Growth stage funding is a term used to describe all VC financing from Series A financing on to the eventual public debut of your company. Unlike seed stage funding, which is funding used to build out an initial concept or developing your first working prototype, growth stage funding is all about lining up (paid) customers, growing your revenue, and getting market validation for your ideas.
A primary focus of growth stage funding is getting a product or service on a commercialized basis. For example, if your startup was initially spun out of a university R&D lab, you might already have a lot of proprietary intellectual property – such as patents or trademarks – that you can commercialize. During the growth stage of your startup, it’s time to convert all of that IP into an actual working product that people will pay money to use.
To invest during growth-stage funding round, venture capital investors are also going to want to see market validation for your product or concept. That’s why many growth-stage startups will proudly announce all of the metrics surrounding their company – such as the number of subscribers, the number of monthly active users, or a number of customers. Of course, the real parameter that matters to venture capitalists is revenue. Sooner or later, you are going to need to prove that you can fund your company without relying on capital from third-party investors – and the way you do that is by showing that all of the initial seed stage funding that went into your company is finally starting to bear fruit.
To qualify as a “growth stage” startup, your company typically needs to be anywhere from two to four years old. If it’s younger than that (as in you just launched the company in your university dorm), then it’s likely that you’re probably still in the “seed stage.” Moreover, if you’re older than four years old, and are still in the “growth stage,” then you better hope that you have very patient investors or that you are in an industry where it can take a long time to come up with a commercialized product. Some biotech startups, for example, seem to be perpetually in the growth stage, as they wait for the results of clinical trials, patent applications, and regulatory approvals.
With the money that you raise from growth stage funding, you will be expected to “professionalize” your company. For example, you might start to make your first official hires from outside of your founding team, such as tapping into a long-time industry veteran to head up your product development team. Also, you will also be expected to pay much greater attention to corporate governance measures, such as holding regular board meetings where you provide updates about your products and services. At this point, VC investors already have a 20% (or higher) equity stake in your company, and they are very much vested in making sure that you meet all of your growth and profitability milestones.
The primary goal of growth stage funding is to get you to your next stage in the funding lifecycle, known as late-stage funding. That’s when venture capitalists can start to see the light at the end of the tunnel, and big-name media publications begin to talk up your company as a potentially hot new IPO prospect. At that point, you have a commercialized product, proof-of-concept for your business model, and a solid financial basis for life as a public company.