What is the Best Stage of Development to Invest in a Startup?

by | Dec 10, 2020 | 0 comments

Are you’re looking to invest in a startup? It’s all in the timing…

There are 5 stages of business development: idea, pre-seed, seed, emerging, or performing.

The Idea stage…

The idea stage is too risky because there is essentially nothing tangible to invest in a startup and there is no foundation to build upon. The idea stage is when the founder(s), family, and friends are putting up their cash — it’s the riskiest time and returns are very questionable. At this stage there is no hook for the rational investor to grab onto and move forward.

The Pre-Seed stage is the perfect stage to invest in a startup

The pre-seed stage is where an angel investor wants to be. Angels get the best deals at pre-seed because the supply of capital is low but the demand is high.  Also, smaller angel investors can find better deals pre-seed because there is less competition for those deals. Particularly, from venture capitalists and institutional investors who compete for deals at later stages.

To minimize risk, angel investors require a high degree of diversification with many small investments. Diversified investment portfolios are easier to build at the pre-seed stage because founders are happy to receive say, $10,000 in investment increments on say, a first-time $200,000 round. Those same companies are not going to entertain small-dollar increments when they reach the emerging stage and are looking for $10 million.

Another big problem is avoiding non-business oriented entrepreneurs. This avoidance is much easier at the pre-seed stage as the business is somewhat already proven to have validity and you should be able to size-up the founder(s)’ acumen.

By Jim Lavorato

Jim Lavorato is the founder of 4M Performance which is designed to assist businesses to survive and thrive in these uncertain times. Jim launched an entertainment-related company in 1988. He was at the forefront in cinema technology and helped spearhead the movie industry's transition to digital presentation and distribution. He also co-founded the Arboreal Group, an environmental consultancy. He has published articles on the motion picture and media industries and is a contributing editor for ScreenTrade magazine and writes a blog "Cinema Mucho Gusto". He is a certified SCORE Mentor in the SCORE Greater Phoenix Chapter and lives in Scottsdale, AZ. Learn more about Jim in his "About" page.

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