What Is the Development Stage?
The development stage refers to a phase that a company goes through during the preliminary stage of its corporate life. Companies that are in this stage are characterized by their focus on early-stage business activities. Development stage companies are generally underfunded and likely to be on the lookout for sources of capital.
- The development stage is the phase a company goes through during the preliminary stage of its corporate life.
- During this stage, companies are focused on R&D, market research, construction of manufacturing facilities, and product design and testing.
- Revenues are scarce and companies are usually not operational during this phase.
How the Development Stage Works
There are several different phases a business goes through in its lifetime. This is generally known as a life cycle. There is some confusion about how many there are, but the general consensus seems to lie between five different stages. The first is the development stage—which is sometimes referred to as the startup period—followed by the market introduction, growth, maturity, and decline phases.
When companies is in the development stage, most of its focus and efforts are in establishing its business. There's a big focus with these companies on research and development (R&D), market research or construction of manufacturing facilities. With a product or service in mind, they will also conduct product design and testing during this period. Early stage companies may not have any revenue generated, and operations may not have been started.
While development stage companies usually have limited revenues and earnings, the prospect of substantial profits in the future 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 to the Development Stage
This period of a company’s life can be especially challenging as it often attempts to bring its product or service to market with limited resources to cover its expenses. Its offering(s) may be out of prototype phase, but refinement and polish may still be needed before they can be mass produced for the public. At this stage, the company is still laying the foundation for its future operations, and may see a series of new hires and layoffs as it strives to find the right size to sustain its growth.
Some developing companies may need to refine their products or services before they can be mass produced for the public.
Businesses in development may need to get some safety and regulatory checks 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.
Example of a Development Stage Company
Pebble Technology 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 the company to run out of cash and become 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.