Sequential Product Development and Introduction by Cash-Constrained Start-Ups

Abstract

Firms developing novel and innovative products regularly face a canonical product development and introduction problem: introduce a proven and immediately available product, or delay product introduction until the successful development of an advanced version. Limited access to resources for the development of an advanced version adds another wrinkle to this problem, particularly for cash-constrained startups. For such startups, introduction of an on-hand product can generate additional funds to support the development of an advanced product. However, the lower performance of the on-hand product can negatively impact the perception of the firm’s future products — i.e., cannibalize the payoffs of the advanced product — and lower future profitability. In this paper, we study this trade-off between revenues that an on-hand product generates for R&D funding and the cannibalization effect it has on future products. We characterize the optimal introduction timing of the on-hand product as a function of the financial resource constraints, the interdependence between these sequential products and the cost of development. Comparison of these results with that of an established firm (with no such cash constraints) show important differences between the optimal product introduction strategies of a startup and an established firm. Specifically, while it is always optimal for an established firm to accelerate the launch of a better quality on-hand product, a startup might find it optimal to delay its launch. We translate our analytical findings into a managerial framework and illustrate these results using examples from the pharmaceutical and medical devices industries.