Future Foundry LIVE 8: How to think like a VC and win at Corporate Innovation Highlights

I think the challenge for most corporate innovators is that when they talk about venture capital, especially in an enterprise setting, most execs greet it with a bit of an eye roll and talk about how that style of investing just doesn't work for corporates. But We've already seen the critical role that VC plays in helping early-stage new ideas to transform markets. And it's the continual interplay between the startup side and the capital side that effectively drives all of this growth. And great ideas don't get to market without VC. VC doesn't make money without great ideas getting to market. And so in short, without venture capital, the whole innovation system collapses. And in corporate innovation, If you don't have a team playing the role of investor, then unfortunately you're destined for failure. And for clients that haven't figured this out and are still fighting for funding in the traditional way, you know, idea by idea, business case by business case, what we tend to see is that there are 3 things going on. So you tend to see extremely large variations in terms of outcomes. You know, more innovation projects fail than succeed, right? That is the nature of what we do. Our job as corporate innovators is to decrease the amount of risk that's involved in searching for those maybe 1 in 10, 1 in 100 winners. But it's exactly this variability that makes our outcomes just really difficult to predict. And what we see is that without venture-style investing, too few projects are funded to smooth that volatility. We also see quite poor average results in these companies. So we hear time and time again about clients who, in their words, have had their fingers burned by an innovation project before where they've probably overinvested, you know, sometimes to the tune of multi-millions of dollars over years and years. And for organizations that have made that mistake, that's usually the only investment that they make, right? And that really negatively impacts the average outcome because they just don't invest in corporate innovation again. And the final thing that we see, which is kind of related, is really poor and quite inefficient resource allocation. So innovation projects have very different risk profiles, very different time horizons, very different success criteria from BAU projects. So they can't and shouldn't be funded in the same way. And if they are, then what we see is that this inefficient resource allocation just further exacerbates both the volatility issue and the outcomes issue. And for all of these reasons, I think that, you know, discarding the skills, the methodologies, the learnings of 80-odd years worth of venture investing is a huge mistake for corporates to make. Venture capital is way more than just a way of investing in other people's companies. It is an approach to asset allocation, to value creation that you need to embrace if you're going to win at corporate innovation. So how do you do it? I think the good news is that the principles of venture-based investing are pretty easy to grasp and internalize within your own companies. So we've boiled them down into 7 that you can take back to work after this episode. And the first thing that you have to do is to assemble a team of investors inside your company. At Future Foundry, when we help clients to do this, We call them the Innovation Engine Board, and it's usually made up of a group of senior execs whose job it is to act as the internal VC to your ideas, right? You know, the ventures, products, and services that you're working on, but they also act as a fiduciary for the company's overall investment in them. You know, these are people who can step out of their traditional managerial roles and adopt the mindset of an investor, um, you know, advocating for growth, encouraging very strategic risk-taking and guiding you and, you know, the rest of the innovation team on what it is that you need to prove to raise the investment in your ideas at different checkpoints, just in the same way that, you know, a traditional VC would. Now, this might seem like a big change in mindset for some of the leaders within your organizations to make, but it is critical if you're going to drive successful corporate innovation outcomes. I think the real challenge is in keeping this board detached from the day-to-day operations of the individual projects that you're working on. And it's a challenge because corporate execs by their very nature are used to managing teams, but when it comes to innovation, they have to let you and your people execute the vision without too much in the way of interference. You know, this board are dealing with what is hopefully or will be a vast portfolio of ideas, and there's just no time for micromanagement. And look, philosophically, they also need to maintain emotional distance from the projects that you are working on. Otherwise, it's gonna be really, really difficult for them to make the objective decisions that they need to make about which ideas to kill and which ideas to fund. You know, VCs don't involve themselves in the day-to-day operations of their portfolio companies. You know, if they do, then something has gone very, very wrong. You know, they trust the founding teams, in this case you, to execute the vision, and they only really step in for, you know, strategic