15.2 Growth problems  (Page 3/4)

A second group that can hinder growth is cooperation strategies, such as when a start-up becomes overly dependent on a more established company as a senior partner, for example, when a small biotech firm depends on a large pharmaceutical company to market its products. If larger established companies really commit themselves to their junior partners and are successful, then cooperation often ends up with the senior partner taking over the start-up. This only ensures the growth of the senior partner. Transferring licenses to larger firms before a product is fully developed is also dangerous—this is a particular problem for biotech start-ups if the government has not yet approved a new drug. However, what is much more common is opportunistic behavior by the senior partner, where it is paid well by the junior partner for its marketing activities, but then it does not in fact aggressively market the junior partner’s products. Such a flawed marketing strategy is also a huge hindrance to growth.

A third group of flawed growth strategies concerns the financing of growth. In the initial phases of the life cycle of start-ups, growth can scarcely be financed out of their profits, nor can it generally be financed alone by the founders’ equity. Start-ups in particular are often undercapitalized. The only alternative that remains is seeking outside capital.

To finance growth strategies start-ups sometimes borrow long-term debt which is to be paid back with interest from the revenues from implementing the strategy. Likewise, some start-ups redeem loans and interest payments step-by-step over a long period by taking out revolving, short-term loans. Both financial strategies jeopardize growth considerably, or even hinder it completely if the firm does not generate the planned revenues, or if no new short-term loans are available to pay off part of the long-term loan at the right time. In addition, start-ups with high growth potential in certain industries, can trade partial ownership in their firms for “venture capital”.

Start-ups can also make another growth mistake in financing by launching their IPOs on the stock market too soon and simply using this revenue to repay debt or venture capital and replace it with equity from the capital market. What is even more serious after an IPO is when firms make the growth mistake of merely increasing their cash management or randomly buying out other firms, rather than using their IPO funds to finance wise growth strategies.

The fourth group of related business strategies where serious mistakes can be made is Human Resource strategies. In many cases the founders and employees of start-ups are in their thirties, and sometimes only in their twenties, and are frequently highly qualified university or college graduates (cf. Frank/Opitz 2001, p. 454). The homogeneity of the age distribution of managers and employees often leads to start-ups acquiring new personnel from the same age group. However, a homogeneous age distribution may lead to a decline in motivation as employees age at the same time. Start-ups must therefore be particularly careful to achieve a heterogeneous age distribution in their personnel. They must also attempt to acquire older employees with experience in the industry and with management competences from other successful companies. It can be of great value to acquire more senior managers who enjoy the new challenge of working for a start-up before they retire. Lack of loyalty in their personnel should lead start-ups to think about how to retain their particularly talented employees. If start-ups fail to consider these points, obstacles to growth are a matter of course.