Why R&D Can Be Every Startup's Not-so-secret Formula To Long-term Success While R&D leads to growth and lack of it hurts innovation, many companies skip past it and hit the markets in order to build revenue faster
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SaaS giant Zoho recently surpassed $1 billion in annual revenue and its CEO and cofounder Sridhar Vembu attributes the success to the company's commitment to research and development (R&D) capabilities across categories and markets. Zoho, in fact, spends three times its marketing spend on R&D, has received 25 patents in the last three years and also aims to double its investments in technologies such as blockchain and artificial intelligence.
R&D is one of the critical aspects of building a sustainable business. And, it's not just limited to medical or manufacturing fields. "In a fast-evolving world where consumers are unlocking new markets and sunsetting old ones, it is crucial for any business, not just startups, to actively reinvent itself by replacing its legacy products or services with new ones. For instance, any company that wants to hold onto its legacy to sell old wine in new bottles is getting upended overnight. Therefore, it should be a founder's dharma to force their organization to continue to 'wow' their customers by taking moon-shot chances into new and innovative ways to fulfill their customer requirements," said Anirudh A. Damani, founder, Artha Group and managing partner, Artha Venture Fund.
Be it Apple, Microsoft, Google or India's top IT and pharma companies, R&D has been a crucial driver of growth for all successful companies. Ankur Mittal, cofounder, Inflection Point Ventures explains it with Apple as an example. "If you look at the growth of the company in the early 2000s, they invested in R&D for iPod and then they got operating leverage out of it for the next few years. And while the iPod was successful, they started doing R&D on iPhone. And when iPhone became successful, they killed iPod by making iMusic a button on the phone. And today, everybody buys iPhones because all their music is stored on iMusic which comes with Apple therefore they have strengthened their ecosystem to improve the sale of iPhones today. So even if some existing Apple users today get attracted to certain android features, they find it extremely difficult to leave the Apple ecosystem because they are deeply entrenched in it - and that is the power of R&D for any company," he said.
Why R&D is often bypassed
While it is undeniable that R&D leads to growth and lack of it hurts innovation, a lot of companies, skip past it haphazardly and hit the markets in order to build revenue faster. "The reason for it could either be external pressure from investors and stakeholders or could also at times be a reflection of a lack of long-term vision of the founding team. Skipping R&D might generate short-term revenue but is definitely not sustainable," said Mittal.
Often, companies also struggle with figuring out the right time to move from R&D and take the product to the market. "Ideally, post launching with MVP it is important that continuous R&D is done to keep improving the offering, and utility and keep building differentiators. And not all businesses will need deep R&D but even those businesses need to continuously experiment with new ways to acquire and engage customers," he added.
Besides offering steady business growth, R&D also comes with tax benefits. This allows companies to continue investing in R&D without a large burn. Despite that, the struggle sometimes is the way R&D gets treated from a company's cultural standpoint. "R&D usually gets done in silos where the final product/service is showcased to the customer without actually involving them in the development journey. Therefore, the customers accepting the final product is a gamble. On most occasions, the result is a grand failure that alienates the company's core customers and ultimately destroys shareholder value," said Damani.
R&D requires resources that don't lead to immediate sales but help in the long term. So, with stress on cash flow, the R&D becomes last priority. "However spending on R&D helps in improvising the valuation as it helps build the IPR and moat to the business. If companies are able to roll out products quickly with the help of R&D then it will certainly improvise their valuation. There are companies that have gained only because of IPR in spite of lower sales number," said Anil Joshi, managing partner, Unicorn India Ventures.
Tackling lag and fixing R&D spend
To address R&D lag, experts suggest having a separate team for it outside of the core business offering, with clear targets and vision. "This should be a team that understands the client's needs and requirements and thus can keep working separately while taking the inputs and ideas from those who understand the operations and core offerings of the business. Because what happens often is that the key operating team gets so busy running day-to-day operations that sometimes they lose sight of continuously experimenting and improving the overall experience of the offering," said Mittal.
"R&D drive typically comes from the founders and leadership team. It cannot be pushed down the throat. There has to be a mindset," added Brijesh Damodaran, co-founder and chief investment officer, Auxano Capital.
Most innovative companies budget 5 to 15 % toward R&D spend. However, there is no fixed percentage to define how much R&D spend is appropriate for a startup. "It is a function of the nature of business, the market they are going after and how they plan to go about it. What is important is the realization that to grow at a high growth rate they have to keep experimenting with new, lateral product offerings," said Mittal.
R&D spend also varies across industries. "Startups in specific industries like SpaceTech, MedTech, SaaS, and DeepTech require more upfront Research & Development ('R&D') than D2C products. However, a founder must look at R&D expenses as investments that generate an ROI and appropriate decisions taken (with impunity) for those experiments that do not meet the minimum ROI requirements of the startup," added Damani.
Today, there is an increased realisation that R&D is an important tool for sustainable long-term growth. Even though some companies run past it, most companies have started to invest in R&D resources even if they do not generate short-term revenue.