High Risk or Low Cost

Dichotomous Choices of R&D Strategy by Startups in Markets for Technology

Joachim Henkel, Thomas Rønde

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

Technology-focused acquisitions of startups by incumbents are highly diverse, comprising radical but also incremental innovations. We build a model of R&D competition between an incumbent and a startup to explain this diversity. Each player chooses investment level and success probability, or risk, of its project. After outcome realization, the incumbent commercializes the most valuable project, and, where necessary, acquires the startup to this end. We find that two locally optimal strategies for the startup can exist, characterized respectively by higher risk or lower cost than the incumbent’s equilibrium strategy. Depending on the R&D technology, either of them may be the startup’s globally optimal strategy. With two startups, numerical analysis confirms this finding. The intuition behind our results is that a startup pursuing a high risk strategy aims at technological superiority, while one following a low cost strategy banks on having the only successful R&D project. Our model thus suggests a dichotomy of technology-focused acquisitions of startups by incumbents.
Original languageEnglish
Publication date2018
Number of pages30
Publication statusPublished - 2018
EventDRUID18 Conference - Copenhagen Business School, Frederiksberg, Denmark
Duration: 11 Jun 201813 Jun 2018
Conference number: 40
https://conference.druid.dk/Druid/?confId=57

Conference

ConferenceDRUID18 Conference
Number40
LocationCopenhagen Business School
CountryDenmark
CityFrederiksberg
Period11/06/201813/06/2018
Internet address

Cite this

Henkel, J., & Rønde, T. (2018). High Risk or Low Cost: Dichotomous Choices of R&D Strategy by Startups in Markets for Technology. Paper presented at DRUID18 Conference, Frederiksberg, Denmark.
Henkel, Joachim ; Rønde, Thomas. / High Risk or Low Cost : Dichotomous Choices of R&D Strategy by Startups in Markets for Technology. Paper presented at DRUID18 Conference, Frederiksberg, Denmark.30 p.
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Henkel, J & Rønde, T 2018, 'High Risk or Low Cost: Dichotomous Choices of R&D Strategy by Startups in Markets for Technology' Paper presented at, Frederiksberg, Denmark, 11/06/2018 - 13/06/2018, .

High Risk or Low Cost : Dichotomous Choices of R&D Strategy by Startups in Markets for Technology. / Henkel, Joachim; Rønde, Thomas.

2018. Paper presented at DRUID18 Conference, Frederiksberg, Denmark.

Research output: Contribution to conferencePaperResearchpeer-review

TY - CONF

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T2 - Dichotomous Choices of R&D Strategy by Startups in Markets for Technology

AU - Henkel, Joachim

AU - Rønde, Thomas

PY - 2018

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AB - Technology-focused acquisitions of startups by incumbents are highly diverse, comprising radical but also incremental innovations. We build a model of R&D competition between an incumbent and a startup to explain this diversity. Each player chooses investment level and success probability, or risk, of its project. After outcome realization, the incumbent commercializes the most valuable project, and, where necessary, acquires the startup to this end. We find that two locally optimal strategies for the startup can exist, characterized respectively by higher risk or lower cost than the incumbent’s equilibrium strategy. Depending on the R&D technology, either of them may be the startup’s globally optimal strategy. With two startups, numerical analysis confirms this finding. The intuition behind our results is that a startup pursuing a high risk strategy aims at technological superiority, while one following a low cost strategy banks on having the only successful R&D project. Our model thus suggests a dichotomy of technology-focused acquisitions of startups by incumbents.

M3 - Paper

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Henkel J, Rønde T. High Risk or Low Cost: Dichotomous Choices of R&D Strategy by Startups in Markets for Technology. 2018. Paper presented at DRUID18 Conference, Frederiksberg, Denmark.