Why primary stage of business

management
is considered as the most crucial stage
Cross-Cultural Management International Exchange Program of the
University of Applied Sciences, Osnabrueck, Germany – State University of
Management, Moscow, Russia

International Management
Examiner: Vadim Anatolievich Zhukov
Submission date: December 6, 2019
Abstract: Understanding why some companies survive while others fail is one of the
central questions in business management. Start-ups are a dominant factor for the
economic development of a country. However, the foundation of a company is a
complex procedure and many start-ups fail. The steps to start your own business are not
always easy. A multitude of different aspects must be considered which cannot always
be dealt with alone. This can be the truer the more innovative or complex the business
idea is. For the founder, starting a new business is always an extreme challenge, as he
may not have all the necessary knowledge to set up a company. The decision to found a
company has far-reaching consequences for the founder. Therefore, this decision should
be given careful consideration. This includes, among other factors, a self-assessment of
one’s own abilities, the willingness to run a company over a longer period and the
analysis of whether the foundation can be financed. All these questions arise in the first
stages of setting up a company and put the whole project to the test. Based on these
difficulties, the question arises why the primary stage of business management is
considered as the most crucial one.

Keywords: start-ups, founders, business management, economy, entrepreneurs,

development stages, “aipark”,
Table of content

1 Introduction.................................................................................................................... 3

2 General problems of business management..................................................................4

2.1 Company example – AIPARK......................................................................4

2.2 Definition “primary phase”........................................................................5

2.3 Pre-Seed-Phase.......................................................................................... 5

2.4 Seed-Phase and Start-Up-Phase................................................................6

3 Conclusion....................................................................................................................... 8

I Bibliography..................................................................................................................... 9
1 Introduction

“Managing any company is a tough job.

Managing a rapidly growing enterprise, however, presents a challenge

because the essential nature of manager’s job changes with growth” 1

No start-up company develops like another. In the course of time, each of them forms its
own microcosm of culture, dynamics, processes and rules. It has been shown that young
and fast-growing enterprises lead to the highest employment growth compared to large
established enterprises. Therefore, successful start-ups are particularly desirable from an
economic point of view.2 In 2018 1.5 billion euros of venture capital were invested in
over 673 young growth companies in Germany, those companies show a great growth
potential.3 The investment trend is increasing and this shows the continuous support of
start-ups.

There is a total of 2.485,783 million small and medium-sized enterprises in Germany.

The majority of the German employees, 60.8%, work for those companies. Almost 95%
of them are managed by their founders. 4 That’s the equivalent of 2.361,494 million
companies. This is called the strong middle class, which maintains the German economy.
In addition, there were 547.000 new business start-ups in 2018. 5 The founders of these
new companies are the key drivers of success. They are irreplaceable in the founding
process and their abilities determine the success or failure of the company. They must
master different phases with special challenges during their development especially in
the beginning - the founding phase of the company. 6

This elaboration deals with the question why the primary stage of business management
is considered as the most crucial one for every company.

2 General problems of business management

1
Extracted from: Roberts, M. J. (1993): p. 361
2
Cf. Dowling, M. and Drumm, H. J. (2002): p. 316; Niederöcker, B. (2002): p. 1
3
Cf. Bundesverband Deutscher Kapitalbeteilugungsgesellschaften e.V. (2019): Statistik 2018 p. 12-14
4
Cf. Anzahl der KMU in Deutschland nach Unternehmensgröße von 2009 bis 2017 (2019)
https://de.statista.com/statistik/daten/studie/732032/umfrage/kmu-in-deutschland-nach-
unternehmensgroesse/
5
Cf. Anzahl der Gründer in Deutschland im Zeitraum von 2000 bis 2018 (2019)
https://de.statista.com/statistik/daten/studie/183869/umfrage/entwicklung-der-absoluten-gruenderzahlen-in-
deutschland/
6
Cf. Dewhurst, J. and Burns, P. (1993): p. 371
The founding process is of great importance for the dynamics of an economy. A steady
influx of new competitors on the markets also challenges the competitiveness of existing
companies. Their offerings must stand up to the new products and services and their
products and services must be constantly developed. However, such dynamic
competition also claims its victims. Companies that do not keep up with the competition
will sooner or later be withdrawn from the market. Very often it is young companies that
have only been active on the market for a short time that are closed. There can be a
whole range of causes for this. The business idea with which young companies enter the
market is proving to be unsuitable for the future. The expectations of the young
entrepreneurs are disappointed, and they close their company again. The
entrepreneurial competence of the founders leaves much to be desired, so that they
can’t handle the challenges of a business management. The possibilities for financing the
business project are insufficient and the young company is running out of money before
reaching a self-sustaining volume of business, or problems arising from unforeseen
events on the markets cannot be overcome.7

