Development Stage Enterprise
A development stage enterprise, also known as a startup or early-stage company, is a company that has just started operations and is still in the phase of developing and testing its products or services. These companies typically do not have an established operating history.
The following are key characteristics of development stage enterprises:
- Product or Service Development: The primary activity is often the development of a product or service, which may still be at a conceptual stage. The product or service may not yet be available for sale or might be available only in limited quantities or in a test market.
- Limited Operations: The company typically does not have a full-scale operating history. Its operations might be limited to activities necessary to advance the development of its product or service, such as research and development, market research, raising capital, and building a management team.
- Funding and Capital: Development stage enterprises often rely on capital from external investors, since they typically do not have a stream of revenue from operations. This capital is used to fund the company’s development activities and ongoing operations.
- Risk and Uncertainty: There is usually a high level of risk and uncertainty associated with a development stage enterprise. The company’s product or service may not become commercially viable, or the company may not be able to establish a market for its product or service. There may also be financial risks related to the company’s ongoing ability to raise capital.
- Potential for Growth: While there is a high level of risk, there is also the potential for high returns if the company’s product or service becomes successful and the company grows. For this reason, development stage enterprises are often attractive to venture capitalists and other investors who are willing to take on high-risk investments.
Accounting standards have specific guidelines for recognizing the revenues, expenses, and activities of development stage enterprises. In the U.S., for example, the Financial Accounting Standards Board (FASB) issued guidance on these topics, which can be found in the Accounting Standards Codification (ASC). However, it’s worth noting that the FASB has eliminated the concept of development stage entities from U.S. GAAP for public business entities.
Example of a Development Stage Enterprise
Consider a biotech startup, BioInnovate Inc., that was recently founded by a group of scientists who have developed a promising new technology for detecting certain types of cancer at an early stage.
- Product or Service Development: BioInnovate is still in the development stage, focusing on refining their technology and conducting necessary tests and clinical trials. Their product is not yet available for sale.
- Limited Operations: The company does not yet have full-scale operations. Its primary activities currently include research and development, applying for necessary regulatory approvals, and hiring key personnel.
- Funding and Capital: BioInnovate is not yet generating revenue, so it relies on funds from investors to support its operations. They have raised capital through a series of funding rounds, attracting investment from venture capital firms that specialize in the biotech industry.
- Risk and Uncertainty: There is a great deal of uncertainty surrounding BioInnovate. There are questions about whether their technology will be approved by regulatory authorities, whether it will prove effective in large-scale use, whether they will be able to secure enough funding to continue their operations, and whether they will be able to penetrate the market and generate a profit.
- Potential for Growth: Despite these risks, the potential for growth is substantial. If BioInnovate’s technology is approved and proves to be effective, it could revolutionize early cancer detection and potentially save many lives. This could lead to substantial growth and profitability for the company, providing a high return for the investors who took on the risk of funding the company during its development stage.
This example illustrates the characteristics, risks, and potential rewards associated with a development stage enterprise.