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Dependence on third parties

24 February, 2015 - 17:30

Many start-up, survival, and growth strategies lead almost inevitably to the dependence of new firms on third parties. This causes no problem as long as the interests of all people and firms involved are relatively equal and/or compatible. Dependence on third parties functioning as investors, licensors, partners, principal customers in the sales market, or single suppliers does not necessarily lead to growth barriers. However, dependence is a disadvantage if there are diverging interests, or if the partners behave opportunistically. In this case, the growth of the start-up is inhibited and the firm is forced to fight the opportunistic behavior of the partners. For the start-up these defense activities incur transaction costs which arise in the preparation phase of a partnership and in the conclusion of cooperation contracts, and are added to later by transaction costs arising from controlling, and correcting errors.

However, the older the firm becomes, dependence on third parties should be reduced. The dependence on licensors should be compensated for by the firm’s own research and development. The dependence on outside investors, on the other hand, is generally unavoidable, but it can be put to positive use by raising risk capital by profit sharing with investors to create homogeneity of interests.

As shown above, dependence on third parties can arise when a firm markets its products. It can, however, also arise in the acquisition of preliminary products, or in financing. It is at its highest in firm networks. Start-ups must therefore ask themselves repeatedly whether these dependencies secure their existence and survival, or whether they are endangering their growth. As long as the firm’s survival is secured by suppliers or customers through strategic dependencies, for instance within a network of cooperating firms, the start-up can profit. If such dependencies however, endanger the success and growth of the firm, the start-up must try to extricate itself by building up its own sales or supply channels. Homogeneity of interests must also be taken into account when building an external network in order to minimize transaction costs which stunt growth.