Sequential Innovation by Start-Ups: Balancing Survival and Profitability

38 Pages Posted: 14 Sep 2013  

Sreekumar R. Bhaskaran

Southern Methodist University (SMU) - Edwin L. Cox School of Business

Sinan Erzurumlu

Babson College

Karthik Ramachandran

Georgia Institute of Technology - Scheller College of Business

Date Written: September 13, 2013

Abstract

Start-up firms, which are by nature cash-constrained, often consider launching an immediately available product to generate funds for developing more advanced products. However, this release could have an adverse effect on the perception of the firm’s future products. A key decision for the start-up firm in such an environment is: when should the first product be released? In this paper we consider the product development and introduction decisions for a start-up which has a product that is ready to launch and is also developing a more advanced product, whose launch readiness is uncertain. We model the tradeoff between the adverse effect of a first version on overall profitability and the valuable stream of revenue it generates for R&D funding. We characterize an optimal policy with cash thresholds to determine when the firm should launch the first version and whether it should continue development. We derive managerial insights by studying these cash thresholds under various technological and market scenarios. Our analysis underscores a fundamental difference between how a start-up and an established firm view commercialization: a start-up would delay the launch of a good first version longer while an established firm (without bankruptcy considerations) would accelerate its launch.

Keywords: Sequential innovation, Entrepreneurship, New product development, Research and Development

Suggested Citation

Bhaskaran, Sreekumar R. and Erzurumlu, Sinan and Ramachandran, Karthik, Sequential Innovation by Start-Ups: Balancing Survival and Profitability (September 13, 2013). Available at SSRN: https://ssrn.com/abstract=2325530 or http://dx.doi.org/10.2139/ssrn.2325530

Sreekumar R. Bhaskaran (Contact Author)

Southern Methodist University (SMU) - Edwin L. Cox School of Business ( email )

P.O. Box 750333
Dallas, TX 75275-0333
United States

Sinan Erzurumlu

Babson College ( email )

231 Forest St.
Babson Park, MA 02457-0310
United States

Karthik Ramachandran

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
(404) 894-8631 (Phone)

HOME PAGE: http://www.prism.gatech.edu/~karthik37/

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