What is the 'Development Stage'

The development stage is a phase that a company goes through during the preliminary or early state of its corporate life. A development stage company is characterized by its focus on early-stage business activities, such as research and development, market research or construction of manufacturing facilities. Development stage companies are generally underfunded and likely to be on the lookout for sources of capital.

BREAKING DOWN 'Development Stage'

While development stage companies usually have limited revenues and earnings, the prospect of substantial profits in a few years’ time, makes them attractive investments for risk-tolerant investors. Early-stage companies that can successfully grow their business and graduate to the big leagues over a period of time, are likely to reward their shareholders well. Since a substantial proportion of development stage companies fail, a diversified approach is necessary when investing in such companies.

Challenges Development Stage Companies May Face

This period of a company’s life can be especially challenging as it attempts to bring its service or product to market often times with limited resources to cover its expenses. Its product might be out of prototype phase, but still require refinement and polish before it can be mass produced for the public. The company at this stage is still laying the foundation for its future operations and may see a series of new hires and even layoffs as it strives to find the right size to sustain its growth.

There may be safety and regulatory checks that still need to be performed before the product can be allowed on the market. This is especially true for biopharmaceutical companies that create novel new drugs. Companies in the development stage might generate buzz about their forthcoming product that increases demand before the item even hits store shelves. That interest may actually work against a growing company by elevating expectations beyond the ability to see through.

Pebble Technology Corp., for example, created one of the first commercially viable smartwatches to catch on with the public. The company attracted attention early on through a crowdfunding campaign that exceeded expectations. Despite the growing demand for the Pebble Watch, the company ran into difficulties managing its expenses as it grew.

The real costs of manufacturing, shipping, and further development of the product led to the company running out of cash and becoming insolvent. Even though there seemed to be market demand to support sales of the smartwatch, Pebble could not sustain itself through its development stage. The company ended its day-to-day operations and sold its assets off to Fitbit.

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