In our continued exploration of the roots of innovation failure in the enterprise, this post has us investigating a misconstrued metric that’s become an alarming priority among innovation teams: how large is our innovation portfolio. Slowly, almost imperceptibly, we’ve come to a point where material meaning has been assigned to the process of giving an innovation monetary value, combining it with other appraised ideas from the company, and showing the largest portfolio possible. Teams derive a real sense of accomplishment if they are able to say, “We now have more than $500 Million in our innovation portfolio,” or however hundred million it happens to be.
More distressing, leadership is complicit in establishing this pattern. Presented with such an ‘innovation report,’ the C-Suite might fire back, “Great work, team! Now, how do we push the valuation to a Billion?”
In the enterprise, we see more and more innovation getting miscast as a top-line exercise, with no accounting for what it will take to make it real. Like the proverbial tree in the woods, there’s a question that’s left unstated: Is an innovation portfolio worth anything at all if you don’t actually deliver?
Why such a devotion to size?
It is not difficult to understand why there’s a profound focus on building up an innovation pool. First and foremost, leadership constantly bears the burden of proof, whether to Wall Street or the Board, that they are materially stewarding the future of the business, and they can be counted upon to yield a reliable stream of successful new offerings. What better way to do that than to boast a large innovation pipeline?
Moreover, just as with any investment strategy there’s a risk management component to taking a ‘diversified’ approach, to ensure every potential gain gets spotted and captured—the more bets placed, the greater the chance of hitting on one of them.
To this end, an Entrepreneur-in-Residence model has become en vogue, whereby companies now distribute ‘scouts’ among their ranks, tasked to find and bring worthy ideas to the Board for consideration and funding. Procter & Gamble, for example, deploys a team of 70 executives it calls ‘technology entrepreneurs’ to mine for new ideas that may build on P&G’s core businesses. In fact, the company credits these employees with uncovering more than 10,000 potential new ideas.
An average 10-figure company could see 1,000-1,500 ideas per month bubble up in this fashion, which means now you have to form an additional team dedicated to curating the ideas – an accelerator, if you will. Where companies run into trouble, however, is that these teams tend to become hyper-focused on innovation that drives internal initiatives such as sales, marketing, or operations. Seldom do they stop to consider what these innovations might actually mean for the market.
In this respect, there is strength in numbers, but there’s a difference between maintaining critical mass and becoming overly enamored with a portfolio’s size, especially if the innovations are merely naval-gazing in nature.
Errors in the IRR calculus
When an enterprise gets to the point it has formed an internal accelerator, that’s the first indication it is moving in the right direction. In fact, we see this kind of initiative as a veritable pre-requisite for successful innovation delivery. Whether you have 1000 ideas or 10,000 ideas, you need to have a VC-style accelerator operating within your company to nurture and grow these ideas. EIRs may be good at spotting ideas, working with internal founders and their executive teams, but may not be the best choice to make a call on “funding” decisions.
In this, enterprises stand to learn most from the methods employed by successful venture operations. To push the model to the proper side of the ledger, funding needs to be controlled by a VC-style partnership within the enterprise. Just as VCs are judged on the Internal rate of return (IRR) of the startups they fund, enterprise accelerators must be judged on the number of ideas that receive proper, vetted funding.
Similar to the points made in section one, the key factor for internal accelerators to understand is that they will be judged on the number of ideas that get funded, NOT on the number of ideas they are incubating. The metric to which you’ll hold them accountable is kinetic energy, not potential energy; it is a basic matter of sound portfolio management.
In other words, enterprise innovation ideas should receive millions in funding only if a traditional Venture Capitalist would have funded it as well. And traditional VCs look at metrics. They are never willing to fund just an idea or a concept. There needs to be a viable market, a strategic opportunity, a secret sauce and, most importantly, a minimum viable product (MVP) that shows traction.
In the absence of such a structure, you’ve opened the door to several counter-productive outcomes:
Millions of dollars end up being committed to ideas with just an unproven prototype.
Millions end up being committed for poor MVPs that would never pass the VC sniff test.
Mechanically, innovation consultants and strategy companies are the perfect candidates to fill the roles of accelerator managers and de facto VCs within the enterprise ecosystem. Putting this kind of third-party separation in place will not only help remove internal bias, but also hold the innovation accountable to the success metrics laid out above.
Examples of this practice in action include Bionic Solution and ZX Ventures, both of which install startup ecosystems within large enterprises. Once these firms bring ideas forward from within their clients’ ranks for prototyping and incubation, M3 Hive acts as an executive partner to help build and deliver the innovation.
Let us be clear. If you haven’t put something new into the market, you haven’t innovated. To use the vernacular of a venture capitalist, the sum valuation of ideas that live in an enterprise’s Innovation Portfolio is Zero. Zip. Nothing. Nada.
Innovation is an action, not a strategic asset. It simply does not exist without Build and Iterate. Without these, innovation will forever be an idea talked about but never delivered.
Talk to us about what it takes to cast aside the shackles of a portfolio mindset, and get building!