Patience Pays Off for Startups

ALTHOUGH SMALL STARTUPS might be eager to get their products to market to raise much-needed cash, they might do so to their future detriment ...

... say Sreekumar Bhaskaran of Southern Methodist University’s Cox School of Business in Dallas, Texas; Sinan Erzurumlu of Babson College in Babson Park, Massachusetts; and Karthik Ramachandran of the Georgia Institute of Technology’s Scheller College of Business in Atlanta.

Conventional wisdom holds that startups should launch quickly, starting with the first viable version of their offerings, so they can raise the capital needed to further develop and refine the product for a second launch. But if their first versions prove faulty, they can lose a great deal of goodwill.

The authors cite one startup’s hasty launch of an orthopedic implant. Convinced by the entrepreneurs of the product’s benefits, doctors used the implant only to cope with post-surgical patient complications. Even though the firm’s second version addressed the initial problems, the firm’s reputation had suffered. Its founders eventually were able to convince doctors to give the product a second chance, but only after issuing apologies and losing potential sales.

Although cash levels are always of concern to a fledgling company, it is in a startup’s best interest to delay a new product’s launch until it has developed a better, later version, the authors emphasize. That’s true even if the first version is fairly strong.

“What may seem to be immediately profit maximizing may lead you to bankruptcy sooner,” says Bhaskaran. “‘Failing forward’ is not the best strategy for startups.”

“Sequential Innovation by Start-ups: Balancing Survival and Profitability” is under review. A working version is available at ssrn.com/abstract=2325530.