guidance, resource allocation. And this same detachment that I'm talking about is super important if your board is going to be successful. And more than anything else, what they should be focused on is that resource allocation. You know, some projects are bound to fail, so their job is to make sometimes quite tough decisions on when to continue funding ideas versus understanding when it is that they should pull the plug. So they'll need some really clear evaluation criteria in order to help them to do this. VCs would call them maybe an investment thesis, and that's what's going to help them to make these sorts of informed decisions and make sure that resources, be that cash, be that talent, maybe their own political capital, are allocated to the most promising projects. And this is good for you as an innovation team or an innovation leader because it fosters this culture of accountability. You know, if the board are tying resource allocation to performance, then as a team, you're way more incentivized to deliver results and demonstrate that really quick progress. And it's this results-driven culture that really helps you to drive the success of the overall portfolio. Now, If you're going to allocate resources in the right way, what they can't do is to use traditional corporate models to evaluate individual initiatives. They've got to adopt the venture capital practice of using milestones and stage gates. You might hear people talking about rounds, you know, A rounds, B rounds, C rounds, and that's going to help them to assess the risk that's involved. It's going to help them to assess potential and ultimately the likely value creation potential of each project. You know, as projects progress, the board have got to ask the right questions essentially. And those questions, depending on what stage an idea is at, might not be traditional questions around EBIT, around profitability. They might, you know, depending on what stage an idea is at, not even be about revenue either. You know, if you're at the opportunity navigation stage and you're asking for, I don't know, $100K to test an idea, it might be about the total addressable market. Or if you've tested an idea and you want to raise funds to build an MVP, it might be about, um, customer willingness to pay. Or if you're trying to get something launched maybe after an MVP pilot, then, you know, it might— and this is depending on the business model— be about customer acquisition cost, you know, lifetime value, churn rates, very non-traditional types of metrics. And, and as an innovation team, what you've got to do is help them to understand Which are the right questions to ask at which juncture? You know, it's these milestones and this stage gate process that gives you way more structure to work with. And if you're breaking projects down into these manageable stages and tying resource allocation to the achievement of those specific milestones, then you can build a really disciplined approach to corporate innovation that a really encourages this progress that we're talking about, but b minimizes the chances of. of wasting resources on projects that are doomed to fail. Now, let's expand on this idea of portfolios. You know, innovation is inherently volatile, and the best defense against volatility is volume, right? Innovation is a numbers game, and the more ideas we test, the more likely we are to find those game-changing propositions that will truly transform our organization. And we'll look at a case study later on But you likely need to invest in 100 things to find the one winner that will pay 10 times over for the 99 that didn't make it. So having this portfolio-based approach really helps to smooth out the risks that are associated with investing in individual ideas, and it actually encourages a high failure rate, right? Which is a good thing. You know, it's that high failure rate that helps to drive us forward to finding the winners. And it's this approach too that helps us to learn from a much broader range of experiments. That's how we build the valuable insights that we can apply to other ideas in the future. And on that portfolio theme, the board should really be focused on justifying not the investments that they're making at an idea level, but the success of the investments that they're making in the whole portfolio. So if you think about how venture capitalists operate, they'll go out, secure funding based on expected returns from their entire portfolio, right? They're not Justifying each investment that they're making to limited partners separately. Similarly, your board should be raising a pool of capital, you know, most likely from your finance department or CFO, and allocating it really strategically over time without constantly having to seek approval from finance for individual projects, because that is going to be like wading through treacle ultimately. And again, it's only by focusing on the portfolio as a whole that you can minimize the impact of individual failures. You know, by having this big diverse portfolio, you can absorb those failures and still achieve massive overall success. And the final principle really relates to the fact that the people on your board are probably used to seeing quite clear evidence of success or failure in a relatively short timeframe, right? But in the world of innovation, in the world of venture capital outcomes, you know, be that individual