Businesses are like seedlings—although they grow in unique and unpredictable ways, there also tends to be some common ground in the life cycle of each one. From the seed stage through growth stages to the exit stage, each new stage of the business life cycle requires founders to use different strategies and skills than the stage before it. Knowing the pitfalls inherent in each stage and the strategies you can use to overcome them will help prevent you from getting stuck, or causing your business to fail. Below is an overview of the seven stages of the business life cycle, and how to successfully navigate them.
Stage 1: Seed
This is the stage before your company is a legal entity—you’re still developing your products or services and testing them to determine their feasibility. Conducting market research is a key component of this phase. You’ll likely need to start out using your own money, but you may also wish to start thinking about seed funding from angel investors, crowdfunding, grants, help from friends and family.
It can be easy for perfectionists to get stuck at this phase, going down a rabbit hole of research and development as a way to put off the product launch. It can also be tough to determine when to ask for seed funding: too late, and you might not get your product off the ground; too early, and you might risk putting off investors. Additionally, although it may seem like the more funding you secure the better,too much funding too early can actually hurt your investment prospects in the long run.
During this stage, it’s important to seek out the advice of professionals that know the industry, so you can assess risk more accurately. Make sure your research includes not only testing your product or service, but the industry as a whole and your startup’s relationship to it. Cultivate relationships with investors early, so that by the time you need seed capital, they’re already familiar with you and your business and as a result more likely to invest. Make sure you also sort out any legal issues like copyrights, patents, and contracts with business partners. If you’ve borrowed money from friends or family, formalize your agreement with them to avoid messy disputes later.
Stage 2: Startup
At this stage, you have a legal business, a product, customers, and a basic organizational structure. You’ll likely still be fine-tuning your product or brand, however, and your market research should be ongoing. This is the point where you may need to seek out Series A funding in order to scale your company, and if you’re going down this route, you should have a detailed business plan with projected earnings and a precise company valuation.
In this phase, it’s essential to balance your spending as you establish a customer base. You’ll be making final decisions about the direction to take your brand and product or service, which can have huge impacts on the future of your business. According to Forbes, it takes founders two to three times longer than they expect to validate a business model, meaning it’s easy to run out of money before you’ve had a chance to scale your business.
If things can go wrong, they often will. Incorporate some buffer time and cash into your plan for this phase and strategize very carefully about how and when to scale your business. If you’re approaching investors, don’t seek out too many, since too many voices can make decision-making impossible. Instead, choose a few investors who can add value and enough capital to get you through the startup phase. While running out of cash is the #2 reason startups fail, the #1 reason is that there’s no market need for what you’re selling. Use your startup phase to make sure there’s enough demand before you scale your business.
Stage 3: Growth
This is the stage where you scale your business; as a result, you’ll have increasing customers and revenues, and will have to make strategic decisions about the way your business is growing. Usually, a founder in the growth stage of a business will be very involved in the recruitment process in addition to making important decisions about streamlining production, expanding space, and developing organizational systems.
In this stage, keeping a startup mentality and failing to invest in streamlining and automating administrative systems can cost you. Managing cash flow while scaling your business can also be tricky, since you have to know when you should spend money and what to spend it on, and whether or not to seek Series B funding at key points in the process. Some business owners may have a tough time delegating tasks and switching their focus to operations, particularly if they had a creative hand in developing the initial product.
According to the Startup Genome Project’s 2019 report, more successful businesses tend to scale after they’ve optimized their sales funnel—not before. Make sure you plan ahead before scaling, which includes finalizing your marketing strategy before you implement it on a larger scale. The growth stage is also where you should streamline and automate as many office tasks as you can; using a program like vcita can help streamline CRM, scheduling, and marketing emails so you have the time to focus on your next steps. Invest any profit back into the company at this point to help it grow or, as a last resort, seek out Series B funding.
Stage 4: Establishment
At this stage, you’ve overcome the major hurdles and growing pains, and your company has a reliable customer base and steady profits. You’re able to settle into a routine, and your cash flow should stabilize as you’ll likely have fewer large one-time purchases to make for the business. After some time at this stage, some companies may decide to go public in order to facilitate further growth and expansion. Others may stay in the establishment stage indefinitely, depending on the aims of their founders.
