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.

Categories: Startups

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.

Check Out These Related Posts

The Perfect Pitch – Does It Exist?

The Perfect Pitch – Does It Exist?

In November 2020 I posted an article entitled, "How To Make A Perfect Pitch When You Only Have One Shot!" Since that time, I have been on the receiving end of at least 100 more startup business proposals. What I have learned is that the perfect pitch doesn't exist. If...

read more
Solopreneurship: Grows Exponentially

Solopreneurship: Grows Exponentially

Most entrepreneurs begin as solopreneurs - a person who starts up and manages a business alone. Solopreneurship is thriving. At 4M Performance over half our new coaching/consulting clients are solopreneurs. Freelancers, independent business owners, gig workers,...

read more

0 Comments

0 Comments

Submit a Comment