Startups, especially in the tech and SaaS industries, are forward-thinking companies that aim to disrupt the market and solve their customers’ problems in new and unique ways.
Whilst all startups – at least when compared to traditional companies – are all quite young, there are key differences in the funding and management needs of startups at different points in their development process.
That’s why analysts and investors usually split startups into time categories known as stages – the youngest of those stages being an early stage startup.
What is an early stage startup? How do they differ from companies in more advanced stages? What are some examples of early stage startups? What’s next for these young firms? What is the best way to fund early stage startups?
Here at FounderPath, we believe in empowering bootstrapped early-stage founders with quick, flexible capital to help them grow into strong, sustainable startups. Find out more about how we can turn your monthly subscriptions into upfront cash later on in this article.
In this guide, we’ll give you all you need to know about the world of early stage startups, including what to expect in this stage of your development process and what you need to do next to help your SaaS business grow!
What are the stages of a startup?
The struggle of defining what stage your startup is in its growth cycle is particularly important for raising funds and capital to finance your expansion.
There is a multitude of different ways to list stages of companies, from pre-seed, seed, post-seed, pre-A…, and so on. We find the level of complexity in stage definition extremely unhelpful – as each startup’s financing decisions are unique to their industry, market, or business plan. That’s why we believe in the three-stage business model:
- Early Stage
- Growth Stage
- Late Stage
Some investors and business professionals consider startups before they reach the early stage to be in a pre-seed stage. There’s often not much difference in funding avenues for pre-seed stages, and we believe their needs and characteristics closely align with early stage startups.
What is an Early Stage Startup?
An early stage startup is a company that is in the early stages of its development. These startups will usually have a business plan, a scalable idea, or a working prototype. In terms of capital financing, early stage companies commonly seek capital from seed funding and Series A funding.
The key to a successful early stage startup is:
- To have a great understanding of the market they’re targeting.
- Know how they plan to solve their users’ problems and provide value.
- Have a clear product-market fit.
Traditional early-stage companies won’t usually have a product ready to launch. But with the rapid pace of software development, SaaS early stage startups commonly have a minimum viable product (MVP) ready to launch!
What’s missing in the early stage startup is profitability, user growth, and expansion of their resources and staff.
The goal of an early stage startup is to grow quickly to become profitable. They typically do this by scaling their operations, attracting new customers, and raising money from investors.
Here are some common characteristics of an early stage startup:
The startup is small
With the limited resources of a young, fledgling company, early stage startups tend to only have a few people working on their product.
Without seeing some solid, sustainable growth, it can be too risky to take on too many people – but what SaaS founders need to watch out for is overworking themselves, their co-founders, or early developers to avoid burnout.
The company may have a working product or service, but it is not yet profitable. Early stage startups typically have a small team and limited resources.
Limited user count
It’s no surprise that early-stage companies suffer from low user counts and limited user engagement. Those young SaaS providers with a live MVP will find they can only attract a few early adopters.
The difficulties are clear: a non-existent brand reputation, a small marketing budget, and not enough existing users to spread your product via “word of mouth.” This all results in a high customer acquisition cost (CAC).
Limited financing & investment capital options
Early stage startups lack sustained, demonstratable revenue and good credit history. Therefore, it can be challenging to get investment capital and borrow funds to finance your expansion.
Why are creditors and investors so unwilling to provide these crucial funds? Early stage startups are inherently risky investments. According to Failory, more than 9 out of 10 startups fail.
Due to this high risk, banks can either deny loan applications for startup ventures or offer unfavorable lending terms. For this reason, early-stage founders often turn to venture capitalists or individual angels to provide the much-needed capital financing.
These funds are provided to those startups that demonstrate good product-market fit and need help with growing their capacity. VCs expect rapid revenue growth in the next few years after their investment as your startup enters its growth phase. In return, investors ask for equity in your business – diluting your ownership and control of the company.
How do I finance an early stage startup?
As we touched on previously, traditional capital financing avenues are unsuited for early-stage business ventures, especially in the tech and SaaS industry.
The challenges are as follows:
- Banks and financial institutions find lending to early-stage startups too risky. Even if you can get a business loan approved, you’re likely to be shackled by short repayment terms.
- VCs and angel investors are good alternatives to bank loans. But in exchange for this investment, you’re giving away precious ownership and control to investors in the form of equity. VCs are sometimes looking for quick returns and, therefore, may not be concerned with your long-term aspirations for the company.
Luckily, there’s a third way to get upfront cash to develop your SaaS business – through cash advances for your future receivables.
The neat trick of SaaS companies is that your revenue is fairly predictable. Given a constant churn rate (the rate at which your customers abandon your product), turning your monthly subscriptions into upfront cash advances is a brilliant way to get capital.
That’s exactly what Founderpath offers.
Firstly, you’ll need to connect your invoicing/payment provider account to our app, and we’ll generate a Founderpath Score (high 1,000). A higher score increases the amount you’ll be able to withdraw and lead to better terms.
How does a SaaS cash advance financing model help solve the aforementioned issues?
- We let you take your time paying back your cash advance. We’re the only company that allows more than 12 months to pay back your cash advance. We can also provide annual discount rates as low as 8%.
- By avoiding investment capital, you get to retain 100% equity in your company.
- Get your funds by wire transfer in as little as 24 hours.
How do I value my early stage startup?
It can be quite difficult to calculate the value of a young, early-stage business venture. That’s why investors usually follow a “rule of thumb” approach to determine how much your startup is worth. This is called valuation by stage.
Investopedia gives an example of one such approach:
| Estimated Company Value | Stage of Development |
| $250,000 – $500,000 | Has a solid business idea or business plan |
| $500,000 – $1 million | Has a strong management team |
| $1 million – $2 million | Has an MVP or prototype |
| $2 million – $5 million | Shows signs of a customer base |
| $5 million and up | Has clear signs of revenue growth and an obvious pathway to profitability |
An early precursor to this approach is the Berkus Method – conceptualized by angel investor Dave Berkus. He argued that for each of the following criteria, the calculated company value should be increased by up to $500,000:
The issue with both of these approaches is clear. They are crude overgeneralizations of the value and assets of an early stage startup. The Berkus method was created in the mid-1990s and is too limited to describe the value of a modern SaaS firm.
That’s why detailed financial analytics is needed to accurately calculate a valuation estimate. By connecting your SaaS tools to FounderPath, you’ll unlock a real-time valuation estimate based on your:
- MRR
- Churn Rate
- Retention
- Average Contract Value (ACV)
- Current Growth
- Concentration
- Runway
Our business metric tool offers both a Founderpath score and a real-time valuation estimate. Why is our valuation more accurate than other methods?
We understand the intricate characteristics of SaaS companies and how value is created in your industry. By tracking these key metrics, we can offer a brilliant insight into how your SaaS business grows and also give you personalized tips on how to increase your valuation.
Get Capital for your Bootstrapped Early Stage SaaS Startup Today!
Founderpath’s cash advance funding model is a brilliant, flexible way for bootstrapped SaaS founders to access capital. Our detailed customer and business metrics tools give you a deep insight into how well your company is performing and what you need to do to advance your startup into the growth phase.
To get started with our tools and funding options, create an account for free. Then, once you’ve connected your SaaS tool/payment service provider, you can find out how much upfront cash you can get within seconds!
