Investments in innovation need to yield results.

The most obvious (and easiest) solution would be to invest only in incremental improvements and in everything that’s very well connected to the core business, but that doesn’t mean it’s also the wisest.

Acting and thinking like a VC investor when making decisions about your corporate’s innovation initiatives can help you invest in innovation successfully.

Easier said than done? Keep reading to find out the tools Dan Toma (Partner at OUTCOME and co-author of two award-winning books) shared during our recent Innov8rs Learning Lab on Innovation Strategy, Leadership, Governance & Portfolio Management.

Corporate World Vs. VC World: Two Sides Of A Coin?

In the ‘real’ VC world, most ideas will fail, and almost 65% of the innovation investments will only break even at the very best. For these reasons, it's important to play innovation as a numbers game: you can never predict which idea will succeed and you can’t select the ‘winners’ without investing in the ‘losers’. In other words, it's crucial to invest in many ideas to eventually spot winners.

However, the corporate context is slightly different from the VC world. First, investing in many ideas is crucial for corporates as well, but there’s no point in only doing that. What really matters here is matching investments to the Innovation Thesis and the overall company’s strategy and objectives for innovation. Without this alignment, we're just going to scatter our investment and innovation becomes a guessing game. And, as we all know, competing against luck is anything but ideal.

“Innovation is a numbers game: you have to invest in lots of ideas. In the corporate context you have to do it in a very scientific way. It makes no sense to allow every flower to bloom; you have to favor the flowers that are in line with your company's vision”.

Furthermore, unlike companies in the VC world, larger corporates often find themselves dealing with some biases that heavily affect their decision-making in innovation. Dan ranks and discusses the most common ones (we’re not saying that these biases would never affect the VC world, but their impact is certainly well below there):

  • Sunken cost fallacy. Once we've invested time and money in something, we are less likely to abandon it. This happens because discontinuing bad ideas actually seems to contradict our previous decision.
  • Survivorship bias. We commonly overestimate the likelihood of success in risky ventures.
  • Safety bias. We protect against loss more than we seek out gain. As a result, we tend to invest very carefully so that we don't lose money rather than look at the upside of every idea.
  • Experience bias. We take our own perspective as the objective truth. “We're all guilty of that and tend to look at things similar to our background, past decisions, and mental paths”, says Dan.
  • Similarity bias. We prefer what is like us – i.e., our core business – over what is different. And again, this happens frequently in large organizations.

Now that we’ve established that the Corporate and the VC worlds differ for at least two reasons, we need to understand what corporates can do to overcome the obstacles on their way to successfully investing in innovation.

The Role Of Corporate Innovation Investors

To invest in innovation and replicate (or better yet, adapt) what VC investors are doing on the outside, corporates need to have a Venture Board (VB) in place, i.e., a group of decision-makers within the organization that safeguards the budget and decides whether or not to invest in some initiatives. In Dan’s opinion, organizations that don’t have a VB set up are actually finding it difficult and tedious to innovate. We'll discuss this more later in the article. For now, it's vital to emphasize that the role of corporate innovation investors (or Venture Board members) is probably the most important in the whole innovation system:

  • They connect the innovation strategy with the practice (the implementation of the strategy); thus, they make sure that what's being said happens in real life. The only way to follow up on innovation strategy is actually to invest in ideas. And it’s innovation investors’ responsibility to decide if and where to invest, if a venture needs to pivot and if that particular pivot still follows the overall innovation strategy.
  • Also, they’re in the position to inform innovation strategy changes based on interactions with the innovation teams. The Venture Board acts as the artery for information to flow between the teams and the executives: “I have never seen an executive having time to go over the details of every single innovation team. Taking the information at the team level and abstracting it to the executive level is the role of the Venture Board”, wraps up Dan.

The job of any VC investor – or any Venture Board member in the case of a larger corporate – is never to decide on ideas. Rather, they always have to decide on evidence. Simply put, never ask yourself: ‘is this a good idea?’; instead, ask yourself: ‘can I trust the evidence that’s presented to me?’.

In this regard, Dan shares the main evidence corporate innovation investors should look for when deciding on ideas. Of course, evidence changes depending on the ideas' maturity phase. And at each stage, teams usually make some mistakes that investors need to remember.