2.1 Company example – AIPARK

The German start-up company AIPARK is used in this paper as an example of how to
successfully survive the crucial stage. In short, AIPARK is an app that works like a
common navigation aid. The user sees his own location, can select a destination via the
search function and start the navigation. The special thing about the app is that potential
parking spaces are displayed on the map. AIPARK offers real-time parking tickets with
real-time information on the availability of parking spaces. Considering all types of
parking options, applicable rules, predictive and live parking availability are analyzed and
matched up with individual driver preferences to create a personalized navigation
experience.

2.2 Definition “primary phase”

7
Cf. Astebro, T. und I. Bernhardt, (2003): p. 303-319.
The literature contains many different approaches which attempt to do justice to the
demarcation and division of business start-ups into different phases. The number of
phases ranges from two8, three9 and four10 up to seven.11 For the sake of simplicity, I will
summarize two phases that can be defined as an overall “primary phase” with a small
view over to the early growth phase.

Pre-Seed- Seed-Phase or Growth

12 Phase Start-Up-Phase Phase

2.3 Pre-Seed-Phase

Pre-Seed stage describes the period before the foundation. Those who are interested in
founding a company join forces or look for comrades-in-arms in order to cover all the
necessary competencies. The business model is developed, the product sketch is
continued, if necessary up to the prototype and business plan is written. In addition, the
financing is being negotiated with potential lenders. 13 Existential problems already arise
here. Is the business idea viable? Do the founders have sufficient skills to lead the
company to long-term success? Is the business plan detailed enough for lenders to
accept the business idea and invest their capital in it? This can be the most awkward
round of raising capital. Just as people do not like to tell you your baby is ugly; people
close to the founder do often avoid telling him his idea is a flop. Funding for Pre-Seed
stage normally comes from the 3F’s (Friends, Family and Fans). In addition, there are
internal and external problems. Internal problems include difficult qualified recruitment,
insufficient knowledge of funding opportunities and excessive workload. Subsequently
the external problems namely doubt about the founders, security requirements of the
investors and taxes and levies.14 The founder is largely on his own probably doing a little
of everything himself. There are unlikely to be any formal management control
mechanisms. The crucial part of this phase is the fact that the money is invested without
making any profit or getting a revenue. You want to get the best metrics possible before
you head into your seed round, as a lack of traction will result in you parting with more
equity. Like growing a plant, pre-seed is getting the soil ready.

8
Cf. Mellewigt, T./ Witt, P. (2001): p. 81-110.
9
Cf. Brixy, U./ Hundt, C./ Sternberg, R. (2010)
10
Cf. Steegmann, J. (2007)
11
Cf. Kaiser, L./ Gläser, J. (1999)
12
own representation
13
Cf. https://www.exist.de/DE/Campus/Gruendergeist/Im-Fokus/Finanzierung/Pre-
Seed_Seed_Growth/inhalt.html (2019)
14
Cf. Szyperski, N./ Nathusius, K. (1999)
So, what did AIPARK do right to overcome this stage? First, the idea was simple but very
valuable. They are the thought leaders who analyzed a well-known and big problem and
offer a revolutionary solution. Second, the young AIPARK team has successfully
dedicated itself to a topic that affects everyone in the world: the everyday search for a
parking space. Experts estimate that in larger cities the search for a parking space
accounts for up to 40% of all traffic. A driver spends an average of 20 minutes searching
for a parking lot each time he travels. In Braunschweig, too, the so-called parking search
traffic is now around 25% at peak times. An enormous burden for every road user and
for the environment.15 AIPARK itself is the result of student work at the TU
Braunschweig. The 24-year-old engineer Julian Glaab came to Braunschweig to study for
a master’s degree and got to know his co-entrepreneurs there. In a seminar they were
asked to develop an app about mobility, which gave birth to the basic idea of AIPARK.
Their professor advised them to found the company, the university provided financial
means and space for further development. In the end, an EXIST start-up grant from the
government was available for start-up phase. 16

To sum up the founders had all the necessary competencies to start a company, the
business model is developed, the idea is good and convincing so that the required start-
up capital is secured. The excessive workload can be distributed to the co-founders.
There is still no revenue or profit, but the investment can be done without any doubts
since the university provides this project as well.

