Saturday, November 10, 2007

Panel on Investing in Innovation

Last night, I spoke on a SVOD panel discussing investing in innovation.

Invitations to speak always spark new ideas and new frameworks for trying to cogently boil down large and complex ideas into a few key ideas.

The topic of the panel and this post provided a framework for thinking about the issues.

For example, innovation is the science of new possibilities. Investing in innovation, however, centers on the science of consumption.

Innovation in a vacuum leads to failure and the commercialization of innovation is predicated on a ready ecosystem in place to enable the development, delivery, and sale of a product.

Consumption, in the broadest sense, demands the marriage of science with application.

A useful framework for tying technical innovation to consumption follows:

Commercial Success = Customer Need x Offering Innovation x Sales and Delivery Model x Ecosystem Development x Risk-adjusted Return

Customer Need = a clear view of the buyer's problem, identity, motivations, and resources

Offering Innovation = a material, rather than marginal improvement in the state of the art

Sales and Delivery Model = a distribution model that aligns product-market fit and, like Occam's razor, reduces any unnecessary frictions from the buying process

Ecosystem Development = no material exogenous market developments are required for the company to be successful. Rather, the ecosystem is ripe to support the innovation.

  • For example, wimax deployments, RFID reader deployment, etc.
  • Also, like Newton's "on the shoulder of giants," all start-ups require a foundation of enabling conditions to truly be successful. Understanding the cornerstones of the opportunity and how to leverage them is key to commercialization.
  • Also, innovation is largely symbiotic. Bill Joy's quote, "innovation happens elsewhere" is important to keep in mind as product design should benefit from the innovation of others rather than solely on the company's employees.

Risk-Adjusted Return = ROI alone is not sufficient to motivate customer behavior.
  • Like any investor, return must be analyzed with risk and customers, like investors, will seek to maximize their Sharpe Ratios, or return divided by standard deviation.
  • Many start-ups fail to realize the vendor, operational, and product risks they are asking customers to take on. Selling absolute return independent of the risk ignores a major component of customers' product selection. Be conscious of inadvertently creating risk and manage risk out of the sales and deployment model.
The panel agreed that a holistic approach to investing in innovation is required. The maturity of a team's plan depends on moving from the art of what is possible to the science of what is most efficiently consumable.

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