The challenges of this stage are less obvious; while day to day operations become easier, it’s also much easier to get complacent, which leaves you at risk of being blindsided by market shifts, political upheaval, or technology changes that affect your bottom line. If you’re a small B2B business (a distributor, for example), remaining in this phase means your larger clients may eventually outgrow you.
It’s important to to keep doing market research and keep on top of industry news, even after your business is well established. When you’re at this stage, it has likely been a while since you’ve made your business plan, so make a new strategic plan that outlines your 5-year goals for the business, with KPI benchmarks along the way to help your team achieve them. Make sure the plan stays adaptable, so you can alter your course to keep up with market changes. A solid business development team that can put your strategic plan into action is a must at this stage.
Stage 5: Expansion
This stage happens when founders decide they want to grow the business beyond the equilibrium they’ve already established. This can be acheived through an Initial Public Offering (IPO)—or the expansion phase might be the route towards going public. If it’s the latter, a business will often need Series C funding to grow into new markets, find new distribution channels, open new locations, or expand vertically.
Expansion will often change the identity of your business and your relationship to it: a larger business will inevitably mean a further loss of control, as well as potential changes to production quality, brand identity, and your workplace culture. You’ll also be risking expanding into unpredictable markets, particularly if you’re considering scaling to global.
If you’re thinking about expanding your business after the establishment stage, take some time to weigh the pros and cons of different growth strategies. Even opening a second location can pose legal, financial, and operational challenges that aren’t so obvious at first, so it’s a good idea to plan carefully. If you will be seeking Series C funding, revisit your strategic plan and modify it to include your growth strategy so you have documentation for investors. Even if you’re not currently seeking funding, developing a formal growth strategy is a good idea in case you need to change your mind.
Stage 6: Maturity/Decline
Once a business has been around for a while, it often reaches a stage where revenues can stagnate, or alternately, maintaining consistent profit becomes a struggle. While a plateau may not be a problem for some business owners, a sudden decline is usually worrisome. A decline can happen at any time, due to changes in the market or the decline of the industry as a whole.
At first, it can seem difficult to differentiate between normal fluctuations in profit and a steady decline, given the fact that identifying a steady decline too late in the game can limit your strategic options—especially if it’s industry-wide, since end-game strategies will vary widely depending on the share of the market that’s left. Even if you’re not facing a decline, this more mature stage poses its own challenges: having a larger company means that small changes in efficiency can have a large impact on the bottom line.
The larger your business grows, the more important it is to monitor efficiency. Further expansion efforts can also help restore growth, such as reaching out into new markets or rebranding your business. A company at this stage may also consider acquiring startups or merging with a competitor. Keep your finger on the pulse of your industry so you can recognize any signs of industry-wide shifts early and get a head start on your strategy for managing them. In the event of a business decline, some founders will opt for an exit strategy early on; others, find success sticking it out in a dying industry by occupying a larger share of an increasingly small market.
Stage 7: Exit
The exit stage happens when a founder either closes or sells the business. While you might exit once your business reaches maturity, you might also exit during one of the earlier stages of your business if you’re approached by a larger company that wants to buy it. The most common exit strategy is to sell, either through public stock, management buyouts, or strategic acquisitions—but some may choose to close their business if it’s no longer valuable enough.
If your exit strategy is to sell your business as the result of a decline in profit, it can be difficult to accept a realistic valuation, especially after several years of success. It can also be tempting to keep trying to make a failing business model work, risking more losses or even bankruptcy. Failure to plan your exit strategy in advance can have devastating professional and personal consequences if your business starts to go south.
According to Small Business Trends, 48% of business owners intent on selling have no exit strategy in place, prolonging their stay in a business they no longer want to manage. It’s essential to have an exit strategy in place if you’re seeking venture capital from investors, but even if you don’t need more funding and aren’t planning your exit anytime soon, knowing what your strategy would be is important. Different exit strategies require different resources and timelines to complete. Having a strategy on the back burner will help you decide if and when to exit, based on what it will take to do so.
In addition to a solid work ethic, adaptability is one of the key traits you need to have as a business owner. Even though the life cycles of businesses designed to scale quickly and small businesses might be slightly different, the importance of your ability to adapt to your changing role and the changing times is the same.