Master Thesis
Common Dilemmas Entrepreneurs Face in First Two Stages of The
Life Cycle of The Firm: Start-up and Growth Stage
Berry Jole
MSc Entrepreneurship, Vrije Universiteit & University of Amsterdam b.jole@student.vu.nl, VU: 2588292, UvA: 12017752
30 June 2018
PREFACE
This master thesis is written to complete my Joint Master Entrepreneurship. My interest for the topic I used for my final master thesis started during the master course, New Venture Creation and Development, taught by Dr. E. Masurel. Next to that, I have always had a great desire to become an entrepreneur myself in the future. This interest gave me the intention to research certain common dilemmas entrepreneurs face when starting or trying to scale up their business.
At last, I would like to express my gratitude towards my supervisor, Dr. E. Masurel, for guiding me using his passion for entrepreneurship, providing me with helpful insights, and giving me critical remarks leading to a well-developed master thesis. In addition, I would like to show my gratitude and appreciation towards all participating interviewees for giving me the time to interview them and use their information in my thesis.
Berry Jole - 2588292 1st June, 2018
Table of Contents
PREFACE ... ABSTRACT ...
INTRODUCTION ... 1
I. LITERATURE REVIEW/THEORY ... 3
1. WHAT IS ENTREPRENEURSHIP? ... 3
2. WHAT IS AN ENTREPRENEUR? ... 5
3. ENTREPRENEURIAL DILEMMAS ... 9
4. THE LIFE CYCLE OF THE FIRM ... 11
5. WHAT IS A START-UP ... 14
6. DILEMMAS FACED BY START-UPS ... 15
7. THE SCALE-UP ... 22 8. DILEMMAS FACED BY SCALE-UPS ... 23 9. LATE START-UP AND EARLY GROWTH ... 25 II. RESEARCH METHODOLOGY ... 27 1. RESEARCH DESIGN ... 27 2. SAMPLE SELECTION ... 28 3. DATA COLLECTION ... 28 4. DATA ANALYSIS ... 31 III. RESULTS ... 33 1. COMMON START-UP DILEMMAS ... 33 2. COMMON SCALE-UP DILEMMAS ... 39 IV. DISCUSSION AND CONCLUSION ... 44 REFERENCES ... 49 APPENDIX ... 55
ABSTRACT
Purpose – Lots of entrepreneurship research with the perspective on common dilemmas that
entrepreneurs face during the beginning stages of a firm that ultimately result in failure of many startup and scale up businesses has been done. Despite that, still today many start-up and scale-up businesses fail. This research paper wants to make the distinction to see what the key dilemmas faced by entrepreneur are in order to shed light on this topic and try to inform future entrepreneurs on what these dilemmas are.
Design/methodology/approach – This paper makes use of an inductive qualitative research
design, by collecting data on common dilemmas entrepreneurs face during the life cycle of the firm with the focus on the start-up and growth stage. This includes one focus group consisting of 10 entrepreneurs who are currently in the late start-up and early growth stage.
Findings – Entrepreneurs and their startup businesses most often face dilemmas such as no
market need, unable to pivot or over pivoting, incompetent team, and insufficient capital. Besides these dilemmas that fall in line with existing literature, this paper found that the lack of standard business experience among founders and troubling relationships between co-founders are additional dilemmas brought to light. Furthermore, Entrepreneurs and their scale up businesses face dilemmas found in the existing literature, such as founders’ mindset towards growth, unable to attract well qualified personnel, and incapable to attract additional capital to support growth. In addition, this paper found that the age of the entrepreneur and not having the access to the right marketing tools stalled or prevented the success of growth.
Originality/value and implications – The clear analysis of the finding of this research paper
adds to the existing literature of entrepreneurial dilemmas by diving deeper in the most common dilemmas faced by starting and growing entrepreneurs and tries to shed light on these dilemmas in order to inform future entrepreneurs on how to notice and overcome them.
Keywords Entrepreneurship, Entrepreneur, Dilemmas, Startups, Scale Ups, Life-cycle of the
Firm, Challenges
INTRODUCTION
Encouragement and tax breaks are offered, by lots of Western governments, to people that run a small business. The reasons why governments and their politicians provide these benefits are not always clear to the public, but they mostly believe that there are unhealthy circumstances when looking at the market supply of entrepreneurship. The topic of small businesses has always gained the interest of politicians and the media, nonetheless, economists still have not proven much on how small businesses are successfully generated by our economy. It is commonly known that textbooks of economics most often disregard the role of an entrepreneur. Besides that, they do not elaborate much on how the creation of small enterprises leads to potentially large corporations.
During the life cycle of the firm, entrepreneurs face lots of obstacles, dilemmas, or challenges. There are many different definitions about what a typical entrepreneurial dilemma is. Nonetheless, this research paper defines an entrepreneurial dilemma as a dilemma, challenge, or struggle faced by an entrepreneur during the start-up and scale-up stage when looking at the life cycle of the firm. This could be when a start-up cannot find sufficient capital to survive and/or expand, but also, when an entrepreneur takes a decision without sufficient knowledge, such as the struggle that due to insufficient market research a developed product does not have enough market demand in a certain market the entrepreneur wants to enter.
Even though, there are lots of studies about the challenges entrepreneurs face during the life cycle of their firm, still a big portion of the young organizations fail to survive in today’s economy. This study will make an effort to shed light on dilemmas start-up and scale-up companies face in the first few years. One should expect, after lots of research done concerning the topic of entrepreneurship and what characteristics shape a successful entrepreneur, the rate of failing start-ups would decrease. This paper will hopefully give answers that fill the gap found in existing literature. Also, hopefully, by showing the dilemmas that young entrepreneurs experience, this paper will help entrepreneurs prepare better before they engage in starting their own business.
This study will conduct research to see which dilemmas and challenges occur during the start-up and scale-up phase. This will provide a good comparison between the two phases in the life cycle of the firm to see whether or not there are similarities and to show what stage specific dilemmas occur. The following research question is constructed: “What are common dilemmas entrepreneurs face in the first two stages of the life cycle of the firm, start-up and scale-up stage.
This research question will help to give an answer and solution to the research gap investigated. Besides the research question there are sub-questions constructed in order to better answer the research question. The first sub-question, what are common dilemmas experienced by start-up companies. This will give a good overview of what dilemmas are occurring when companies are in the start-up phase. The second sub-question, what are common dilemmas experienced by scale-up companies. This will give a good overview of what dilemmas are occurring when companies are in the scale-up phase.
