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The different phases of company foundation

Founding a company is a very complex process – especially in knowledge-intensive sectors such as biotechnology. Turning a vague business idea into a successful company is characterised by different phases that place great demands on the qualifications and learning aptitudes of the company founders. Financing and economic organisation often means that company founders have to enter completely unknown new territory.

Every company establishment has its own story. Sometimes it is like a modern fairytale –“Facebook” for example. The Internet platform that enables users to set up and maintain social networks was started in 2004 by the then 20-year-old computer science student Mark Zuckerberg. The company founded by Zuckerberg was able to acquire more than US$ 40 million in venture capital; the strategic partnership with software giant Microsoft brought in another 240 million – and all this despite the fact that “Facebook” still does not have a sustainable business model.

The foundation of new biotechnology companies is usually far less spectacular because investors are increasingly shying away from the high costs and long time period required for the development of new products in the life sciences sector. Figures published in the latest German Biotechnology Report produced by Ernst & Young speak volumes: Last year, the risk capital invested in biotech companies decreased to 198 million euros, which was the lowest investment sum since 1999. Despite this, the number of companies being founded has remained virtually constant over the last four years.

Venture capital investment development since 1999
Venture capital investment development since 1999

Company foundation is a complex process 

For many start-up companies in the biotechnology sector, direct support from the German government for their R&D projects is becoming a key factor. In addition, initiatives such as the High-Tech Gründerfonds put in place by the German Ministry of Economics and Technology and numerous well-known industrial concerns, provide the start capital urgently needed by young companies. The purpose of government support is obvious: the successful knowledge transfer of promising research results into start-up companies is an important part of economic value creation - and hence an important source of future growth and employment.

However, financing is not the only challenge that has to be overcome in the course of company foundation. Start-up companies go through a number of different phases between the original idea and market establishment. These phases are associated with phase-specific activities, management tasks and problems.

Economics publications have for quite some time been discussing different phase models. The partition into three major axes oriented around the financing particularities of a new company seems to be the most persuasive model. Of course, such a phase model can only be of model character. The differentiation between the individual stages is often only possible with restrictions - the length of the three phases can also vary considerably between the different sectors. Internet companies seem to speed through the seed phase, whereas biotech companies often have a long start-up phase due to the intensive research that they have to carry out.

Phase model

1. Early investment phase
The early investment phase is further divided into a seed phase and a start-up phase:

• Seed phase 
The seed phase is the first phase in a company's life cycle. This phase, which precedes the formal and legal foundation of the company, is of huge importance for the success and long-term survival of the company. In this phase, the major focus of the company's activities is on research activities and product development. The immediate goal is the transfer of an idea into usable results - until a functional prototype is set up.

In addition, company founders need to prepare a sustainable business plan in which they give concrete information on financing, location and an analysis of potential markets. In-depth economic know-how is important, which founders with a science background often do not have, meaning that they therefore have to resort to the help of professional service providers and other external sources. In this phase, capital requirements are relatively high because the companies are still unable to generate own revenues.

• Start-up phase 
This phase comprises the steps from the actual company foundation to the introduction of the product on the market. The company's principal efforts need to be centred on turning the business idea into a competitive product. The company founders, whose angle of vision is often technology-based, must be careful not to neglect the requirements of the market. R&D activities should always focus on the benefit that the product brings to the client.

The start-up phase also includes the planning and preparation of production. Targeted project management is important in order to keep control of the market introduction schedule as well as the cost of R&D projects.


2. Growth phase 

This phase is mainly characterised by the organisational and institutional establishment of the company. In order to increase revenues, it is necessary to establish and expand manufacturing capacities and sales channels during the growth phase - in parallel to market introduction.

Despite rapidly rising revenues, companies do not usually find themselves in the black at the beginning of this phase. This usually only occurs with the expansion of production along with the distribution system.


3. Consolidation and expansion phase

This phase usually starts with the crossing of the break-even point. In the case of continuing market success, the company's profits enable it to expand the product portfolio and tap new markets. This first expansion phase may be followed by a further expansion and growth phase, but may also be followed by stagnation and attrition phases, both of which are no longer part of the foundation process. A company is usually considered to be an established company if it is still on the market five years after its foundation.

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