New Venture Start-Ups and Technological Innovation

Abstract:     
We compare investment in innovation (e.g., R&D) between new venture start-ups before commercialization and operating businesses after commercialization. Operating businesses use R&D to improve actual earnings while start-ups use R&D to improve prospective earnings. When a start-up entrepreneur commercializes his/her new product, device, or service with conventional investment (e.g., plant, property, and equipment to begin production), prospective earnings convert into actual earnings. In a model of sequential R&D, we show that the ability of the start-up entrepreneur to avoid commercialization costs upon failed R&D makes R&D more valuable to the start-up entrepreneur than to the manager of the operating business (for whom commercialization costs are sunk) and despite R&D costs that the start-up incurs without the revenues that only commercialization generates. The value of R&D to the start-up can be so great that the entrepreneur invests in R&D before the manager of an otherwise similar operating business in similar business conditions. Under broad circumstances, a new venture start-up undertakes R&D before an already operating business. We discuss the empirical implications of our results.

Number of Pages in PDF File: 44

Keywords: New Venture Start-ups, Technological Innovation, Entrepreneurship, R&D

JEL Classification: D92, G24, M13, O32

Accepted Paper Series