The three sub-questions listed above will help in answering the main research question of this paper and give new entrepreneurs a good overview on what to expect in the beginning stages of their venture. With the use of interviews, this paper will gather the necessary data needed in order to answer the research question. This paper will interview five entrepreneurs who own a start-up business and five entrepreneurs who own a business that is scaling up in size. This will give a good overview on what the dilemmas are that occur during these stages.
The paper is structured in the following way. Section I represents the literature review. Section II describes the different methods used in this paper. Section III contains the results and section VI provides a summary and concluding remarks.
I. Literature Review/Theory
The topic entrepreneur and entrepreneurship has significantly gained popularity around the world in the last decade. The same increase in popularity has been visible in the field of academia, because more and more researchers devoted their time and effort to the subject. The attention to the world of entrepreneurship seems to be justified due to the growing evidence that new venture creation encourages economic growth, by supplying hundreds of thousands people a new job opportunity (Birch, 1979). Furthermore, Birley, (1987) showed that new venture creation improves local and federal revenue, increases national productivity, and increases exports.
It has been proven that entrepreneurs have played an important part in the establishment of today’s society and economy. This has been put at display when the American newspaper USA Today released a special 25th anniversary special that included the 25 most influential people in the last 25 years. This list showed how important entrepreneurs have been to the economy when Bill Gates, the owner of Microsoft, came out on top. Besides that, Oprah Winfrey, Howard Schultz owner of Starbucks, Larry Page and Sergey Brin founders of Google, Russell Simmons, and Sam Walton from Walmart. To give another example, Ted Turner, Bill Gates, Mark Zuckerberg from Facebook, Jeff Bezos from Amazon.com, and Andy Grove from Intel have been selected as the Person of the Year by Time magazine since 1990. Interesting to see, even though the entrepreneurs of today receive much attention from the public media, they haven’t been much of a topic for textbooks that are written by economic historians and economists.
1. What Is Entrepreneurship?
The question, what is an entrepreneur, can be answered with many possible definitions. Nonetheless, economists disagree on how to correctly define an entrepreneur. Looking at the French origin of the word entrepreneur, an entrepreneur is a person who ‘undertakes’ a certain business project. A more extensive definition describing an entrepreneur is given by Hebert and Link (2009), they combined over twenty years of economic events to see what characterizes an entrepreneur. According to them, an entrepreneur is (1) someone who accepts the risk involving uncertainty, (2) supplies financial capital, (3) makes decisions, (4) innovator, (5) a manager, (6) an industrial leader, (7) the founder and owner of a business, (8) someone who attracts and coordinates economic resources, (9) a contractor, (10) an arbitrageur, (11) one who stimulates production, and at last (12) someone capable to find alternative usage for resources. Based on this
characteristic Sobel (2008) came up with the definition of an entrepreneur as ‘a person who organizes, manages, and assumes the risk of a business’.
Researchers such as Hebert and Link (2009), developed their theories about entrepreneurship based on the research done by Joseph Schumpeter (1934). When Schumpeter (1934) worked on his theory of economic development he positioned the innovative entrepreneur at the center of his research. He stated that someone is an entrepreneur when he truly brings out new business ideas. Also, he said that someone loses the label of an entrepreneur when his business is built up, reaches maturity and becomes a sustainable business on its own. Furthermore, the research of Schumpeter (1934) showed five importation innovations entrepreneurs give in order to boost the economy. First, entrepreneurs introduce new and interesting goods to the market that are totally new or are an improved product based on something that already exists. Secondly, an entrepreneur is someone who opens a path to a new market, by introducing something totally different unlike any market. The third important innovation entrepreneurs bring to the economy is the introduction of a new technique for production, which has not yet been tested by the market. Fourthly, entrepreneurs supply a new source of raw materials of semi-manufactured goods. The last innovation sketched by Schumpeter (1934) is that entrepreneurs create a monopoly position or break up an existing monopoly position within any industry by introducing an organization that is highly impactful. The main thing that separates the everyday businessmen or woman from an entrepreneur is that business people do these activities sometimes, as where entrepreneurs make these characteristics their specialty.
Even though, Schumpeter (1934) states that innovation plays an important role in understanding the impact of entrepreneurship, one should not forget that some entrepreneurs tend to replicate ideas from their competitors. This makes it hard to make a distinction between innovation and replication. Despite the definition of an entrepreneur given by Schumpeter (1934), the term entrepreneur has been used not only for innovators, but also for almost everybody who runs a business. To clarify the discussion about who is an entrepreneur, Marshall (1920) made the distinction between the active entrepreneur and the passive entrepreneur. An active entrepreneur is someone who introduces new and improved business methods, whereas the passive entrepreneur is someone who follows other innovations and lives of the success of other entrepreneurs. Concluding, the discussion surrounding the history of entrepreneurship is full of active
entrepreneurs who lay their focus on innovation and passive entrepreneurs who follow others and from time to time show some novelty in their methods.
2. What is an Entrepreneur?
In recent studies done by Baron & Markman (2003) and Baum, Frese, & Baron (2007), the literature related to entrepreneurship changed to a wide selection of entrepreneurial competencies. These competencies, including skills, knowledge, and being able to exploit new opportunities and turn them into a successful venture, are known to be more variable and subjected to change in comparison to personality characteristics. Rauch and Frese (2007) have found several personal traits and competencies that are increasing the chance of business ownership as an entrepreneur. Mazzarol and Reboud (2006) stated that people who have these competencies perform entrepreneurial tasks more successfully. They focus on seven traits and competencies that help entrepreneurs tackle entrepreneurial tasks. The first six competencies are related to innovation and the ability to explore new opportunities, whereas the last competency, transformational leadership is about the ability to delegate responsibilities.
Independence
Among entrepreneurs and small business owners, independence is known to be the leading motive for starting their own organization (Hisrich, 1990). According to Shane, Locke, and Collins (2003) someone who is independent takes responsibility for his own decision instead of following others. Furthermore, according to Lumpkin and Dess (1996) independence is almost similar to autonomy, because certain ideas or visions are introduced and completed by the independent action of a person. Also, they found that the entrepreneurial actions require independence when looking at the creation and innovation of new ideas. Interesting to see, in the existing literature about entrepreneurs, many researches list independence as one of the main characteristic of an entrepreneur. (Carton, Hofer, & Meeks, 1998; Cromie, 2000; Utsch, Rauch, Rothfuss, & Frese, 1999). Besides that, Aldridge (1997) found that business owners scored much higher on independence during a personality test compared to the rest of the population. So, it is imperative for entrepreneurs to be independent in order to make hard decisions during challenging times.