2.4 Seed-Phase and Start-Up-Phase

After the preparations in the “Pre-Seed-Phase” the company is founded, further details
adjustments to the product are ideally made in coordination with potential clients. The
business plan is continuously adjusted and, depending on the growth dynamics, contacts
must be established with investors for the next financing round. Employees are hired.
First steps are taken to launch the product on the market – nationally as well as
internationally if necessary. Marketing and sales must be expanded. In this phase, costs
are incurred for the establishment of the company and associated consulting services.
Above all, further expenditure for the further development of the product and marketing
must be financed. In addition to public funding, business angels can also have capital to
invest and crowdfunding can be considered as well. 17 In this stage the company already
exists for up to one year.

15
Cf. https://www.braunschweig-best-choice.de/aipark-ein-junges-startup-loest-ein-altes-problem/ (2019)
16
Cf. https://www.basicthinking.de/blog/2019/10/16/aipark-parkplatzsuche-start-up-check/ (2019)
17
Cf. https://www.exist.de/DE/Campus/Gruendergeist/Im-Fokus/Finanzierung/Pre-
Seed_Seed_Growth/inhalt.html (2019)
Like trees, businesses do not grow overnight. They develop from seedlings and form
roots and foundations before they grow. Seed rounds are meant to supply a start-up
with the capital they need to build the kind of foundation that yields a profitable
business. Founders may think now they know everything, but they do not. Therefore, the
seed or start-up-phase is a great time for the founders to fill their knowledge gaps with
new members of the team. This stage is also typically used for things like hiring key team
members and testing the market in more detail to gain ideas. The key here is to take
your time and find the right consumer group for your product. The company already
made investments and a rejection of the founding project is usually only possible with
high losses. It is also called the point of no return and is the most crucial stage for the
business management. The product or service was brought to market and either you
generate sales, or you do not. Despite the revenues, the investment amounts are
significantly higher, and the important decision must be made whether the revenues
generated are enough to keep the company alive or not.

AIPARK was founded in 2017 and since then it has been able to hold its own in the
market. After the launch of the app the founders still searched for improvement of their
service. The young entrepreneurs have already won several prizes with AIPARK. For
example, the Innovation Award in 2018, endowed with 100.000 Euros, which is
additional capital to invest into the improvement of the app. This year, the Federal
Ministry of Economics and Energy also awarded them with the title “Digital Startup of
the Year 2019”.18 These awards are an excellent publicity and simplify the marketing.
Fewer investments are made in this area, as public relations already generate a lot of
attention. Furthermore, the positive public acceptance of this idea causes a rush of
investors who would like to support the project in the longer term. Among the investors
are the following companies: SAP Startup Accelerator for Digital Supply Chain and
Siemens Mobility.19 The app is free and available for both iOS and Android. The company
earns money by providing providers of navigation apps and automotive services with
real-time data via a licensing model. They can then access the data in the parking cloud
and seamlessly integrate it into their own products and services to improve their own
products. Thanks to the various awards AIPARK was able to bring strong investors on
board. The question of if and how to continue as a company has already been clarified,
as the app is a great success. The AIPARK maps are available in 500 cities across 15
countries with an upward trend.20

3 Conclusion

18
Cf. https://www.netz.de/apps/news/da-ist-was-frei-gratis-app-aipark-hilft-bei-der-parkplatzsuche (2019)
19
Cf. https://www.marketing-boerse.de/news/details/1915-studysmarter-aipark-und-docsinnovation-sind-
sieger-des-innovators-pitch-2019-1/156035 (2019)
20
Cf. https://www.aipark.io/app/ (2019)
In summary, it can be said that the primary stage of business management is the most
decisive phase for the company. The listed factors such as the future viability of the
business idea, financing possibilities, skills of the founders as well as the marketing of the
product involve many risks for the entrepreneur. With the success of the planning and
the start of the business activity the foundation project stands and falls. Is the
entrepreneur willing to take the risk? Is his planning reliable and promising? He has to
deal with these questions in the primary stage and therefore this is the most decisive
phase. Without overcoming this phase, no growth is possible, and the company is
doomed to failure. Nevertheless, there are companies that can assert themselves
through the excellent leadership competence of their founders and enrich the market
with their business idea. This can be seen in the example of AIPARK, which solves well-
known problems with new approaches. As an entrepreneur, you should not take the
initial phase of the foundation lightly, because it determines the success or failure of the
project and requires a thorough examination of the listed difficulties in that phase.

