Investing in innovation isn’t the same as making traditional investments in your business. So when you apply the same thinking, it just doesn’t work. Three of the top mistakes we see CEOs and CFOs make when investing in innovation are asking innovation teams to write business plans, thinking they can pick the winning innovation projects and refusing to retire projects that aren’t working.
Below, we unpack each of these errors and offer suggestions for what senior leaders might do instead. The takeaways are based on an interview Alex Osterwalder (CEO, Strategyzer) had recently with Alex Haneng (SVP Digital Innovation at Posten and Host of Ledertips). You can see the video clip here.
We still see companies asking early-stage innovation teams to provide business plans, but this is bad advice.
When you ask a team for a business plan, you’re asking them to make you believe they know the idea is going to work and you just need to execute it. - Alex Osterwalder
That’s because in the beginning, good ideas and bad ideas look the same. You don’t know which projects will be successful. Ideas that look promising on a spreadsheet or in a PowerPoint or even on paper, might be wrong. That’s why you should never invest in a project based on a business plan.
Companies that still use business plans [in early-stage innovation] maximize the risk of failure. - Alex Osterwalder
Moreover, the investment mechanism and metrics used to measure success in innovation are fundamentally different from those used to grow an established business. That’s why business plans don’t work for innovation projects. Business plans make sense in more traditional investments like building a new factory or expanding an existing supply chain.
Encourage early stage innovation teams to use the Business Model Canvas.
They should avoid writing long business plans early on.
When you make an investment decision based solely on a business plan, you are effectively saying you know how to pick the winner i.e. you know which innovation projects will succeed and which ones will fail. The reality is nobody knows how to pick the winners in innovation.
Consider how venture capitalists work: They invest in a portfolio of startups, fully aware that they don’t know how to pick winners, they create a portfolio of small bets, betting that 1 in 10 will be successful.
If even VCs can’t figure out how to select the best investments without investing in the failures, it goes to show how hard it really is.
So what your CEO and CFO need to understand is that investing in a portfolio of innovation projects offers the best chance of success. Small bets early on are spent on figuring out what works versus what doesn't work. You then make follow up bets, increasing the size of the investment as you go.
A natural consequence of investing in a large portfolio of innovation projects is that many of those projects won’t succeed. In fact, the vast majority will fail. So you have to get good at killing off these projects at the soonest possible stage.
The trouble is it’s not so easy to do. We work with one of the top 10 pharmaceutical companies in the world. They weren’t able to kill projects. So we helped them introduce a kill rate to make sure they retired projects that weren’t getting traction. Doing this often requires you to change the culture of your organization. You need to create an environment where it’s safe to fail. Companies like Amazon, Netflix and Ping An are fantastic examples of companies that have been able to do this. They’ve figured out how to distinguish between no-go operational failure (of which you don’t want any) and experimentation failure (of which you want a lot.)
Failure is not the goal but it is an inevitable side consequence of innovation. - Alex Osterwalder
If you’d like to learn how world class organizations like Amazon and Ping An manage innovation, sign up for our virtual masterclass called Building Invincible Companies?