By Anton Braun
Businesses like Apple and Microsoft don’t just appear as they are - they go through various stages before they become big conglomerates. This article will discuss these stages, which are: startup, growth, maturity, and decline, and it will analyze factors affecting the move from one stage to the next.
Startup
When the founders first come up with an idea for a business, they enter the startup stage. This stage is characterized by researching and testing ideas. What type of business will it be? What will its product/service be? How will it be different from competitors? Aside from these substantial questions, there are also practical questions that need to be discussed. How will the business be run? How much will running the business cost? Where will it get the capital needed to start the business? Having a clear answer to these questions will be vital to ensuring that the business launches successfully. It will also help with attracting outside investors, who will want to see a business that knows exactly what it is doing so that the chances of an investment being profitable are increased.
At the startup stage, the founders will also need to find the necessary funds to start their business. This may come from the founders’ own pockets if they have capital set aside already, or it may come from friends and family. More commonly, angel investors and venture capital firms will provide the necessary pre-seed and seed funding (pre-seed funding funds an idea, seed funding funds the product itself). Angel investors are individual people that have a lot of money and invest some of that in startups where they believe in the founders or the business idea. In return, the angel investor gets a stake in the company, which they hope to sell at a later stage for a profit. Some angel investors may also be heavily involved in the business, advising or taking control of parts of the business, but this depends on the angel investor. An example of angel investors are the investors in Shark Tank.
Venture capital investors specialize in investing in early-stage businesses that they believe will get them high returns in the future. Like angel investors, they get a stake in the business and may take an active role in the business by appointing managers. Venture capital is different from angel investors in that venture capital money comes from a venture capital fund, which itself has several people that have invested in the fund. The top venture capital firms include Andreessen Horowitz, Sequoia Capital, and Dragoneer Investment Group.
Both angel investors and venture capitalists require the founders to give up a share of their business. If the founders want to retain full ownership and control over the business, they can also go to banks or organize fundraisers to gain the funds necessary. Where the founders choose to go to a bank, they will usually borrow money, which must be repaid in full in addition to interest (similar to a mortgage). However, the bank does not get any ownership in the business. Fundraising involves people donating money to a business with an idea they believe in. This money does not need to be repaid, and the founders retain full ownership, but it may be difficult to get large amounts of money through fundraising.
Once a business has their business plans and financing sorted, they can officially launch a company and start growing it.
Growth
The growth stage is characterized by a focus on improving and expanding the company so that it can become profitable. Ways to grow the company include improving the service/product, distinguishing the company from competitors, and extensive marketing. During this stage, the company will likely require extra capital. It may gain this capital by undergoing further venture capital funding rounds (known as Series A, Series B, etc.) or further loans from banks. At this point, they may also consider doing an initial public offering (IPO). An IPO is where a private company offers its shares to the public on a stock exchange for the first time. This allows individual investors to directly invest in the company while providing the company with extra capital to fund their growth.
Once a company has grown enough to have successfully established itself in the market, it enters the maturity stage.
Maturity
The maturity stage is where companies like Apple and Microsoft find themselves. The company has a strong management team and shows consistent growth year-over-year. It may also start diversifying into other sectors by releasing a new product, for example. Many companies in this stage will also try to solidify their position in the market by merging with competitors or other companies in the production chain, or they may even acquire them outright. These types of deals are called Mergers & Acquisitions or M&A. The company may also decide to do the opposite: they may sell off parts of the company that are unprofitable or no longer fit their vision. The owners may also decide to cash in by selling the whole company.
A company may do very well for a long time, but the life cycles of even the most established companies are likely to come to an end at some point. This happens when they enter the decline stage.
Decline
When a company is in the maturity stage, its revenue will rise and fall depending on demand, competition, and many other factors. But if revenue consistently decreases, that is a problem for the company’s future. Management will have to look at ways to change the company, which could be by making it more efficient or by changing their vision and product. If these do not work, the owners can try to sell part or all of the company, although any offers to buy will likely be low given the difficulties of the company. In the unfortunate case where a company owes more than they own (they have more liabilities than assets), they may go through financial restructuring, which may involve renewed injections of cash and significant changes to the company’s financial structures in order to get out of trouble.
Should all else fail, the company will go into liquidation and no longer exist.
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