One of the biggest obstacles to successful innovation efforts is a challenge familiar to any entrepreneur: funding. Good ideas take time and money to get off the ground. But when those ideas are relatively “out there” or unproven, the investment can be hard to justify.
This is especially true in a corporate environment. Standard corporate funding models for technology projects simply don’t align with the way innovation works. Traditionally, organizations base their internal investments on a business case that shows projected improvement from a baseline. The business case requires and includes upfront knowledge of the full funding needed to complete the project, and assumes that every project will in fact be successfully completed.
Traditional Funding Models Breakdown in the Face of Innovation
This model breaks down when applied to innovation efforts for multiple reasons. First, it sets up a chicken-and-egg scenario. Innovators typically do not have a full appreciation of the value creation potential of an idea until it is at least partially developed. If that potential must be clearly defined as a requirement for investment, it will never get off the ground. Further, if the value creation potential isn’t known upfront, the business impact of the idea cannot be known either. This obviously hinders the usual ROI calculations in a traditional business case.
In addition, if innovation efforts are done right, not all ideas will be successful. This is not only to be expected, but encouraged; pushing the envelope by definition will include some failures. Standard funding models, however, predicate their investment on the assumption that the initiative will run to completion. This works for projects designed as incremental tweaks, but falls down when projects aim for significant disruption.
Venture Capital Firms Can Teach Us How to Fund Innovation
Innovation efforts, therefore, demand a different way of thinking about investment. One approach borrows from venture capital (VC) firms: a milestone-based method used to nurture startups and other early-stage companies to success.
A VC-based approach makes intrinsic sense for innovation initiatives; VCs trade in innovation every day. In the startup world, it’s an accepted fact that investment is required to prove up an idea. Venture capital firms implemented milestone-based funding to support early-stage innovation while mitigating risk.
With a milestone-based approach, you don’t fund the entire effort, just what it takes to get to the next milestone. Milestones will vary by product and industry. Initial milestones may be technical, steps on the way to a working prototype, for instance, or getting demo units in your customers’ hands and consolidating their feedback. Down the road, they may include customer acquisition numbers or the proven ability to monetize your users. They should include measurable KPIs that are used along the way so that it’s always clear where the project currently stands.
To define milestones for your innovation initiative, create an initial hypothesis of what an appropriate set of value creation landmarks might be. Document the assumptions you used to form that list, so that if and when those variables change, your milestones can change too. Don’t be afraid, in fact, to change your milestones. It’s important to revisit them as your learnings grow and adjust as necessary to keep your objectives both realistic and pointed toward eventual success.
Milestones provide both entrepreneurs and their investors, in and out of the enterprise, with clear opportunities to make go/no-go decisions.
- When a milestone is reached – or not – determine whether value is being created as anticipated
- Factor any new information or circumstances into your assessment and your next steps
- Verify that the concept is still valid enough to move forward with additional funding and attention
- If the concept is no longer valid, don’t be afraid to cut your losses and fail fast.
In the VC world, only about 6% of funding goes toward the startup phase. The dollar amounts allocated to the early milestones are typically low – one of the ways that the approach reduces risk. The majority of the investment goes into subsequent rounds of funding dedicated to bringing the innovation to market. This strategy applies at the enterprise level as well.
Allocate small portions of your overall innovation budget to seeding any and all promising ideas. Keeping investments down in the early stages keeps risk low as well, encourages moonshots, and allows for failure to occur (again, that’s a good thing.) Evaluate each idea at its major milestones and dedicate more budget to the projects that prove out. In this way, larger dollar amounts go to the ideas with the greatest chance at returning the investment.
Resist the Urge for Business As Usual
As the more successful initiatives grow, however, resist the urge to return to the usual business-case investment model. While mature projects may begin to demonstrate their value in a traditional way, today’s market moves fast. The value potential of the innovation will undoubtedly evolve. You may see a clearer path to ROI, but the ability to adapt and respond quickly remains paramount. A flexible funding model is key to that process.
Innovation efforts in the enterprise succeed or fail not just because of their brilliance, but based on how much support they receive from the business – including how they are funded. Consider not just how much money to put towards innovation, but how to structure it. Think incrementally with a milestone model that builds in success and failure. By borrowing an approach from VCs, experienced innovation experts, the enterprise can reduce early-stage risk and greatly improve the chances of business transformation.