It’s hard to venture into the unknown while navigating the risks along the way.

All corporate innovation strategies involve an element of risk. The important thing is that you effectively manage your risk, and you can do that by making lots of small bets.

At a recent Innov8rs Connect online event, Tom Salmon and Andrew Humphries, co-founders of The Bakery, shared how that works in practice.

Here's a snippet from Tom & Andrew's session. For the full session recording, check here.

Attitude Towards Risk: Startups, Investors and Corporates

Startups are inherently good at managing risks due to their asymmetric risk profile. With not much to lose in the early days and everything to gain, startups can make lots of small bets with very little total risk exposure.

Investors take a different approach to risk than startups. Investors are often using other people’s money, so they need to understand the risks involved to a very high level of detail. Diversification of their fund is key to minimize major short-term risks, while taking advantage of long-term gains through compounding.

By constantly reviewing their portfolio, investors often achieve 3x their initial innovation investment over the course of 10 years. The component of failure is inevitable. By diversifying, you can afford to lose some of your bets, and win big with a smaller proportion that cover any losses and then make up the gains.

From the corporate side, you can still take risks, but there is often a need for more planning. You need to ask what the outcomes will be and understand that, while there is a small chance of achieving massive success, lots of low-risk bets can yield big returns over time. They’re also much safer in terms of risk exposure.

This is particularly true of Horizon 3 projects that involve an outlook of 5-12 years. To approach these, you should first map out the biggest and hardest goals. Then, think about what achieving these goals would do for the business in 10 years’ time.

From there, it’s a case of turning that single big bet into lots of small bets by creating an incremental plan that manages risk. Trying to solve bigger problems obviously comes with bigger risks. By compartmentalizing these risks, you can reduce your overall risk exposure at any one time.

Why Do Corporates Dislike Risk?

If a corporate innovation strategy is well-managed, there is very little risk involved. But the attitude within the corporate structure is often very anti-risk. This is because they need to protect the business’ infrastructure, forgetting that in the beginning they exposed themselves to a lot of risk.

The sales process – inherent to all businesses in one way or another – is itself inherently risky. You start out with goals and evolve your sales pipeline over time until you achieve them. You don’t know what works in the beginning, and you rely on experimentation to find out what you should be doing.

Without this initial exposure to risk, corporates would never establish themselves. The problem is that an aversion to risk develops as the business grows. It then becomes more difficult to convince leaders that they need to take risks in order to grow further.

But to do this safely, it’s not a case of making a few big bets. Once again, this reinforces the importance of many small bets, this time with an analogy to drilling for oil. Oil companies don’t just drill one hole in the hopes of striking it rich. Instead, they drill lots of holes, spending lots of money up front, in the hopes that many of them will yield a lot of oil.

How do you drill for oil without just wasting your money on lots of duds?

Building Your Innovation Pipeline

By building an efficient innovation pipeline, you can screen out a large proportion of bets that were never going to work. You start out with lots of opportunities. You narrow things down by filtering these opportunities through your criteria for success. The ones that meet these criteria then go through trials, and eventually lead into scaling solutions.

This pipeline ensures you don’t waste too much time working with proposed solutions that were doomed from the start. It allows you to double down on what works with as little effort and as few resources up front as possible.

Questions to ask when creating your business’ unique criteria for success include:
• Is it a valuable opportunity?
• Are you solving a real problem?
• Does it align with the corporate’s goals, rather than simply adhering to the desires of the manager?

Using this innovation pipeline approach, in one client project, The Bakery was able to narrow down nearly 8000 proposed solutions to 149 problems to just 76 that met their success criteria and made it through the trial phase. But these numbers will change for your unique situation.

You need to gauge how much you must spend in order to realize your ideal return on your innovation spend. You also need to understand your key metrics. Engage all stakeholders involved to ensure you spend money efficiently, aligning it with your goals and key performance metrics.

One great metric to use is brand awareness. Others that relate to improving your customers’ experience should definitely be on your list as well. You need to know what your metrics are above all else. Otherwise, you’ll have a hard time measuring your success.

Measuring Progress Through Hard and Soft Returns

Andrew used the quote “sometimes you win and sometimes you learn” to describe the two forms of returns you should expect to see. While you will be able to benefit a lot from soft returns – such as the knowledge you gain from failed projects – hard, commercial returns are essential.

To put it simply, when businesses don’t see a financial return on their investment within a given partnership, they stop doing business with that partner. Your innovation portfolio should take this into account, by ensuring financial returns are realized.

The financial gains don’t need to be hard and fast cash within a given time period. Instead, innovative solutions can free up staff members’ time. This in turn can be equated to an amount of money saved, which is a financial gain in itself.

But the soft return of learning from failures is also important. Tom suggested that learning should be a part of the positive feedback loop that eventually helps fund future investments.

In Summary

By solidifying your goals and time horizons, and creating an innovation pipeline, you can “de-risk” the process of innovation. Whether you want to employ incremental, adjacent or disruptive innovation, you need to ensure everyone is aligned on the project to minimize the risk and possible room for error.

It can be hard to convince stakeholders to take risk. This cultural challenge can be overcome by reminding them that nobody can see into the future. Big bets that could pay off massively are obviously more attractive than lots of small bets with minimal potential returns individually. But by taking lots of small bets, you reduce your instantaneous risk exposure, and foster more opportunities for successful innovation.