Risk-taking propensity
According to Cromie (2000) within the world of entrepreneurship, risk and uncertainty play a significant role. Knowing this, many studies have come to the conclusion that entrepreneurs score higher on risk taking propensity compared to normal people (Schumpeter, 1934; Tang, Tang, & Lohrke, 2008). According to them, risk taking propensity is being able to take chances when difficult decisions have to be made. Consequently, when looking at previous literature, risk taking propensity is often listed as an important characteristic that define an entrepreneur (Ahmed, 1985; Cromie, 2000; White, Thornhill, & Hampson, 2006). Interesting to see, Shane (2003) found no significant difference in risk taking propensity between business owners and the general population. Moreover, Duchesneau and Gartner (1990) found that successful entrepreneurs try to reduce the risk involving their firm. This result was confirmed by Rauch and Frese (2000) when they found that taking high risk will affect business success negatively. This inconsistence in the literature related to risk taking and entrepreneurs might come from many definitions of risk taking used in the research on entrepreneurship. A solution to this confusion was found by Lumpkin and Dess (1996), they state that the risk entrepreneurs make involving a decision depends on whether there is a possible loss or gain. In other words, they found that people expecting gains will minimize risk taking and when expecting a loss, they will maximize risk.
Tolerance of ambiguity
According to Begley and Boyd (1987) it is hard to effectively structure or categorize an ambiguous situation due to its lack of clarity and insufficient cues. Budner (1962) defined tolerance of ambiguity as the ability to observe ambiguous situations as normal or positive, whereas a person who is intolerant to ambiguity has the tendency to observe those situations as challenging and negative.
According to existing literature, the majority of entrepreneurial decisions deal with ambiguity. For example, Schere (1982) and Begley & Boyd (1987) both stated based on their results, that entrepreneurs are more tolerant to ambiguity then general managers, so entrepreneurs have an ambiguity bearing role. This result has been confirmed by Koh (1996) who found that entrepreneurs have more tolerance of ambiguity compared to the people that are not involved with entrepreneurial actions. Nonetheless, there are numerous studies, such as Shane & Locke (2003) and Begley (1995), that did not found those conclusions. They came to the conclusion that founders
and business owners who bought an existing firm did not differ much when looking at tolerance of ambiguity. Nevertheless, there is sufficient evidence in existing literature that show that entrepreneurial involved people have more tolerance of ambiguity making it an important characteristic defining an entrepreneur.
Self-efficacy
The next characteristic defining an entrepreneur is self-efficacy. According to Bandura (1997) self-efficacy is the capability to gather and apply the required personal skills, resources, and competencies in order to accomplish certain tasks and goals. This entrepreneurial characteristic indicates the capability to evaluate his or her ability to control certain tasks or events. Lim (2008) showed recently that self-efficacy played a more important role within entrepreneurship. Furthermore, Markman and Baron (2003) found that entrepreneurs with more self-efficacy will achieve more success compared to entrepreneurs who have less self-efficacy due to the fact that their actions lead to possible outcomes. They saw that entrepreneurs with a higher confidence level will make decisions before they totally make sense. Busenitz and Barney (1997) supported this by stating that confidence will entail additional risk, but early decision making will lead to opportunities that might be gone if the entrepreneur lacks in confidence and waits before making a decision.
More evidence is provided by Chen, Greene, and Crick (1998) who state that entrepreneurial self-efficacy can be described as a person shows confidence in his or her capability to be successful when executing entrepreneurial tasks. Furthermore, they found that self-efficacy stimulates the aim to start a new venture. Additionally, Zhao, Seibert, and Hills (2005) found that there is a significant difference between founders and non-founders when comparing their level of entrepreneurial self-efficacy. Existing literature shows a correlation between, self-efficacy and self-confidence, and venture growth and entrepreneurial focus (Koh, 1996; Shane and Locke, 2003). This concludes that self-efficacy is indeed a characteristic that belongs to an entrepreneur. Innovativeness
Throughout existing literature, it becomes clear that innovativeness and creativity are part of almost every definition of entrepreneurship. Whereas Timmons (1990) states that entrepreneurship involves creative acts. Also, Cromie (2000) found that entrepreneurs generate new concepts and ideas, find opportunities, and use existing resources and ideas to find a way to
create additional value. Lumpkin and Dess (1996) say that innovation helps in executing and supporting new ideas, experimentation, novelty, and creative actions that will ultimately result in new technologies, or services. These arguments and the strategic behavior shown by entrepreneurs indicate the level of creativity they possess. Consequently, Drucker (1985) came to the conclusion that innovation and creativity are highly important when fulfilling the role of an entrepreneur.
The empirical research of Bartram (2005), Cromie (2000), and Ward (2004) found that entrepreneurs compared to non-entrepreneurs show a higher creativity and innovativeness. Furthermore, Lumpkin and Dess (1996) found that innovation is one of their five core dimensions when looking at the entrepreneurial orientation. Also, Timmons (1990) claimed that innovativeness and creativity are two necessary yet hard to acquire characteristics that will increase the probability of entrepreneurial success and support business growth.
Market orientation
Another critical characteristic defining an entrepreneur is market orientation. According to Morgan and Strong (1998) a market oriented business finds opportunities and avoids threats by having the understanding of potential customer needs and the ability to follow ever changing needs of customers, customer value, and the ability to follow activities of competitors. Furthermore, Markman and Baron (2003) found that successful entrepreneurs have the ability to create their new ideas while at the same time matching the buyer’s needs, skills, knowledge, and being able to successfully offer their product towards the market. Venkataraman (1997) found that entrepreneurs need to have a degree of market orientation in order to exploit profitable opportunities. So, being alert to what happens in the market paired with market orientation are important personalities that increase entrepreneurial success.
Leadership qualities
The last characteristic that is key in defining an entrepreneur is leadership. According to House (2004) leadership is when an individual takes on a leader role and is able to motivate, influence, and stimulates other people to work towards success within the organization. Smid and Van der Woude (2005) say that leadership directly impacts revenue generation, cost, service, motivation, market value, and sustainability. Also, they say that leadership involves guiding, directing, and motivating employees, which is important to achieve success with the firm. The characteristic leadership, is one of the few that can be trained and developed overtime.
Extensive research, done by Hornaday and Aboud (1971), showed that entrepreneurs possess more leadership qualities compared to the normal people in society. Furthermore, Lim (2008) found that leadership has a significant impact on the performance of entrepreneurial businesses. Timmons (1990) stated that leadership is one of the six key characteristics an entrepreneur should have in order to achieve success. A strong entrepreneurial leader is growth orientated and will increase the success of the business.
