Abstract

http://ssrn.com/abstract=1440374
 
 

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Production, Process Investment and the Survival of Debt Financed Startup Firms


Fehmi Tanrisever


Eindhoven University of Technology (TUE) - Department of Industrial Engineering and Innovation Sciences

Sinan Erzurumlu


Babson College

Nitin Joglekar


Boston University - Department of Operations and Technology Management

July 23, 2009

Forthcoming in Production and Operations Management

Abstract:     
Whether to invest in process development that can reduce the unit cost and thereby raise future profits or to conserve cash and reduce the likelihood of bankruptcy is a key concern faced by many startups firms that have taken on debt. We explore this concern by examining the production quantity and cost-reducing R&D investment decisions in a two period model. A startup firm must make a minimum level of profits at the end of the first period to survive and continue operating in the second period. We show that under a base case, with deterministic demand, such a startup should produce the monopoly quantity and use an invest-all-or-nothing investment policy. However, under stochastic demand and allied survival constraint, the optimal investment policy does not necessarily have an all-or-nothing character. We establish conditions for creating hedges through either aggressive or conservative investment alternatives. If the startup makes a “conservative” investment decision, it sacrifices some first period expected profits to increase its survival chances and chooses an optimal quantity less than the monopoly quantity. Further, if the startup decides to invest “aggressively”, then it produces more than the monopoly quantity to cover the higher bankruptcy risk due to such aggressive investment.

Keywords: Joint Production and Process Investment Decisions, Operational Hedging, Startup Operations, Survival under Debt

Accepted Paper Series





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Date posted: July 31, 2009 ; Last revised: July 1, 2014

Suggested Citation

Tanrisever, Fehmi and Erzurumlu, Sinan and Joglekar, Nitin, Production, Process Investment and the Survival of Debt Financed Startup Firms (July 23, 2009). Forthcoming in Production and Operations Management. Available at SSRN: http://ssrn.com/abstract=1440374 or http://dx.doi.org/10.2139/ssrn.1440374

Contact Information

Fehmi Tanrisever
Eindhoven University of Technology (TUE) - Department of Industrial Engineering and Innovation Sciences ( email )
Den Dolech 2
Eindhoven
Eindhoven, 5600 MB
Netherlands
Sinan Erzurumlu
Babson College ( email )
Babson Park, MA 02457-0310
United States
Nitin Joglekar (Contact Author)
Boston University - Department of Operations and Technology Management ( email )
United States
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