Marketing, R&D, and Startup Valuation

The problem focus is on startup decisions associated with staged venture financing, where both R&D and marketing are significant percentages of overall expenses. When should a startup owner acquire working capital, and how should she/he distribute that capital between R&D (to improve product quality) and marketing (to increase sales) to ultimately grow valuation? Also, should the startup owner cap the total R&D and marketing budgets to increase profitability during staged venture financing? We develop a model to study resource acquisition and allocation decisions across successive stages of startup growth. The model incorporates a funding process whereby the startup valuation is positively impacted by improved product quality and market growth. This model provides insights on optimal acquisition and allocation practices and characterizes the impact of changes in productivity, along with the evolution rate of R&D and marketing payoffs, on the underlying decisions. Our results also illustrate conditions for optimal capping of R&D and marketing expenses as a percentage of revenues.