Invest Early-Stage or Late-Stage – What’s the Challenge?

Invest Early-Stage or Late-Stage – What’s the Challenge?

April 18, 2022 by investor

Invest Early-Stage or Late-Stage – What’s the Challenge?

Venture capital has two choices in funding startups. 

They can go for early-stage companies or late-stage companies.

So, which stage to focus on?

The risks are higher for early-stage companies, but the valuations are lower. Any meaningful acquisition typically leads to a successful investment outcome.

Later-stage companies come with less startup risk, but valuations are typically high. The company must sell for a substantial valuation to give the investors a return.

As the rule of 5 tells us, a good investment requires an exit of 5 times the post-money valuation. Later-stage companies often come with $20M to $30M post-money valuations which means they would need to exit at $100M to $150M to be a successful investment.

Early-stage startups simply need to launch and grow reasonably well. 

Later-stage startups need to become the leader in their category as acquisitions usually focus on the leader and not the various followers.

In conclusion, the early-stage company comes with high risk for startup failure but an easier time to reach a successful investment exit.

The later stage startup has a lower risk for startup failure but a more challenging time to reach a successful investment exit.

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.

Thank you for joining your host Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.

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Copyright (c) 2023, Hall Martin and All rights reserved.

Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.