MVP (Minimum Viable Product), A prototype does not need to be functional, unlike an MVP which must be functional and at the same time viable.
3. Early Stage
The early stage indicates the beginning of a phase in which the idea is left to evolve until it becomes a product or service in the market.
It is time to launch a test usually the first version of the product; The goal of this test is to see if it´s a Minimum Viable Product (MVP).
An MVP is a product that does not have its full functionalities, this ensures the test is less complex.
Test results and information are collected and analysed to evaluate whether the product meets the needs of customers; if not, improvements are made with new versions that try to meet and satisfy the user.
4. Growth Stage
At this stage of a startup, The startup should have reached the level of having a consistent customer base and a steady flow/source of income Because the company is growing.
At the growth stage, the business may look at hiring more employees to help manage the workload and also automate some of its processes.
The whole business now has a clear business model and a reasonable marketing budget to push the product.
5. Expansion Stage
In this Stage, The company must have advanced in the execution of its business model, and move forward, consolidating its growth with a constant inflow of revenue and increased employees.
it is time to leap: open up to new markets and/or segments.
The expansion phase requires greater financial support which can come via external investment, or with the company’s funds.
6. Exit phase
Not many startups make it to this stage, research shows that 21.5% of startups fail in the first year.
So the few startups who made it this far are characterized by their strength and a high potential for continuous growth. There are business models whose goal is to become a high-value and long-term company.
The startup can exist in a form of a merger with another company or by independently keeping both brands and firms in the market
However, it is very common for the last step to be to perform an exit by selling the startup.
There is also the Public Offer of Sale(IPO), where the company is listed on the stock exchange.
Finally, there may come the approach of an outright sale (exit) of the company.
As a startup founder, these are moments you will have to go through and you will have to adapt at every step.
At startup LaunchCode we understand going through this stage is draining. You need all the support and we are always on the lookout to help startups grow.