How to Choose the Ideas Your Company Should Invest In

My last post described how Innosight follows a three-stage process to evaluate investment proposals from outside entrepreneurs. But deciding how to invest in ideas at a corporation is a different beast. In The Innovator's Guide to Growth we suggested that companies should create one-page "Idea Resumes" that capture the essence of an idea on a single PowerPoint slide.

After this starting point, however, our VC process holds pretty well. The first decision is whether to explore an idea more deeply. Consider some combination of the following criteria:

  1. Does what we hope to do fit our strategy? (If you don't have an innovation strategy, go and create one.)
  2. Can we get to the market without any technological miracles?
  3. Can we do a simple, back-of-the-envelope calculation to cross an identified threshold for the opportunity size? (If you don't have an identified threshold, go and create one.)
  4. Is there someone who is pounding the table to push the idea forward?

Don't kill anything at this stage. Write down why you have shelved certain ideas, and make a routine habit of looking in the "idea refrigerator" to see if something has changed that would cause you to reevaluate an idea.

After exploration, there are lots of ways to plan, but at the very least a good plan details the target customer, crucial stakeholders, the essence of the idea, key economics, the commercialization path, proposed operations, the team, financial requirements, and the action plan. Don't detail these components in an effort to prove the idea is right; rather, identify its weakest elements. What are the assumptions in which you are least confident? Which possibilities could cause the most damage to the plan?

The analysis helps to make the second decision about whether to run tests to address key assumptions. The following criteria are helpful here:

  • Does this fit a pattern? (Innosight Ventures uses a 20-question checklist; The Innovator's Guide to Growth details a 12-question pattern we have generally found to be a helpful starting point for these efforts.)
  • Can we build a "reverse income statement" where reasonable assumptions support reaching our profit and revenue targets?
  • Is the testing plan well thought out?

A small decision-making team can come to consensus about the right plans to take forward. Importantly, that decision-making team shouldn't be the same team that is making day-to-day operational decisions for the core business, because they are quite likely to implicitly default back to core disciplines where different ones are required.

Note what isn't part of the decision: an idea's net present value or return on investment. Teams should certainly develop their best guesses about how the idea will make money, but leaders shouldn't place too much emphasis on financial metrics for early stage ideas.

The goal in executing tests is to maximize short-term learning, not profits. I typically suggest avoiding setting any revenue targets at all during the testing phase, because it opens the door to all sorts of core controls that can squeeze the life out of new growth ideas.

You should expect that after some period of time testing the team leader will come back and say one of three things:

  • "We can't address a key risk, so we stopped the project."
  • "We picked the right space, but our idea wasn't quite right, so here's a new plan."
  • "We had the building blocks right, but the details have changed a lot."

It's conceivable — but unlikely — that the leader will say, "Full speed ahead!" When I hear those words, I wonder whether a team has fallen prey to confirmation bias and ignored information that didn't conform to their initial hypotheses.

Then it's time to decide whether to launch, a decision that should mix qualitative (have you addressed the key risks?) and quantitative (what do the numbers show?) criteria. If you follow this process, decisions get easier as the required resource commitments go up, because the team has gone out and created the data that is required to make a good decision. In other words, as the team has run its tests, it has learned more about the key assumptions behind success. The odds are very high that some of the original assumptions haven't quite worked, and the team has had to make some fundamental changes to the plan. That's a good thing.

Disciplined companies sometimes look at innovation with skepticism because it appears to be random and chaotic. The best innovators, however, really are disciplined. It is just a different set of disciplines, ones focused on lean learning and rapid risk reduction. If you ever get stuck, just remember the simple mantra: ask the right questions at the right times.

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