1. Early Stage or Discovery Phase Ideas

The first thing you have to be aware of is that, at this stage, it’s too early to talk about price points or churn rates. Instead, you should be really interested to understand if there is a market for that idea, if customers actually care about having that particular problem solved, and if that idea is solving a real problem or not. Gathering this evidence will ultimately help you decide if it’s time to stop the idea before investing further in it. This is a delicate phase, but it can be relatively easy for corporate investors to spot weak evidence. In fact, teams at this level are prone to making some of the following mistakes:

  • No evidence from real customers: teams sometimes just interview their colleagues, friends, or whomever they have near them.
  • Confirmation bias – i.e., the tendency to interpret new evidence in accordance with existing beliefs or theories – that's rooted in the wrong questions asked.
  • Experimenting on the wrong customer segment out of convenience or fear.
  • Jumping to conclusions and wanting to progress faster rooted in a deep love for the idea.
  • Wrong experiment or too complex.
  • Too much preparation in pursuing perfection or out of fear. For example, they might spend a lot of time polishing the words in the interview script rather than just interviewing people.

2. Pre- And Early-Revenue Ideas

In the case of pre-revenue or early-revenue ideas, the teams have ideally already validated the problem as well as the value proposition to some extent and may have generated some early revenue. In this case, you should try to uncover if the target customer accepts the envisioned solution in that particular proposed form. You need this evidence to understand if it makes sense to build that idea and what parts of it you really need to create. For instance, if you already have some products that can be improved and innovated by just adding new features, it isn't very meaningful to build the whole thing from scratch. Common mistakes made by teams in this second include:

  • Teams only focus on the total addressable market, omitting computing the serviceable obtainable market.
  • Teams compute the market size starting from the total addressable market and only in terms of the number of customers.
  • Teams consider only one business model, which in many cases is the one used by the company's core business.
  • Teams walk customers through the prototype in an effort to confirm the value of the solution. “Whenever you hear somebody saying a few people have found their prototype amazing, ask them how they got that feedback. Most of the time, they simply don't allow their prototype to fail”, says Dan.

3. Scaling Ideas

At this point, teams have to prove they’re in a good position to start scaling. And this can only happen if and when the business model works and there’s real hope for a long-term sustainable business model. Typical mistakes that teams make and corporate investors need to pay close attention to are:

  • Teams focus too much on acquisition instead of focusing on retention. Yet this particular point is deeply connected with the business model. And so, as an investor, you have to see it through your business model’s lens, which means if your primary focus is acquisition and you’re not interested in retention, you should not consider this point as a mistake. For example, selling books is an acquisition business, not a retention business, so there's nothing wrong here if the focus is on acquisition.
  • Teams are not data-driven and decisions are made based on a predefined product roadmap.
  • At the same time, teams ignore the importance of qualitative insights. Sometimes they rely too much on the data and forget that they also need to consider the qualitative aspect. In fact, the data tells us what's happening, while the qualitative interviews tell us why that is happening. And usually, mature teams tend to ignore the fact that they still have to interview. “Running interviews can be very uncomfortable for most people. However, there is gold in those qualitative insights", adds Dan.

It's a Team Sport

Investing in innovation takes time and effort and is a team sport. As mentioned, corporates need an actual Venture Board not to suffer from the biases we’ve discussed so far and make bad investment decisions as a result. According to Dan, the typical composition of such a board should be as follows:

1. Innovation Manager (permanent position)

2. Innovation Strategy Owner (permanent position): this might be the VP of innovation or the Chief Innovation Officer. In general, the Innovation Strategy Owner has a direct line of communication with whoever in the corporation is in charge of the innovation strategy.

3. Domain Expert (rotation): in this position, you need different experts depending on the idea the VB is examining. For instance, if you need to evaluate a blockchain initiative, you would need a blockchain expert; in the case of a renewable energy initiative, you would need a renewable energy expert, and so on. This figure will help you and the whole board understand if the team is performing correctly.

4. External (permanent position): Dan believes that having somebody external from the local VC community as a permanent position can enrich you and the corporate with interesting, different perspectives. If you don't find an external, involve somebody from another department. As an added benefit, this will also ensure cross-pollination between departments and break down silos.

5. C-level (case by case): when you have to make major investment decisions, you want C-level Executive (s) to be part of that meeting. But, usually, you will need the innovation manager, somebody who's connected to the innovation strategy, a domain expert, and somebody external.

In conclusion, it’s up to the Venture Board to decide whether or not to invest in some initiatives based on the quality of the evidence the innovation teams are able to provide at each development stage of their ideas. In essence, corporate innovation investors are decision-makers who must ask the right question at the right time and leave their personal opinions out of the conversation. After all, facts don’t care about feelings.

By focusing on evidence – reliable data and qualitative insights – Venture Board members can make the right investment decisions, thereby improving their corporate’s ability to invest in innovation.