Key risks of the 4 stages of a startup's life cycle

According to the US Small Business Administration, about 50 per cent of the small businesses that exist today will fail within 5 years. These failures are due in part to the fact that the challenges small business leaders face can change from one day to the next. And while it is possible to control many of the challenges imposed by a startup's internal operating environment, controlling a significant number of external risks is more difficult. For this reason, it's important that a company's leadership recognise the unique challenges that arise as a startup moves from one particular life cycle stage to the next. Only then will a business deploy the defense mechanisms necessary to address the forces that conspire against them.

Seed stage

While a company is in the seed stage of its life cycle, an entrepreneur focuses on identifying business advisers, developing a business concept, and designing the product or service the business will market. The business leader also writes a business plan, completes the paper work necessary to establish the business as a legal entity; conducts the research necessary to create a business and marketing strategy; and concentrates on creating a marketing plan to introduce products or services to the market. The entrepreneur meets with finance companies and individuals to obtain the funding needed to lease or buy a facility and possibly a production line; acquire materials and supplies, and hire employees.

In the seed stage, a primary risk is the failure to design a business plan and strategy that will enable the company to become profitable as it makes sales and earns revenue. Other significant risks include a dependency on seed money to cover operational costs for a longer period than anticipated, or a lack of funds to cover rising employee and infrastructure costs.

Startup stage

During a company's startup phase, an entrepreneur will lease or purchase a storefront, factory, or another business space, and interview and hire employees. The business owner introduces the company's product or service to potential customers, including product testers, and other business or personal acquaintances. The entrepreneur will address flaws before he releases the product to a market; select sales and distribution channels; and commit to building market awareness of the company and its offerings.

Startup stage risks include the inability to get a sufficient number of customers to create the cash flow needed to fund operations, or deliver the necessary volume of products or services, in the appropriate manner to remain a viable business. Business leaders are concerned with expanding the company's customer base, a lack of product acceptance by customers, and having the revenue needed to cover the cash demands of the startup stage. Another risk is the costly impacts of making hiring mistakes in the early stages of the company.

Growth stage

As the company's growth stage begins, the business may refine its product or service offerings in response to market feedback, as a means to attract new customers, increase sales volume or revenue, expand its market share, and become profitable. In addition, an entrepreneur might revise the company's business plan, due to both consumer responses to the company's products and the introduction of competitors' products to the markets. A business might need to hire additional employees and seek new funding sources to support its growth. During the growth state, a company works to become operationally and financially efficient. In the process, employees assume newly defined management roles and work to streamline and coordinate internal functions to improve productivity.

Risks related to a company's growth stage include deciding to exploit a company's accomplishments by expanding, rather than keeping the company stable and profitable; and expanding into new markets that are too small to support all the companies competing in it. A company risks depleting needed reserves by developing new products and installing new production lines to sell products that are not accepted in new markets. Another common risk is a failure to understand how to properly establish a valuation for the product or company.

Expansion stage

Once a company achieves its desired share in one market, it pursues new markets, and designs and implements new distribution channels to support those markets. The business might create a new division or acquire another business as a means to market new products. In turn, the company may modify its structure and revise business functions; hire personnel with unique skills to best support its new business model; and decrease costs and product prices. Also, the company might seek new funding from banks and investors to support its expansion.

Problems might arise during the expansion stage if the business owner delegates primary responsibilities to other employees who negatively affect the managerial effectiveness of a fast-growing and increasingly complex enterprise. Additionally, sufficient cash might not be available to satisfy the financial demands that accompany growth due to ill-advised investments.

A business changes with the passage of time, as do the risks that can negatively affect its profitability and continuing existence. Throughout the four stages of a company's growth cycle, changing risks will demand that the small business owner change his focus and adopt new methods to overcome challenges and maintain the financial and operational wherewithal to succeed. Consequently, the entrepreneur must research and implement strategies for each stage of growth, and avert whatever might be detrimental to the company's future.

Andrew Armstrong, Managing Partner at KickStart Search Engine Marketing

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