Calculating the Value of Innovation

Innovation is critical. But in a world of finite resources, how do you decide when to invest in a speculative project?

impact-effort matrix
The “Effort and Impact” matrix isn’t enough for some decision-makers. Some folks need to see numbers!

I was first introduced to the concept of Innovation Accounting by David Binetti at the Lean Startup Conference in 2014. In 2015, he introduced a means to calculate ROI and Risk of Pre-growth initiatives with his Innovation Options Framework.

This summer, Dan Behr from the Innovation team developed a version for our own portfolio management here at ReadyTalk. I asked Dan, a self-professed “excel hound”, what drew him to this project.

“I’m fascinated by the challenge of quantifying value and risk, especially when there is no historical data to base these estimates off of. This challenge is intriguing because it addresses a fundamental problem all businesses face: how do you make a good decision under uncertainty?” — Dan Behr, ReadyTalk

While I initially mentioned this approach to Dan as a way for us to compare our own initiatives within the innovation team, he quickly made a case for this to be used across our existing lines of business as well. This enabled us to compare projects that were already in flight with those our team was proposing for funding.

At ReadyTalk, we have two lines of business, and an innovation team charged with exploring alternatives: new products, new markets, new business models.

It’s a lot easier (and cheaper) to come up with possibilities than to execute on them, so the Innovation Options framework helps us with decision-making. It lets the numbers tell the story, so we aren’t always biased towards what we know and ‘less-risky’ bets.

The framework helps project leaders make their initial request for investigatory funding.

  • What is the eventual market potential
  • What funding are you requesting now
  • What will you need if this investigation goes well
  • How long is the investigation period
  • How frequently will you provide update/check progress

This level of funding helps get things off the ground: it helps move things forward. As progress is made (positive, negative or inconclusive), the future value of the project is updated, so it is clear whether further investments should be made or not.
Dan cautioned me that his model has some flaws, but it’s a great starting point to help inform our decision-making and investment process.

As the summer draws to a close, we’re eager to kick off using Innovation options to help us weigh what we work on next.
As for Dan and his own take-aways from this project?

“I was most surprised by how big the problem [valuing a new idea] I was addressing truly is. Upon reflection, I should have known that there would be many answers to this question, all of which have strengths and weaknesses. Ultimately though, the depth and breadth of this question only makes it more interesting. That’s why I hope to continue looking into solutions to this problem.”

I’m pretty sure Dan was contemplating trinomial trees during this hike.
I’m pretty sure Dan was contemplating trinomial trees during this hike.
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