**2. Startups by type of innovation**

Schumpeter highlighted the leading role of innovation as a fundamental internal engine for the economic growth of companies and nations. Therefore, regardless of the origin of the companies, the innovation of processes, products and services constitutes a strategy that allows companies to project greater added value, increasing the possibilities that they can become competitive organizations and manage to adapt to the demands of world markets.

For Schmookler, innovation arises after the need to solve a problem, creative and innovative ideas respond to a demand originating in the environment [3]. Sherman [4] defines innovation as Ideas originated after identifying a need, resulting in the invention of new products, processes or techniques to achieve success in the market. Malerba and Orsenigo define innovation as a dynamic and interrelated process, with continuous feedback effects between the different stages, and, furthermore, this entire process takes place in a changing environment in which agents and competitors react, in turn, before each of the changes [5]. Likewise, the OECD defines innovation as the creation or improvement of a product, process or in turn the combination of both [6].

There are various authors who have defined innovation; however, in most definitions it is understood that innovation is associated with the use of knowledge for the creation of strategies capable of generating improvements in the product or process. For this reason, process innovation and disruptive innovation will be defined below.

#### **2.1 Process innovation or frugal innovation**

When you talk about innovation, you have the preconceived idea that it means the creation of a totally new product; however, innovation could also occur in the modification of a current process to make it more efficient. This is known as process innovation -or frugal innovation- and consists of the application of knowledge that develops new tools or methodologies that allow optimizing the behavior and results of the processes ([7], p. 19).

Through process innovation, companies manage to increase their competitiveness, reducing costs and times, improving customer satisfaction rates. In this way, the returns on investment are increased and the participation of the company in the market is increased ([7], p. 23).

Process innovation must meet certain conditions to be considered as such. This type of innovation must increase the productivity or yields obtained so far and there must be a significant and demonstrable change, otherwise, it cannot be considered as innovation, but as an improvement in the process, also called Kaizen (see **Figure 31**).

The kaizen method has the same objectives as innovation in terms of increasing competitiveness; however, this is achieved through the constant improvement of the business productive apparatus. That is, through "small improvements made in the status quo as a result of progressive efforts" ([7], p. 31), while innovation implies a drastic improvement in the status quo.

#### **2.2 Disruptive innovation**

Various academics such as Danneels [8], Bass [9], among others, define disruptive innovation as the evolution of a product or service, using technologies to increase current returns. This causes companies that go through this process to displace established competitors. This type of innovation has as its main characteristic the transformation potential of industries and considers the process from the introduction of changes to the acceptance of the new offer in the market by new consumers [10].

For disruption to be successful, it must have the potential to improve steadily over time; For this reason, the innovation process includes "subsequent developments that raise the attributes of the new product to a level sufficient to satisfy the main customers" ([11], p. 13; [12]). **Figure 32** shows the fundamental characteristics of disruptive innovation.

### **2.3 Compared life cycle of startups**

### *2.3.1 Differences in risk*

All companies face constant challenges that put business stability at risk. Companies that decide to innovate are not exempt from these dangers. For this reason, this section will discuss the main types of risks faced by companies that are committed to innovation.

The implementation of any innovative idea requires previous studies that evaluate the feasibility, development of the prototype, the business model, among other previous steps, which represent an investment in research and development. Even, on some occasions, transferring the innovation from the prototype to reality is highly expensive and sometimes it is not possible to have a viable product or that the market can demand, so the investment made is risky.

**Figure 31.** *Differences between Kaizen and innovation. Source: [7].*


#### **Figure 32.**

*Subsequent developments that raise the attributes. Source: Prepared by the author.*

As for companies that choose to innovate in their processes, most of the risk is found in the Research, development and implementation process, since it is at this stage that the greatest investment is needed. On the other hand, disruptive innovation is conditioned by a type of additional risk, given that, once the implementation investment has been made, the product or service may not be well received in the market. Disruptive innovations usually have unattractive performance in the short term, since they assume a different value than the one established, so that new products or services are not initially competitive and have a slower maturation process. The initial rejection or little acceptance of the product will be reflected in a low level of sales.

Although "not all paths of disruption lead to success" ([10], p. 9), various authors argue that this type of innovation takes years to disrupt the market, but when they do, their growth is amazing. However, it is not without risk; for this reason, investors tend to be more conservative, since if the business does not work it would represent an economic loss for them and the company, associated with the high costs of research and development and the uncertainty of the results.

Based on the above, it is evident that uncertainty is one of the risks associated with innovation and that, in general, disruptive innovation is perceived as riskier than process innovation.

### *2.3.2 Differences in the duration of the startup life cycle*

It had been argued that to analyze a company it is convenient to locate it in the stage of the business life cycle that corresponds to it, it was also previously mentioned that the life cycle shows business development through the evolution of its sales over time. In general, when a company begins -especially in startups- it goes through a **stage of development** of its products that it then submits to the market and begins **its introduction stage**. If the company exceeds its germinal stage, it will begin to develop its potential in the **growth stage**. Finally, the company will enter its **maturity stage** when sales growth rates slow (see **Figure 2**).

There is a close relationship between the life cycle of a company and the decisions of the type of innovation it wishes to undertake, and the life cycles of startups that develop disruptive innovations will be different from those that opt for process innovation; The product development processes will be different and consequently the investments to be made, which for example leads to the perception that disruptive

innovation is riskier than process innovation and this fact alone will generate differences in the life cycle of companies that opt for one or another type of innovation.

It can also be seen that the disruptive startup causes the shift towards a completely new paradigm; however, this change is not immediate, since it involves the adaptation of consumers or the creation of a new market. For this reason, the introduction phase of a disruptive startup is usually longer than the introduction phase of a startup that focuses on process innovation, as shown in **Figure 33**.

The startup that innovates in processes presents a lower risk of market adaptation, since this type of innovation starts from an existing market that seeks to make the client company more efficient and competitive, but does not alter the final product or service. However, since the market is defined, the growth in product sales is limited by its demand, since the production rate must not exceed what the market needs. In this sense, the growth stage of the company that innovates processes is more limited than in the case of the startup with disruptive innovation, where the growth stage is more pronounced, since in this case innovation has the potential to create a new market. and thereby grow to a higher level. Once the growth stage is over, both startups reach their maturity stage, with the process innovation startup arriving first.

#### *2.3.3 Investment level according to the type of innovation*

Both in startups with disruptive innovation, as well as in those with process innovation, the investments made consider the research, development and implementation of the innovative idea, as well as the formation of the business, which defines its stage of development. Given that startups with disruptive innovation have a longer development and introduction stage, then investment levels will be higher for two reasons: first, because of the magnitude of the investment involved in developing a new product for the market and the longer investment period because while in process innovation the process to be optimized is known and therefore the research is limited, on the other hand, in disruptive innovation, research processes have to be

**Figure 33.** *Comparative cycles. Source: Prepared by the author.*

## *The Life Cycle in Startup Valuation DOI: http://dx.doi.org/10.5772/intechopen.110765*

**Figure 34.** *Investment level. Source: Prepared by the author.*

carried out with many hypotheses and test models, which mean a longer period of investment- This can be seen in the **Figure 34**.