In the end, successful entrepreneurship requires a wide range of skills, competencies, and characteristics. To obtain such success the entrepreneur needs to have a combination of good judgment, vision, ingenuity, creativity, the ability to solve problems, hard work, leadership skills, persistence, and the ability to take risks. Nonetheless, it is not easy to accomplish this and put them all together to fight themselves into a competitive market. Nye (1991) stated that entrepreneurial success is hard to achieve, because you need lots of luck by being at the right place at the right time, follow the correct path, and finding an entrepreneurial strategy that withhold sudden changes in today’s competitive economy.
3. Entrepreneurial Dilemmas
A dilemma can be defined as a situation that requires a choice consisting of several alternatives or options, however, these alternatives or options will not be ideal or desirable. In other words, when an entrepreneur is faced with a choice, but does not have sufficient evidence or does not know how to assess the information to make a confident decision. Nonetheless, the choice that will be selected will have unfavorable entrepreneurial consequences. To put this in perspective, a dilemma is similar to “zugzwam”, a position in chess or similar games where a player needs to make a decision or move that will result in losing one chess piece. When the player does not make this choice, it will weaken his position in the chess game as a consequence. Another example out of the movie The Odyssey, where Odysseus had to face a dilemma when he needed to pass with his ship between the six-head monster named Scylla, and a whirlpool named Charybdis. Odysseus made the decision to pass closer to Scylla, which resulted in losing some sailors to the monster. He chose this path instead of losing the entire boat with its crew members to the whirlpool. One can describe this dilemma as being caught between a rock and a hard place. According to Shane and Venkataraman (200), dilemmas happen in several contexts and in each dimension of entrepreneurship. These dilemmas occur in research, teaching, service, and also in the field of entrepreneurship about legitimization. McGrath (1982) showed that dilemmas happen
in the field of research much often. He said: “the research process is to be regarded not as a set of problems to be ‘solved,’ but rather as a set of dilemmas to be ‘lived with’; and the series of interlocking choices to be regarded not as an attempt to find the ‘right’ choices but as an effort to keep from becoming impaled on one or another horn of one or more of these dilemmas.” (McGrath 1982)
There are many common multi-dimensional challenges in the field of entrepreneurship, especially when looking at the start-up and growth stage of the life-cycle of the firm. The challenges that happen during these stages are related to dynamic environment, socio-economic dilemmas, type of stakeholders and organizational setup, match with investors, awareness and acceptance of the market setup, resource utilization, affordable and available offerings, and scalability dilemmas. The next section will display nine key challenges or dilemmas.
The first dilemma is related to the dynamic environment involving the market imperfections connected to the information, customer, government, competition, and infrastructure dynamics. (Dixon and Clifford, 2007; Marshall, 2011; Wilson and Post, 2013). These challenges occur when looking at cultural, educational and economic differences, by the absence of enough financial support, language barriers between parties, cash flows that are not flowing in on constant basis, and the acceptance of purchase decisions. An example of an infrastructure challenge occurs when there is a shortage of the basic setup, such as water, technology, electricity, transportation and roads. Also, one will experience information asymmetry dilemmas when there is a scarcity of trustworthy data sets and information about culture, market based, geographic, and demographic patterns. Another dilemma can occur when entrepreneurs receive limited support from the government and have to deal with unpromising rules, regulations, and policies. An additional challenge can arise when looking at the competition, where the informal market takes over the ecosystem that will lead to lower skilled local providers that will offer low quality solutions when trying to outperform the competition.
The second dilemma, involving socio-economic dilemmas, happens when an ethical dilemma arises while sustaining a balance between the social mission of the company and the returns expected by its stakeholders. (Tracey and Phillips, 2007; Wilson and Post, 2013).
According to Tracey and Phillips (2007), the third dilemma is connected to the selection of an organization structure, setup, and processes. These decisions are made to develop a diverse network of stakeholders.
Dees (2001) and Alcantara & Kshetri, (2013) provide a common dilemma when looking at the ideal match with an investor. A firm needs to build up a social legitimacy towards capital investors, while at the same time the need to create a good fit between the needs and values of a community and the investor.
The fifth dilemma founded by Tracey and Phillips (2007), involves the awareness and acceptance of the market setup. This dilemma occurs when there is an overflow of informal market ecosystems, which leads to a lack of trust, awareness, and acceptance against the formal market organization within the ecosystem. Resource utilization creates a sixth dilemma in the world of entrepreneurship according to Mair & Schoen (2007), Dixon and Clifford (2007), and Wilson & Post (2013). This challenge is connected to the restricted availability of funds and skilled manpower within the ecosystem, which makes it difficult to acquire and select the right people and find the right funding the firm needs to sustain.
The seventh dilemma occurs when looking at the affordability and availability of offerings. Mason (2007) and Lumpkin (2013) argue that this type of challenge arises when a firm looks into the identification, delivery, and design of a particular offering, while at the same time looks at the challenges involving accessibility, affordability, and availability of the offering.
A last dilemma, a scalability dilemma, arises according to Mair and Schoen (2007). Such dilemma is created when the entrepreneur has to maintain a social relevance in order to increase the reach, impact, and growth of his firm. Based on these nine dilemmas stated above, this study will research the challenges start-up and scale-up businesses face during these stages.
4. The Life Cycle of The Firm
Chandler (1962) stated that over time organization’s structure and strategy develop and get more mature during their life cycle. Existing authors and their literature have proposed we can explain and predict the design and performance of an organization, by using life cycle models. (Adizes & Naiman, 1988; Greiner, 1972; Lyden, 1975). In this paper, the concept is predominantly used to explain the start-up and scale-up state in order to display certain dilemmas that occur during these two stages in the life cycle of the firm. The section will display the origin and definition of the stages in the life cycle of the firm.
Life Cycle Stages
theory where he indicated that organizations react to everyday growth and market challenges by developing certain organizational structures. His work was a great starting point for further studies involving this fascinating topic. The definition of a life cycle from The Concise Oxford Dictionary is used in early studies in order to define and explain each life cycle stage. The definition was as follows: ‘The series of changes in the life of an organism including reproduction’. Furthermore, Thompson (1995) described a stage as a point or period in a process of development. The theory of life cycle stages is derived from the science of biology, which is used in literature of this topic to describe the stages an organization goes through. Moreover, Scott (1971) explained that ‘it is possible to divide the organizational developments into stages or periods of time’. Research done by Dodge, Fullerton, and Robbins (1994) state that stages are divided as (1) displaying how a series of events inside an organization change things over time, (2) a hierarchical development that is not effortlessly reversed, and (3) a composite of structures and activities inside an organization characterizing a certain stage.’ Existing literature commonly uses the terms life cycle stages, development stages, and growth stages when describing their research. Also, previous literature uses variables that explain organizational structure and divides them into two dimensions, contextual and structural. Company’s size, age, focal tasks and obstacles faced, and growth rate are considered to be categorized as contextual dimensions. Whereas, structural dimensions consist of formalization, vertical differentiation, structural form, and the amount of organizational levels. Nonetheless, researchers state that it is too soon to talk about life cycle theories. This is stated by Gibb and Davies (1990) where ‘the construction of such a theory in the near future is unlikely’.
