The Counterintuitive Way To Win With Innovation

The way that companies win with innovation is counterintuitive. Leaders have to give up the need to win on every investment they make. Instead, they have to make multiple bets and expect to win on only a few of those bets. This is a difficult mindset shift for most corporate leaders to make.

In venture capital, this mindset is already in place. According to venture capitalist Fred Wilson, when they raised their first fund for Union Square Ventures, he told their investors to expect one third of their investments to fail. Fred Wilson says that he works with the ‘one third rule’, which assumes that “one third of investments will fail, one third will under-perform expectations, and one third will meet expectations”.

The venture capital approach is different from how corporate leaders make investment decisions on innovative ideas. In most companies, the team that is asking for investment has to promise a certain level of return to the organization. This promised return on investment is what is later used to hold the team accountable for the success or failure of their idea.

Most company leaders do not have other mechanisms for managing their innovation teams. They use business cases to make decisions. Then they manage the teams by checking whether they are following their roadmap by staying on time and budget. At the end of the process, leaders look at the returns to judge success or failure. And what leaders really want is for teams to succeed every time.

Wanting innovation teams to win with every idea shows up in two ways that both produce the same outcome:

1. Guaranteed Returns: The only way to ensure that every new idea works out is to invest in products and services that are close to our core business. In this case, we know the customers and we know how to sell to them. Investing in the core business limits the chances of failure. When innovation teams know that their leaders are looking for guaranteed returns they will not propose transformative innovations. This is how you end up with a company that is constantly launching similar products and services with minor tweaks.
2. Immediate Returns: The only way to ensure short term returns is to invest in products and services that are close to our core business. An efficiency innovation that improves the manufacturing process for our best selling product can bring immediate returns. In contrast, transformative innovations require patience because returns may take up to three years to show up and success is not guaranteed. When innovation teams know that their leaders are looking for immediate returns they will not work on transformative innovations. So you still end up with a company that is constantly launching similar products and services with minor tweaks.

Wanting to win with every idea makes leaders impatient. This impatience means that they can kill transformative ideas too early. When an idea does not promise immediate returns it can be killed at the decision making table, before the team even gets a chance to start. If the team is lucky enough to get started, then they are on a short leash with expectations for short term results.

The counterintuitive way to win with innovation is to make multiple small bets. Instead of expecting a return on each investment, what leaders should look for is a return on the overall portfolio of bets. The way to produce that return is to increase investment only on ideas that are showing progress towards success and stop investing in ideas that are not making progress. Overtime, the portfolio of bets should produce revenues that pay for the failures, while giving leaders a great return on their overall investment.

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This article was first published on Forbes where Tendayi Viki is a regular contributor. Learn more at www.tendayiviki.com