A startup's life cycle might begin like this: You have an idea that you think can make a big difference in the world. Maybe you already have a couple of friends who believe in your idea. Usually in the early stages, things move forward with speed and excitement. Maybe you visit a startup event to present your idea to investors and potential employees. You’ve even gotten a small amount of start-up capital from your acquaintances and a core team built.
Testing a prototype produces the first product version that can now be tested on the market. Particularly in the software market, it’s now easy to test products at a very early stage. Then you need to find a reasonable earnings model for the product and its metrics. By measuring the market potential of a product, the company is developing the product so that it may help raise the next round of funding. And all this time, your startup is burning cash. Often, no sales are generated in the first year or two.
Entering Death Valley
Virtually every startup will encounter a "Death Valley" somewhere along the way. Cash reserves are dwindling month by month. Product announcements are increasingly delayed as technical problems accumulate. The original idea is starting to feel like a bad one, and especially the idea that it could somehow generate revenue for the company starts to seem like a lost cause.
However, the startup must still push forward. After market testing and development, your product finally looks like it can begin to generate revenue for the company. Now it’s time for the commercial release. If all goes well, you can start expanding your marketing efforts and scaling your product market share.
Throughout this journey, a startup teeters on the edge of life and death.
A startup's success is determined by its momentum: the ability to quickly set up experiments and find workable solutions. By experimenting, it’s possible to find new ideas and insights, the best of which can be scaled into a successful business. If an idea is not new enough or groundbreaking, no investor will touch it.
In addition, a product or service innovation developed by a startup must be scalable. If the service cannot be duplicated into a big global phenomenon, it’s unlikely that a firm built around it could grow so dramatically that it will attract venture capital investors. These investors expect startups to earn much higher returns than traditional business. A slightly better rubber boot hardly inspires anyone to believe in explosive growth. Your new rubber boot should be at least ten times better than existing boots.
If a startup is not able to operate quickly and dynamically, new and workable ideas will not emerge. Without new and workable ideas, you can’t justify high return expectations. Without high return expectations, it’s impossible for startups to have sufficient investment capital to even get the innovation process up and running, and the startup will end along with the runway.
Why startups need financing
The race against the clock is exactly why startups need financing. Startups need capital in order to grow as fast as they can. Different companies also have different kinds of needs in terms of financing. For example, hardware and production companies often need a lot more capital to build a factory or pilot product line. From there, growing the company to an industrial scale needs even more capital. On the other hand, companies selling services or acting as a marketplace often don’t need as much capital to build their product, but their biggest resource issue is usually finding the right people and especially marketing.
For high growth, the fast scaling of operations is not possible with just the income that the startup is getting. The product or service can be profitable in the beginning or still at a stage where the company is figuring out their business model, but regardless of the profitability of the product or service, you’ll need extra resources to grow fast.