Many researchers have questioned the science surrounding the organizational life cycles. Penrose (1952) gave his critique whether or not the analogy of the life cycle is appropriate in the field of economics. She stated her belief that the development some firm experiences does not happen according to the same rules as living organisms. The argument given by Penrose (1952) was that organizations have the ability to terminate where organisms do not. Even though the believes of Penrose (1952) are somewhat outdated, there is empirical evidence given by Merz, Weber, and Laetz (1994) that supports the analogy of organizational life cycles. Furthermore, lots of deductive research is done by researchers who tried to highlight a philosophy that believed business growth is similar to a living organism. (Kazanjian, 1988). Deductive research done by these researchers often missed empirical consistency in their results, which led to missed opportunities to explore the processes of organizational growth. For example, Hanks (1993) and
Merz (1994) only acknowledged the symptoms of growth, which could have been done in combination with other research.
Other studies were done with more empirical consistency, such as research done by Dodge and Robbins (1992), they investigated lots of small business case reports and found that they experienced different problems during each stage in the life cycle of the firm. For example, young organizations have more trouble attracting capital compared to organizations in more mature stages. Research done by Kazanjian (1988) supported the findings of Dodge and Robbins (1992). They examined 105 organizations and found that opportunities and threats change over the course of each stage in the life cycle. Where starting firms are active with product innovation and development and mature firms are active to formalize and expand the number of management levels and procedures. Nonetheless, Hanks (1993) stated that this topic of life cycle stages should be further developed with better empirical analysis and inductive research.
Theories about Life Cycle
There are many theories concerning the life cycle of the firm. This section summarizes two interesting theories developed by Dodge & Robbins (1992), Masurel & Monfort (2006), and Sirmon, Hitt, Ireland & Gilbert (2011), they give a clear overview on how they define the stages an organization goes through as they mature.
Dodge and Robbins (1992) built their research on two assumptions developed from existing literature concerning the organizational life cycle model. First assumption is built on the research done by Quin and Cameron (1983), they stated that each stage is unique and experiences different challenges and obstacles. The second assumption is built on Dodge and Robbins (1992) own believes. They believe that the actions taken by management determine whether or not organizations move to the next stage. Dodge and Robbins (1992) determined four stages a firm goes through, based on an extensive literature review. The stages are (1) start-up stage (Formation), (2) the growth or expansion stage (Early Growth), (3) expansion stage and domain protection (Later Growth), and (4) the stability stage. In the early stages of their research they found five stages, but later on they made the choice to select four stages that where key in defining the life cycle of the firm. The research of Dodge Robbins (1992) concerns small business development and survival, but their findings are relatable to this topic. Moreover, they found that the external environmental problems mainly occur during the first stages in the life cycle and that internal environmental problems are mainly active in later stages.
A second theory, developed by Masurel and Montfort (2006) based on prior extensive literature, found that within the life cycle certain patterns can be distinguished despite the different stages. They developed the following four stages and used them as groundwork for further studies, (1) Starting, (2) Growth, (3) Maturity, and (4) Decline. Interesting to see compared to other theories that do not include the decline stage, the study of Masurel and Montfort (2006) argue that every business in its life cycle will ultimately experience decline. In their empirical research, they made the distinction between labor force, labor productivity, and firm sales. They concluded that those factors increased during the first three stages and decrease during the last stage of its life time. Masurel and Montfort (2006) found that all factors cannot be seen separate from each other due to the causal effect, but all factors satisfied their initial expectations.
The last theory discussed, done by Sirmon et. al (2011) found that the amount of resources owned by a firm depends on the stage of development an organization is currently in. They found it imperative to look at how a firm organizes their efforts to acquire resources during each stage in the life cycle of the firm. In their research, Sirmon et all (2011) displayed similar life cycle stages as Masurel and Montfort (2006) namely: (1) Start-up stage, (2) Growth Stage, (3) Mature Stage, and (4) Decline Stage. According to them, the entrepreneurial focus should mostly be on managing and structuring the required and available resources during the first stage. Also, the growth stage should permit an organization to make the transition from a fragile stage towards a more mature stage. They believe that it is from utmost importance that an organization correctly manages its resources in order to transition to a new growth stage. A firm that is unable to execute this correctly will ultimately experience decline. Furthermore, Sirmon et all (2011) found that an organization should protect its resources by reassessing its core business. They managed to display how important resources are during each life cycle stage a firm goes through.
5. What is a Start-up
The first stage of the organization life cycle of the firm is the start-up stage, in this stage entrepreneurs transform an innovative idea into a sustainable product. Besides that, another task is to make sure that the basic fundamentals of a starting business are organized and up and running. According to Hanks (1990) a start-up is an organization that is new or in the beginning phases of its life cycle, has a small number of employees, and has a growth rate that is unpredictable. In this stage, to acquire necessary start-up funding, the entrepreneur is faced with certain risky decisions
based on one single product that they bring to one single market. Such start-ups incorporate a niche strategy by presenting a small product line. Besides that, start-ups most often carry out significant product innovations. Also, in the startup stage, there are large investments made in order to develop their product, buy a plant and equipment, and secure sufficient working capital.
What really characterizes a new venture in the start-up stage, is a lack of or almost no formal organizational structure. According to Hanks (1990) it is very common that a simple organizational structure is put in place and that the founder is the one who has supervision over the work of the small group of employees. The founder most often generates an informal and personal tone throughout his business. Nonetheless, there are some formal systems put to work, such as planning and control that happen most often on an intuitive basis.
There are some critical skills that the entrepreneur, also the founder of the new venture, needs to have during the beginning stages of the start-up business. These skills are creativity, strong commitment, market vision, the ability and guts to undertake certain risks, and the ability to make the right decision when facing a dilemma. At last, it is critical that the entrepreneur is a result oriented worker who wants to achieve set goals in order to scale up his business in the future and make sure that his organization is up and running in order to sustain.
When a new venture develops over time and the organization starts growing in size, the venture will be more complex and has to deal with new dilemmas and challenges. There are many life cycle theories arguing that when a firm experiences growth and becomes more complex it will give the organization new demands. Such demands can translate into the discovery that existing organizational structures and systems are unproductive and weak. Meaning, if the organization desires to be sustainable and wants to serve the marketplace in the most effective way, the organization would have to change its structure and systems in other to achieve a better fit that is in line with the current size of the venture and solves its complexity and focal problems.
