How does a company's life stage affect finance sources?

A company's life stage significantly influences its sources of finance, with different stages requiring different types of funding.

In the initial stages of a company, often referred to as the start-up or seed stage, the primary sources of finance are usually personal savings, friends and family, or angel investors. At this stage, the company is still proving its business model, so it's often difficult to secure funding from more formal sources like banks or venture capitalists. These early investors are willing to take on a higher risk for potentially higher returns.

As the company moves into the growth stage, it may start generating profits and demonstrating a viable business model. This opens up additional sources of finance, such as bank loans and venture capital. Venture capitalists are professional investors who provide capital to companies exhibiting high growth potential in exchange for an equity stake. They not only provide funds but also bring in their expertise, strategic guidance and networks to help the company grow.

When a company reaches the maturity stage, it has a track record of stable earnings and a well-established market presence. This makes it attractive to a wider range of investors. The company might consider going public, i.e., conducting an initial public offering (IPO) to raise funds. This involves selling a portion of the company's equity to the public. Alternatively, it might also attract private equity investors who are interested in investing in mature, stable companies.

In the decline stage, a company might face difficulties in attracting investment due to decreasing profits or market share. It might have to rely on internal sources of finance, such as retained earnings, or resort to debt financing, such as issuing bonds.

In summary, a company's life stage plays a crucial role in determining its sources of finance. The risk profile, profitability, and growth potential of the company at each stage attract different types of investors, each with their own expectations and investment strategies.