R&D Printing money or burning cash

The expectation of ROI (return on investment) is commonplace throughout businsses, investors, even schools and nonprofits. However calculating ROI or an expected ROI from a future product is complicated.

For estimating a product in discovery research, one has to obviously estimate costs. Also, some idea what you will sell the product for, and often overlooked the estimate of being successful. If one is defending a market, one shouldn’t estimate an entire market loss, even if it is expected to be a critical product or service as opportunities for purchasing or licensing key technologies are available. This misstep often inflates the value considerably.

Another misstep is not looking at the real Net Present Value vs ideal NPV. Yes NPVs are at best just estimates based upon costs, timelines, interest rates, etc. However, based upon where one is in terms of a research pipeline, a success factor needs to be added for realtime NPV. Early stage maybe expect 1/10 success rate, later 1/4. Even with multiple projects towards the same market, your cumulative current NPV << Estimated Commercial Product NPV. That is where risk/return decisions need to be made (does one cut losses and move on, or double down). Business textbooks are full of examples where either was successful or a failure.

Sunk costs, fixed capital, cross functional staff, etc within research are sometimes difficult to place in terms of ROI. These could be estimated as a set number or run as internal cost program (chargeback business model).

When one is discusing or promoting research, especially with investors or Wall Street analysts, it takes one of two forms.

  1. During a growth market it is all about bragging on percent of sales going into R&D. Spending more than your competitor means you are an innovative company smartly reinvesting in future growth.
  2. If there is a downturn, the opposite is true.

Well actually both are more PR, Wall Street or expensive consultant alchemy than real science. Spending more than a competitor might just mean spending more. Tax incentives for R&D can also blur the accounting of business operations versus actual research work.

Downturns and other market variables require adjustments, but decisions need to be based on ROI. Trouble is valuing science is not an exact science.