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Should You Back That Innovation Proposal?

Geplaatst op sep 25, 2013 in News

Imagine you were choosing between two investment proposals. The first comes from a team of young entrepreneurs hoping to bring word-of-mouth marketing to China. The team’s concept is unproven, and the entrepreneurs admit they have no idea precisely how big their business will be. The second comes from a seasoned team inside a large company that’s looking to tap into a growing segment adjacent to its current business. The strategy is logically sound, takes advantage of the company’s capabilities, and the team is offering up precise financial projections promising hundreds of millions of dollars in revenues.

Seems like an easy decision, right? Yet, we decided to invest our own money into the first proposal, and advised a senior executive team to not invest their money in the second.

While that may seem counterintuitive, our experience in the trenches of innovation teaches us to look beyond a plan’s superficial elements to assess the team and how they created the plan. The first team forged its idea in the white-hot heat of the market, which meant that the many assumptions that remained were grounded in real-world experience. The corporate team, on the other hand, forged its idea in the languid lights of the conference room, which meant the plan was based on assumptions the team didn’t even realize it was making.

The word-of-mouth idea was pitched to Innosight’s investment arm by entrepreneur Christoph Zrenner in 2010.  Zrenner had partnered with Benjamin Duvall, a business school classmate of his who had previously worked at Bzzagent, which had built a successful word-of-mouth business in the U.S.  Team members had augmented the standard facts and figures suggesting that the market had potential with acknowledgment of remaining risks and uncertainties. Far more telling to us, they had spent significant time in the market pitching their idea to potential corporate customers, and had even successfully recruited a few, most notably Kraft Foods. We invested in the business, which – after a few twists and turns – is now growing rapidly across Southeast Asia under the name Wildfire.

The second team was well-intentioned but simply hadn’t done the fieldwork. Despite the soundness of the logic and the strength of the projections, the strategy was replete with risks that we could see but that the team had not acknowledged. The proposal dramatically underestimated how unique the value proposition was compared with offerings from start-ups. And it projected a pace of scaling that wasn’t credible given the company’s inconsistent innovation track record. Our assessment was that revenues would take longer to come in, and would be significantly smaller, than the team projected.

It is rare for members of an innovation team to admit that they haven’t done the right homework, or, in many cases, that they don’t even know what the right homework is. So what should leaders look for to increase confidence that the team in which they are investing is following the right approach, and how can they guide teams that aren’t?

The first place to look, ironically, is the precision of financial forecasts. Forecasts with precise point estimates that carry two numbers to the right of the decimal point often rely heavily on analysts’ detailed market projections. Certainly companies like IDC, Nielsen, and Gartner produce high-quality work. But estimates of the size and growth characteristics of new markets are notoriously inaccurate. Ask team members how many prospective customers they’ve talked to, or how much time they’ve spent in the field. The ratio of the time spent preparing for and attending internal meetings to the time spent in the market should be no higher than 1:3. Round numbers, backed by the right fieldwork, typically indicate a team that recognizes the uncertainty of early-stage ideas.

The second area to investigate is the degree to which a team has designed an offer based on what the company already has instead of what the market truly needs. Clearly companies should have some kind of advantage or capability that gives them a leg up in a new market, but a core reason why incumbents so frequently miss disruptive opportunities is that they try to force-fit existing capabilities onto new markets, while new entrants are building far more appropriate offerings from the ground up.

To get some sense of how well-targeted the offering is, ask team members how prospective customers have responded to their idea. Ideally the team has created an early offering that is good enough to generate some actual purchases (what the Lean Startup community would call a minimum viable product). Even reactions to mockups or early prototypes can be useful. Negative reactions aren’t necessary bad, by the way, as long as the team draws constructive lessons from them and modifies its approach appropriately.

Finally, check the degree to which team members have personal experience in the target market. Large companies often overestimate their ability to enter into markets that are new to them but known to others. Corporate innovation teams that make this mistake are typically those that lack adequate experience in the market they hope to target. Accordingly, leaders should carefully evaluate the résumés of the team members they are sponsoring. If no one has relevant industry experience, leaders should encourage them to carefully study the industry and talk to industry experts. Consider engaging an expert on an on-going basis to provide advice during key decision meetings to help the team keep on track.

To make steel useful and strong, it needs to be forged at a temperature above 2,000 degrees Fahrenheit. At that temperature, the metal becomes soft enough to shape without cracking. Similarly, resilient strategies emerge from the harsh fire of competitive markets. Leaders, be wary of growth strategies with falsely precise numbers based on analyst reports created by an overly insular team. Push the team to recognize the imperfection of any new strategy and to spend the necessary time in the marketplace to create a more resilient strategy with sharply higher chances of success.

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