6. Dilemmas Faced by Start-ups
According to Butt, Cho, Coskun, Kamrani, Khademhosseini, Volpatti, Yetsen, and Yun (2015) the most occurring reason that start-up companies fail to survive is due to the lack of demand for its product. Butt et al. (2015) show in order to overcome this dilemma an entrepreneur should lay his focus during the development of the product on customer development. This way, by tracking the customers’ needs and wants, the entrepreneur can address the perfect niche market that will fit his product and decrease the probability of failure. Furthermore, Butt et. al (2015) show
that the lack of sufficient capital and having an incompetent team are the two other significant dilemmas faced by entrepreneurs that can lead to the failure of the start-up. Also, they show that premature scaling and growing of the start-up can lead to failure as well. So, in concluding words, it is of other most importance that the entrepreneur is able to pivot to a different strategy when the initial strategy is not successful. The reason why this research paper selected these four common dilemmas, found in existing literature, is to give a good and clear answer to its research question. Also, these four dilemmas were most forthcoming in existing literature and were relevant for this research. This way this study can display the dilemmas that are the most common and try filling the cap in the literature found for the research paper.
No market need or demand
A lack of true market need for a specific product is one of the main reasons for the lack of translation of the technology to a certain product. (Butt et. al, 2015) A prime example of this issue, the field of microfluidic has a wide range of proof-of-concept devices yet they have a hard time putting these to the market due to the shortage of commercially successful products. These products and technologies may have tremendous benefits, but they are not successful now because the public does not see the benefits in the short term. Knowing this, companies are forced to use different marketing strategies to bring these high-technological innovations to the market. Laboratories do not want to change and buy these new products until they see convincing advantages, so these highly technological products will not have a wide range of customers in the short term due to the lack of convincing advantages. This is a reason why start-ups will not acquire the needed funding in order to sustain their business and delay their entry into a specific market. Also, founders may experience a longer period of time to authenticate their needed target market for their start-up then they initially expected. This is a dilemma of high importance, which can lead to a decision to scale up a start-up prematurely which can result in a failure of the firm. So, an entrepreneur should hold back on the scalability of its product until the development of the product is finalized.
It is key for entrepreneurial success that the entrepreneur considers a market demand while developing its technology for a product instead of finding a market for a product they already developed. When a start-up is market driven it will lead to a strong and consistent growth. A product driven entrepreneur will experience a much slower or non-progressing growth due to the
successful commercialization, an entrepreneur needs a product that brings a solution to an unanswered question while at the same time targets a niche market. According to Butt et. al (2015) entrepreneurs of start-ups need to look at their product critically to see what is the reason this product does not exist yet. They do this by checking their assumptions and evaluating if there is indeed a demand for their product.
In order to build a sustainable and successful business, a start-up needs to understand how its competitors perform and asses the current stage of their target market. This assessment is key, because the customers of a particular market will not be ready when a start-up has a product that is well advanced and ahead of the market. Besides this, an entrepreneur should have the capacity to predict the trend of a certain market to ensure that this market will uphold and exist in the future. A well-designed product that has a market in mind may not satisfy the demand and needs of the market selected. The product might still need certain changes in order for the product to be a good fit in the market. This process of bettering the product in order to satisfy the needs of the market is one of the main concepts of the lean start-up model. A lean start-up process is considered to be a learning approach which leads to shortening the development cycle of a product by integrating customer feedback. When this process is not done successfully, the product may need to be totally redesigned, because the entrepreneur and the team did not listen closely to and validated the customer’s ideas, needs, and wants throughout the development phase.
In the end, you need to be able to market a product to your customer. High technological entrepreneurial start-ups commonly fail, because their innovators frequently abandon the process of productizing, meaning an entrepreneur might have a market need for its fully developed technology, but if the product is not easy to use by the customer they will not be able to commercialize their product. A product should simply be able to stand alone or be able to compete with existing equipment and the product should have a long-lasting advantage over other products instead of being a small improvement of existing products. Besides that, a product has to be easy to use in order to not lose functionality for the customer. Knowing this, it sounds easy to develop an easy to use technology, but engineers most often tend to over-engineer their product which will lead to confusion and unattractiveness towards their customer’s needs. Through over-engineering, the start-up could experience a delay of the product launch, which will cut back in the time needed to build a large customer base.
try to determine the right target market. This way they can make sure that they will have the right customer base for their product. Additionally, it is of other most importance that the start-up looks at who will actually pay for its product. For example, a diagnostic device in a hospital can be paid for by the patient, the hospital, or even through medical reimbursements. This is important to consider when launching the start-up with its product, because you need to know the market size and its available funds to see if they are sufficient to cover all costs and expenses made. This is why an entrepreneur should make a competitive analysis of the market, industry, and all offerings of funding before launching or selling a product or service. This analysis will include acquiring objective and constructive feedback from their potential customers in the market.
Nonetheless, a common pitfall of entrepreneurs is that they deal with dilemmas on an easy note with their over-optimistic view on marketing deadlines and attracting customers. To attract customers, start-ups will need to do more than just launch a website, product or service. It is key for a start-up to begin the promotion of the product well in advance before the product is finalized. To give an example, a start-up can discuss the development status of the product through blogs and (social) media. This way they will promote the development of the product and obtain early customer reviews and generate a hype around a certain product. The website could have a service that will allow customers to preorder the product. Hence, according to Butt et. al (2015), a marketing plan should be launched and put in use at least three months prior to the launch date of the product. Also, start-ups should place the lifetime customer value in front of the cost to acquire certain customers. Meaning, it is key for a start-up to acquire customers for less money than they will bring value to the company and customer relation over the span of the lifetime of the company. So, it is of other most importance that a start-up uses a good commercialization strategy, which allows for a higher scalability to obtain customers than the cost of acquisition.
Insufficient capital
Another dilemma faced by ups that leads to failure of the company occurs when start-ups use all their available working capital and cash reserves. According to Butt et. al (2015) around four percent of companies in the market have a yearly revenue over one million dollars and even less companies, around 0.4 percent of all businesses, have a yearly revenue of ten million dollars. Knowing this, a start-up should plan the amount of funding that is required in the early development stages in order to gain a good infrastructure while at the same time have a constant
invest their money more likely in a company that has previously acquired initial seed funds. According to Lita Nelsen, a director from MIT, a large dilemma faced by the entrepreneur is to convince investors to take a risk by investing their money into a product that is undeveloped and has yet to be proven to be legit.
