According to the organizational life cycle theories, new ventures usually follow a progressive process made up of three successive phases (Mukherjee, 1992): the seed (1), the start-up (2) and the expansion stage (3). The terminology used varies throughout the literature, but the concepts hold.
Figure : Early Company Life Cycle (Mukherjee, 1992)
1. Seed Stage
The venture is initially referred to as a seed. This is the birth of the business, the transformation of the entrepreneur’s original idea into a real product. The team is usually limited to the founders. The main challenges are to identify the niche the company wants to compete in and to get known by the market.
2. Start-Up Stage
The business enters the second step of its evolution, the start-up phase, when it starts attracting customers and generating cash flows. The initial assumptions behind the entrepeneur’s vision must be challenged to ensure that the company answers the clients’ profitable needs.
3. Expansion Stage
Once the start-up has acquired an intimate knowledge of its customers and decides to scale up its activities, it reaches the expansion stage. At this point, the entrepreneurs formalize the company’s structure and identify growth opportunities.
During its evolution through the organizational life cycle, the company will be able to raise funding from an increasing number of sources. Initially, founders usually have to finance with their own savings, with the help of their family and friends (including crowd funding) but later on, as the market has validated the company’s value proposition, it might draw interest from business angels and venture capitalists.
Importance of Learning
Cash required to operate the business creates a certain sense of urgency, which is referred to as the Death Valley Curve. If the young firm doesn’t generate positive cash flows soon enough and is unable to raise additional capital, it will die off due to insufficient funding. On the other hand, evolving from seed to start-up, and then expanding requires overcoming each stage’s problems and refining the strategy to account for the emergent (Tsai and Lan, 2005). Managers must therefore find the right trade-off between the time they spend making wise decisions and the cash it costs them doing so.
Mukherjee, T. K. (1992). Financing the three stages of the small business life cycle: A survey. Journal of Business and Entrepreneurship , 4, 33-43.
Tsai, S. D., & Lan, T. (2005). Development of a Start-up Business‚ A Complexity Theory Perspective. N.A., 1