The Stages of Startup Growth

Any company that’s in the initial stages of business can be described as a startup. But startups typically have huge ambitions, particularly when it comes to growth.

While there are several different types of startup, every startup has one thing in common: it’s serious about scaling up quickly.

There are three recognised stages of startup growth, and many startups follow a similar journey through these stages before they really take off.

In this article, we’ll explain more about how growth usually works for startups, before taking a look at strategies that often prove successful for ambitious companies.

The three stages of startup growth

Startups will go through three distinct stages on their route to success.

Every new startup begins in the early stage, where it looks for investment and starts to build a business. From there, companies move into the growth phase, where they continue building on previous success until they reach what’s known as the late stage.

Read on to learn more about what’s involved in each stage of startup growth, and what companies need to do to move onto the next step in their growth journey.

The early stage

Before a startup is formally funded, it’s said to be an early stage startup. This means that a business has an idea that could work, and that there’s potential for it to grow with the right support and strategies in place.

Startups in the early stage are usually relatively small. They’ll often be managed by the founder, who may be working alone or with one or two colleagues.

At this point, the business doesn’t yet have a rigid structure. But the person or team behind it will be hard at work trying to turn their idea into a viable business.

One of the most difficult challenges of the early stage is the fact that companies don’t usually have the metrics they need to prove that their business is viable.

It’s difficult to secure funding based on previous performance when a business is so young, but getting investors on board is often a key goal for founders at this stage.

The growth stage

If a startup starts to get attention, possibly securing funding from investors, it’ll quickly move into the growth stage. Also known as the venture-funded stage, this is an enormously important period in the rise of any startup.

Startups are said to be ready to move into the growth stage when they have begun to achieve measurable growth, backed up by KPIs that are achieved on time.

A company’s customer base will also be on the up at this point. If a startup’s customer base grows so significantly that it needs to scale up production, it’ll soon be moving into the growth phase.

As a startup begins working within the growth phase, it’ll begin to build its team, attracting the attention of the key talent it needs to expand. Team members will now start to have their own designated responsibilities, making organisation far easier.

Startups have a far better chance of securing financing in the growth stage, as companies will have plenty of proof of their success up to this point.

Once investors are on board, the startup is immediately transformed. Investment means that the company will be required to hit certain targets, within a predetermined time frame. It’s vital that the company achieves these goals, so that it can continue on its path to success.

The late stage

Startups that are said to be in the late stage will have a detailed business plan and reliable sources of funding. In this phase, the priority is maintaining a great performance and continuing to build the business.

Late stage startups will usually have achieved a good level of brand awareness, using it to capture a share of the market that brings in profits. Typically, startups in this phase are well staffed. Companies often choose to hire a CEO when they reach this level of success, allowing founders to take a step back.

A late stage startup will have demonstrated its potential and made a name for itself, but there’s always more work to be done if a company is to stay on top. Late stage companies usually focus on hiring the best talent in their industry and ensuring the continuation of reliable funding sources.

Late stage startups often have grand expansion plans, but a significant level of risk still applies even when companies reach this stage. Even the most successful startups can be seriously impacted by expansion plans that don’t go as well as they’d hoped.

How to measure startup growth

Measuring the growth of a company isn’t as simple as it sounds.

There are an endless array of metrics that can be used to demonstrate the growth of a business, and of course some are far more indicative of real, sustainable growth than others.

Here are a few of the top metrics to keep an eye on as you measure the growth of your startup.

Monthly recurring revenue

Measure the revenue that customers are generating on a monthly basis to see growth as it happens.

For some companies, you’d expect to see a rise in monthly recurring revenue every month, but others might have a more complex growth pattern. Either way, it’s vital that this metric is tracked every month.

Burn rate

Startups will often need to spend significant amounts of money to get off the ground in the early stage. The amount being spent every month is known as the burn rate, and it’s crucial that all startups keep an eye on this.

The burn rate should be measured monthly, to check for any excessive spending or areas where money would be better spent. Calculating the burn rate regularly will also reveal opportunities for further investment, whether that be in new staff or more targeted advertising.

Customer acquisition cost

The lower the customer acquisition cost the better. For new startups, the cost of every new acquisition will be relatively high. But over time, as the company grows, this figure will reduce as profitability improves.

Retention rate

It’s important to nurture existing customers, to reduce customer acquisition spend and increase sales. Calculate your retention rate at regular intervals to track improvements over time.

Customer lifetime value

This is along the same lines as the retention rate, but it’s another important metric that will demonstrate the growth of the company. Over time, you’ll be able to measure the lifetime value of customers. Strategies aimed at improving the customer experience and customer support offering should result in improvements in this figure.

Return on advertising spend

All marketing spend should be analysed to see what works and what doesn’t. Advertising is no exception. Calculate the return on your advertising spend to see whether you’re targeting your audience efficiently, and find out whether that spend is resulting in an uptick in sales.

Startup growth strategy examples

There are many different paths that startups can take to reach their goals. Companies tend to use a variety of growth strategies, depending on the audience they’re looking to reach and the products they’re hoping to sell. Take a look at some of the growth strategies that are most often used by early stage startups.

Product development

Companies might choose to grow their market share by focusing on product development. This strategy sees startups concentrate on creating a range of diverse products to pique the interest of their audience.

While early stage startups might only have one or two product ideas up their sleeves, companies will often concentrate on creating new products and services during this stage, to achieve growth through product development.

Market development

Market development is another important growth strategy for startups. This strategy sees startups prioritise expanding an existing customer base. Growth can also be achieved in this way by encouraging current customers to increase their usage of a product or service.

Customer retention is key to achieving growth with this strategy. Improvements in customer experience can make a real difference to a company’s chances of success here.

Market penetration

Startups might opt to concentrate on marketing penetration to grow their business. This strategy relies on a range of tactics, such as reducing prices, increasing advertising spend or creating product bundles to entice new customers.

Significant investment is usually required to achieve growth using the market penetration strategy, but it can be hugely successful when done well. Often, this strategy is explored as investors come on board.

Diversification

If a startup has begun to exhaust its primary target market, it might go down the diversification route. This strategy involves companies growing their market share by diving into a previously unexplored sector.

Growth through diversification can be achieved with the launch of new product lines or a range of different services, designed to attract a brand new group of customers.

The diversification strategy isn’t without its downsides, however. It can be quite costly, and as brands are venturing into the unknown this is one of the most risky growth strategies that startups can choose.

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