Critical Success Factors For New Businesses

Term Paper, 2005

8 Pages, Grade: 1,7


Table of content

1. Introduction: Commercial Relevance of New Businesses

2. Definition of Success

3. Critical Success Factors For New Businesses
3.1 From Business Idea to Business Expansion
3.2 Financing
3.3 Market Entry
3.4 Resources: Dependency on Founder
3.5 Know-how through Networks

4. Conclusion: Investment Decision And Business Plan


1. Introduction: Commercial Relevance of New Businesses

This essay should call attention to critical success factors for new businesses and summarize important issues in the area of Entrepreneurship. Derived from that, it should point out what kind of start-up is the most worthwhile to put money into. First of all what is the increased significance of new businesses based on? Their relevance for the national economy seems to be frequently underestimated. They are the backbone of the most successful economies and show immoderate dynamic growth. (Audretsch et al, 2002) For instance 70% of all over 100-year old German companies are small family businesses. (Klein, 2004, 34)

In most cases entrepreneurs create jobs, whereas managers in established companies actually tend to cut jobs. Relating to the Global Entrepreneurship Monitor 2005, almost 74% of all jobs are generated by entrepreneurs and small businesses. (GEM, 2005) Nevertheless their probability of surviving is considerably affected by critical success factors, which should be discussed in the following.

2. Definition of Success

Success factors could be broadly defined as internal and external influencing variables, which represent a “measurable and positive contribution for a long-term establishment of a company”. (Voigt, 2004, 33)

However, what issues have an impact on the success of the company? According to a recent survey, in which 8,500 founders of different industries have been interviewed (Maisberger, 2004), attributes of above-average successful start-ups are:

- Good preparation and start-up concept (business plan)
- Secured financing
- Cooperations and network contacts
- Specialised knowledge/expertise
- Expert advice (tax adviser, bank)
- Sophisticated marketing and advertising concept
- Cooperative family and friends

Particularly new ventures are confronted with problems such as access to funding and startup capital or administrative charges and restrictions. (Sheikh, 2001) Additionally they have to fight with restrictions like the lack of equity capital and qualified personnel. In the following only the most critical success factors should be discussed in detail.

3. Critical Success Factors For New Businesses

3.1 From Business Idea to Business Expansion

A start-up passes through generally different development stages, until it is established on a certain market. (Bhide, 2000) The first phase could be characterised by the development of a business idea and a business strategy, which can be understood as a guidance theme. Especially the idea for the solution of a problem - whether market or technology driven - and the derivation of a long-term development are of fundamental importance. Additionally there must be a demand for the new product or service. Sources for successful business ideas might be changed customer needs, new technologies or a deregulated market situation. (Hungenberg, 2001)

It also must be possible to transfer the business idea into concrete measures that can be implemented. After completing milestones like the legal foundation process, the coverage of financing and the business expansion needs to be planned.

3.2 Financing

At an early stage external finance seems to be the only possibility for a sustainable development of the business. Internal cash flows are not sufficient to gain the capital costs. Large initial investments are required and yields are missing. In addition comparative figures from the past cannot be consulted, which makes it difficult to set up a consistent financial planning.

However, the start-up does not dispose of fixed assets in the beginning. Immaterial assets outweigh. Patents, which can be used for a maximum of 20 years (Business Link, 2005), are important to protect ideas, inventions or brand marks from imitating by competitors. Furthermore, there appears to be high uncertainty regarding the forecasts of income streams, mainly because of the innovation degree and a dynamic business environment. For this reason a young business is in need to compare the planned with the actual development.

Finally, new businesses see themselves confronted with an increasing demand for a higher equity ratio. In contrast they are also provided with low debt capital. The consequence could be a financing gap. Particularly the very low equity ratio of start-ups (Die Zeit, 2003) prepares multiple problems. However, this is not only necessary to get better ratings, but also to secure the long-term stability of the business. The internal financing strength of a new business is usually not sufficient for an increase of equity capital.


Excerpt out of 8 pages


Critical Success Factors For New Businesses
University of Hull
Catalog Number
ISBN (eBook)
File size
433 KB
Start-up, Unternehmensgründung, Entrepreneurship, Erfolgsfaktoren, Geschäftsmodell, Success, Geschäftsidee, Business Plan, Finanzierung, Markteintritt, Gründer, New Business, Business Idea, Equity, Venture Capital
Quote paper
Dipl.-Kfm. (Univ.), B.A. Christian Kneer (Author), 2005, Critical Success Factors For New Businesses, Munich, GRIN Verlag,


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