Words: 2350

I Bibliography
Roberts, Michael J. (1993): "Challenge of Growth, The." Harvard Business School
Background Note 393-106 (Revised November 2001.)
Dowling, M. and Drumm, H. J. (2002): Gründungsmanagement, Vom erfolgreichen
Unternehmensstart zu dauerhaftem Wachstum. Publisher Springer Berlin Heidelberg
Niederöcker, B. (2002): Finanzierungsalternativen in kleinen und mittleren
Unternehmen, Eine neo-institutionalistische Analyse unter besonderer Berücksichtigung
der Innovationsfinanzierung. Publisher Deutscher Universitätsverlag
Bundesverband Deutscher Kapitalbeteilugungsgesellschaften e.V. (2019): Statistik 2018

Statista (2019): Anzahl der KMU in Deutschland nach Unternehmensgröße von 2009 bis
2017 https://de.statista.com/statistik/daten/studie/732032/umfrage/kmu-in-
deutschland-nach-unternehmensgroesse/ on November 19, 2019

Statista (2019): Anzahl der Gründer in Deutschland im Zeitraum von 2000 bis 2018
(2019) https://de.statista.com/statistik/daten/studie/183869/umfrage/entwicklung-der-
absoluten-gruenderzahlen-in-deutschland/ on November 19, 2019

Dewhurst, J. and Burns, P. (1993): Small business management. Publisher Macmillan

Astebro, T. und I. Bernhardt, (2003): Start-up financing, owner characteristics, and

survival, Journal of Economics and Business 55
Mellewigt, T./ Witt, P. (2001): Die Bedeutung des Vorgründungsprozesses für die
Evolution von Unternehmen. Stand der empirischen Forschung. Zeitschrift für
Betriebswirtschaft, Auflage 72.

Brixy, U./ Hundt, C./ Sternberg, R. (2010): Unternehmensgründungen im weltweiten

Vergleich. Länderbericht Deutschland 2009. Global Entrepreneurship Monitor: Hannover,
Nürnberg.

Steegmann, J. (2007): Funktionen der Hausbank bei der Unterstützung von

Unternehmensgründungen. Josef Eul Lohmar, Köln

Kaiser, L./ Gläser, J. (1999): Entwicklungsphasen neugegründeter Unternehmen. Trierer

Arbeitspapiere zur Mittelstandsökonomie, Universität Trier: Trier.

Bundesminiterium für Wirtschaft und Energie (2019):

https://www.exist.de/DE/Campus/Gruendergeist/Im-Fokus/Finanzierung/Pre-
Seed_Seed_Growth/inhalt.html on November 15, 2019

Szyperski, N./ Nathusius, K. (1999): Probleme der Unternehmensgründung. Eine

betriebswirtschaftliche Analyse unternehmerischer Startbedingungen. 2. Aufl., Josef Eul,
Lohmar, Köln.
Braunschweig Best Choice (2019): https://www.braunschweig-best-choice.de/aipark-
ein-junges-startup-loest-ein-altes-problem/ on November 16, 2019

Basic Thinking (2019): https://www.basicthinking.de/blog/2019/10/16/aipark-

parkplatzsuche-start-up-check/ on November 22, 2019

Zeitschrift NETZ (2019): https://www.netz.de/apps/news/da-ist-was-frei-gratis-app-

aipark-hilft-bei-der-parkplatzsuche on November 22, 2019

Marketing Börse (2019): https://www.marketing-boerse.de/news/details/1915-

studysmarter-aipark-und-docsinnovation-sind-sieger-des-innovators-pitch-2019-
1/156035 on November 26, 2019

AIPARK (2019): https://www.aipark.io/app/ on November 25, 2019