According to Butt et. al (2015) it is key for an entrepreneur to evaluate initial financial performance by talking to potential venture capitalists and angel investors in the early stages of the product. During conversations, investors want to know the three core qualities in the start-up in order for them to commit to a long-term funding agreement. Besides that, investors want to be constantly updated on the development and financial progress of the start-up they invest in. Hence, it is key that the entrepreneurs are able to give their investors an evolution of the progress and success achieved within their company and show that there is enough initial funding that will take care of the liabilities. This way the company can show if it steadily grows over time or not. Additionally, to create more momentum, start-ups have to have a network of associations setup filled with successful companies for easy access to resources containing shared equipment use and knowledge transfer. The main advantage of such network is that investors will feel more confident in investing in a start-up on a long-term basis.
When a company runs out of cash before they reach the next milestone or goal is another reason why startups have trouble finding sufficient capital and have difficulties in raising more capital. It is key for a team to be aware at all-time how much capital is accessible to see if it is enough to reach the next milestone. Besides that, the start-ups team should have the ability to increase or decrease capital outflow to acquire financial benefits. According to Butt et. al (2015) when the start-up is in the beginning phase of product development, the team needs to shrink operating cost and remove unnecessary cash outflows. Also, they argue that a common error made by entrepreneurs is spending lots of capital on hiring marketing and sales staff when the product is yet to be fully developed according to the market needs.
To help the entrepreneurs, according to Butt et. al (2015), start-ups should make good use of a financial team that will offer them techniques in order to control and manage the money outflow at all time. The team will prepare financial reports on a monthly basis, which will give the entrepreneur a good overview of the sustainability of the company. When the entrepreneur desires to scale up his startup, he can see how much money is obtainable in order to hire employees or further develop his product.
Incompetent team
Having an incompetent team inside a startup is another reason why start-up tend to fail, especially when there is an incompetent team in the strategic parts of the start-ups development. (Butt et. al, 2015) For example, a big issue could be created when a start-up business uses a certain commercialization strategy and management develops a product that is not in line with the needs and wants of the market. One can notice key characteristics of an incompetent team when they are incompetent in executing certain tasks, remaining on schedule, and managing the company’s finances. Knowing this, it is imperative to have a team that consists of members that are just as motivated, organized, and passionate about the venture as the entrepreneur.
The first thing investors look for within a start-up is an experienced and well-motivated team that has a good reputation within a certain industry. A good team should have a good sense of how to develop and grow a start-up. This will result in good management of projects and personnel, shaping and executing of the vision of the start-up, and will insure a good implementation of the chosen commercialization strategy, which will increase the chances of the company’s success.
A balanced point of view within a start-up is created by selecting individuals that have varied backgrounds. For instance, a technical founder is frequently interested in developing interesting technologies that can improve their own life styles. Knowing this, it is important to balance this view with marketing personnel that will ensure that the product is commercially feasible and is in line with the needs and wants of the market. Research done by Butt et. al (2015) shows that balanced teams with one business orientated founder and one technical orientated founder will acquire 30 percent more funding, experience 2.9 times more customer growth, and will have a 20 percent lower chance of scaling up prematurely compared to teams with only technical or business founders.
At last, to increase the success of a team one cannot underestimate the importance of the founder’s network and mentorship. It is key for each team member to build a network around them consisting of influential people. Such network can consist of mentors, industrial partners or business associates, media outlets, and influencers that will increase the likelihood of success of a company. Research done by Butt et. al (2015) found that having a mentor had a significant impact on the company’s performance and companies were better able to acquire additional capital. They also showed that a team that had useful mentors could acquire up to 7 times more capital and
experience a 3.5 times more customer growth. Unable to pivot and over pivoting
The model about customer development by Steve Blank’s argues that the capability to pivot the business model until the model is been proven to work is highly useful when an entrepreneur wants to enter a rapid growing market. In other to understand the customer values of a company, an entrepreneur should deal with customer development that will deal with customer validation, company building, customer creation, and customer discovery. Pivoting is defined as developing and thinking about the company’s strategy in order to find the best business plan to make the business successful. Some entrepreneurs do not have sufficient business knowledge that leads to being unable to pivot, whereas some entrepreneurs tent to overthink and spent too much time on finding the right strategy that leads to over pivoting. Entrepreneurs should pivot in the early stages in order to discover the correct business model. By following the customer development model and measure the expected customer behavior compared to the current market, the entrepreneur can guarantee there is a demand for the product and that the business has enough room to scale up. So, it is of other most importance that a start-up starts with customer development almost simultaneously to starting to develop their product.
As an entrepreneur, it is imperative to have the ability to change strategy in order to overcome unforeseen challenges. This is of high importance, because when the initial strategy fails, the company’s team needs to swiftly pivot to an altered strategy. A start-up cannot fundamentally change its technology, although management should be capable to change their application to avoid wasting money, resources, and time. When this change is needed, management needs to take a leading role in making rapid and well-organized decisions and make sure that the vision of the company is being upheld. If this is not carefully done there is a greater chance that the start-up will fail, because the decision-making procedure cannot cause a delay in reaching the milestones and goals set by the company. It is crucial to keep the investors happy, they require a certain return on their investment, and this makes time a valuable asset throughout the starting phases of a start-up business. It does not describe a startup’s performance once a commercialization strategy is selected, but when management is forced to pivot to a substitute strategy at a later stage it can severely affect the probabilities of the start-up to effectively exit. Research done by Butt et. al (2015) shows that start-ups will acquire 2.5 times more capital when they pivot their initial commercialization strategy once or twice. Also, start-ups that pivot will
experience 3.6 times more user growth, and just over five percent of the start-ups are less probable to scale up prematurely compared to start-ups who pivot more than two times or tend to not pivot at all. Based on these dilemmas stated above, this study will research the challenges start-up businesses face during the start-up stage in the life cycle of the firm.
7. The Scale-up
If we assume that management is successful in the reconfiguration of the venture’s structure and systems, the venture will continue towards the next stage in the life cycle of the firm, called scale-up (also called: expansion) (Hanks, 1990). The venture might experience rapid growth, which will give the entrepreneur new challenges for his organization. Such challenges are; being able to meet their growing product demand by effectively increasing the production capacity and hire additional personnel to control and guide such expansion. In other words, the organization is required to improve the production and distribution capacity of their products or services when this is demanded by a constantly growing customer base. This will give the entrepreneur some additional challenges and risks, because he will need to push his informational, physical, human, and financial resources to achieve such growth. Moreover, the entrepreneur will have to make sure that there is a sufficient supply of such resources at all time.