project profitability or portfolio returns, Can take much longer to materialize, and I think when you're raising capital for this board to allocate, you have to take a multi-year view, right? Not a quarter-to-quarter view. They've got to get comfortable with the fact that meaningful progress in innovation projects takes time, and it's only really by embracing this long-term perspective that you can make better decisions about which projects to support and allocate resources in the right way. It's also going to help you to build an environment that fosters. resilience and persistence over short-term thinking, because success in corporate innovation, as we know, is rarely overnight, right? It's a process of continuous effort, adaptation, and pivoting. Now, I wanted to bring this to life for you in a slide that you can take back into your business to advocate for this shift from traditional corporate investment decision-making into one that's more akin to a VC. At Future Foundry, we've been working with a client in the financial services space for the last couple of years, And we've really helped to master the art of this VC-style investing. So in that time, they've navigated around 200 opportunities using $200K of seed funding. Of this, they've chosen 36 ideas to incubate. Of those, only 14 of them got a follow-on round for acceleration at $300K each, and ultimately 9 of those things launched at a total cost of just over £12 million. 191 ideas didn't make it. But this is a portfolio that's producing over half a billion pounds in annual revenue, which is a 25 times return on the money that was invested in the portfolio as a whole. And interestingly, over half of this revenue is actually generated by only 2 of the 9 projects that were launched, which incidentally is a pretty similar pattern to return that we see in venture capital funds. So as a general rule, if your investment as a company in innovation isn't producing at least 10x returns, then you need to figure out why quickly. You know, it could well be that you are not working on enough ideas. You know, if you only started with 25 opportunities in this navigation stage right here, then you wouldn't have anything to show for it by the end, and your company, you know, particularly in the current climate, is going to be wondering why they keep investing good money after bad in corporate innovation. You can use our corporate innovation checkup to do that and to figure out, you know, where the blockers are. Is it the startup methodology side? You know, perhaps you don't have that quite down yet, or is it the investing side? Is it both? There are around 30 questions in the checkup. I took a client through it the other day, And in like 10 minutes. So I guess you could say that if you're underperforming, then you can 10x your returns in 10 minutes using it, which would actually be quite a catchy headline for this. We'll also send you a pretty comprehensive report off the back of this so that you can pinpoint exactly where the issues are. And yeah, I'll leave that up for a sec so that you can grab it. But ultimately, I think as corporate innovators, there are 3 big learnings that we have to take from today if We're going to get to a place where our ideas are funded and our efforts are having a material impact on the future of our companies. The first is that lean is not enough, right? Most companies have spent the better part of a decade now investing in startup methodologies without reaping any real benefits. But that's not because lean's the wrong approach, it's because it's not enough. To win at corporate innovation, you have to have the innovation engine board in place acting as an internal VC to power it. The people on this board also need to behave like an investor, not an operator. You know, there's a huge amount to be learned, as we've seen from 80-odd years of venture capital success. And if we're gonna keep up with the changing world around us, then we have to have people in our companies who can embody those learnings and use them to fuel the ideas that we are working on. And finally, you've gotta place a large number of small bets to win at innovation. It is a numbers game, and you've gotta stop placing bets on one or two initiatives at a time and spread the risk by placing a much larger number of small bets across an entire portfolio. It'll mean that you get to work on a much higher volume of projects, and of those, many, many more of them will get to market and generate the big returns that we're all looking for, which, you know, after all, that's what we're all shooting for, right? But if you'd like some professional help as it relates to corporate innovation, then You can book a demo with me right here, and we can walk you through how Future Foundry can help you to 10x your impact. Or drop me a follow on LinkedIn, get some daily snippets of corporate innovation goodness in your feed. But that's all for now. Keep an eye on your inbox for the next Future Foundry Live. That's happening in July. Lovely, lovely warm July. Thanks so much for joining us. And if you'd like us to run this episode of Future Foundry Live inside your company, Uh, we did that a few times after the last one, then more than happy to help you out and do that. And if you enjoyed this episode, head over to LinkedIn, share your feedback, tag us in that. We'd love to hear it. But for now, we'll see you next time. Thank you.