Different from the start-up stage, moderately formal structures and systems will develop during the scale-up stage. For example, functional departments are created for production, engineering, administration, and marketing ultimately changing the organizational structure from simple to functional. Furthermore, new operational systems need to be developed for accounting, work standards, generating reports for budgets and control, and employee systems. Changing these structures and systems is not the only challenge the entrepreneur is faced with. Also, after putting these developed systems in place they need to be enforced and monitored, which is often inconsistent due to the fast growth rate of the firm. Another difference from to the start-up stage is that in the scale-up stage decision-making processes are less centralized and functional managers are more incorporated in important decisions. (Hanks, 1990)
According to Hanks (1990) when entering the scale-up stage, the venture will have a fully developed product that is receiving positive feedback from the market and its customers. However, there is sufficient managerial attention needed to make changes in the company’s structure and strategy. As mentioned before, success in the start-up stage is generated through flexibility,
up stage. Also, when the organization is learning how to upscale its production volume, the venture needs to replace flexibility with starting to use standardized operating systems and make use of functional structures. Even though a scale-up is still moderately informal, they will add some new formalizations.
8. Dilemmas Faced by Scale-ups
According to Mittal (2016) every start-up business wants to successfully scale-up and try to take over a big share of the industry they are active in. Even though, starting your own business is somewhat easy, the rather difficult part is successfully scaling up your business. Existing literature has found that a large proportion of start-up companies close their business since they failed to scale-up successfully. Research done by Rajawat (2016) showed three main dilemmas that entrepreneurs and their start-up business face when they intent to scale-up. Also, they found that one of the most common reasons that companies in the scale-up stage in the life cycle of the firm fail is due to the wrong attitude of the founder himself. Furthermore, Mittal (2016) and Rajawat (2016) show that start-up businesses and their entrepreneurs are incapable to attract well qualified employees who bring valuable additional skills to the company. The last main reason found by Rajawat (2016) is that scale-up companies do not have enough working capital or are unable to attract additional funding. The reason why this research paper selected these three common dilemmas, found in existing literature, is to give a good and clear answer to its research question. Also, these three dilemmas were most forthcoming in existing literature and were relevant for this research. This way this study can display the dilemmas that are the most common and try filling the cap in the literature found for the research paper.
Founder’s Attitude
Mittal (2016) found that the biggest reason why scale-up businesses are unable to successfully grow is not because of a bad product or service that they bring to the marked, but they fail because of the founder himself. In other words, founder’s attitude is often the reason why their start-up fails to successfully grow. A majority of founders are incapable of adapting to certain changes in the market they are active in or anticipating on the behavior or strategy of their competitors. Meaning, some entrepreneurs are stubborn and are not willing to develop their business beyond their original ideas, in order to successfully scale-up (Mittal, 2016; Rajawat, 2016). Besides not having the ability to change with a certain market trend, some entrepreneurs do
not want to scale-up for personal reasons. According to Rajawat (2016) some entrepreneurs do not feel the need to grow their business, despite the fact that their product is in high demand. They are not willing to take on the additional risks that are paired with scaling up and make the decision to stay in the start-up phase instead of growing. Also, some entrepreneurs are afraid to lose total control over their own business. Scaling up will involve additional investors who want more control over what is going on in the business, which will scare of some founders (Mittal, 2016). Failure in attracting well qualified employees
Another dilemma faced by scale-up businesses that leads to failure of the company occurs when scale-ups are incapable of hiring the right employees who bring something new to the table that will help a venture to successfully grow. According to Butt et. al (2015) it is imperative that organizations hire people who are better skilled or have an different opinion than the founder, but many scale-up companies work with new employees who do not have the right skillset to help the company successfully scale-up. Founders make the mistake to hire downwards instead of upwards. This could be compensated by Venture Capital funds or Private Equity funds taking over the hiring process and hire suited employees on a leadership level. Nonetheless, many scale-up businesses tend to do the hiring process by themselves, which will hurt the process of growth or even fail the process as a whole (Butt et al., 2015). The pitfall of downwards hiring done by entrepreneurs is that they start a downward spiral of micro management in the company, with the result that employees have to constantly wait for clearance and approval from the entrepreneur. In comparison, according to Butt et al. (2015) hiring on a leadership level will give employees the room to push through developments that will ultimately help the company grow much more freely and more successfully without too much negative influence from the founder. Mittal (2016) concludes that founder’s success within a growing company increases significantly when the founder is able to attract well suited and skillful employees that will help the process of growth. Therefore, entrepreneurs should take their time in hiring employees with the needed quality instead of rushing the hiring process and end up with incompetent people that ultimately will hurt the growing process of a company.
Unable to attract additional funding
The last main dilemma or struggle entrepreneurs of a scale-up business face is the access to additional capital and funding. Existing literature has shown that it is imperative to have the ability to acquire additional funding in order to scale up a business (Butt et al., 2015; Mittal, 2015; Rajawat, 2016). Even when start-ups have a product, service, or concept that is proven to be successful in a certain market, in order to effectively grow and enter the market these companies still need additional funding to realize such expansion. The finding from Rajawat (2015) showed that lots of entrepreneurs fail to acquire additional funding needed to expand, because raising capital is extremely time consuming, dull, and some founders do not have the right competences to convince investors in order to attract additional capital. This dilemma is often found in literature as being a vital reason why scale-up companies fail to successfully expand their business.
According to Butt et. al (2015), scale-up businesses should make good use of a financial team that has the ability to manage the money outflow at all time. This way, management will have financial reports on a monthly basis and the entrepreneur has a good overview of the sustainability of the company and where additional capital for growth is needed. This way the entrepreneur can see how much money is obtainable in order to hire employees or further develop his product. Based on these dilemmas stated above, this study will research the challenges scale-up businesses face during the scale-up stage of the life cycle of the firm.
9. Late Start-up and Early Growth
When looking at the two stages in the life cycle of the firm defined above, it is hard to see when a company is transitioning from a start-up to a scale-up company. This research paper will therefore combine these two stages and treat them as late startup/early growth. This is done to strengthen this study’s fieldwork, while at the same time give a clear answer to the research question of this paper. During a class taught by Enno Masurel, New Venture Creation and Development, the researcher of this study learned that there is no clear point in the life cycle of the firm that shows when a company transitions from one stage to another. Also, it became clear that a business can be in multiple stages at the same time. A business can be ready to scale-up, but is still facing start-up related issues and dilemmas. In conclusion, instead of doing fieldwork pointed at start-up and scale-up businesses, this study will conduct interviews with businesses that are in the late start-up and early growth stage combined. This is a crucial point in the life cycle of
the firm where lots of organizations seem to struggle to survive and this research paper will try to fill this gap by answering the research question.
