Get validated ideas into customers’ hands by embracing an approach to securing funding that thrives on uncertainty, and begin winning at corporate innovation.
Now everyone’s recovered from the Easter sugar rush, we’re diving into the second instalment of Future Foundry LIVE for 2023, taking an in-depth look at what it takes to get your innovation efforts funded.
So, dig out the last of your chocolate and watch the full episode here or enjoy our write-up of the key takeaways below.
With increasing focus on budgeting, efficiency and returns in organisations, it’s easier than ever for investors to say ‘no’ to getting successfully validated ideas into customers' hands.
Let’s dive into why this is and how you can win at corporate innovation by thinking more like a VC.
What’s stopping investors from funding great ideas?
As innovators, we’re constantly told that to succeed in getting new ventures, products and services to market, we need to ‘be more start-up’. Those espousing this advice are well-intentioned; they want us to move faster, be more flexible, and focus relentlessly on the customer.
But in 2023, most innovators are already doing that. In fact, a recent InnoLead survey found that over 80% of companies with more than $1bn in revenue use a lean startup approach in their corporate innovation efforts.
So, we’re pretty confident that you likely already use lean startup methodologies to navigate opportunities, incubate ideas and accelerate new ventures to market.
When you pair this lean approach with a good brand reputation, customer access, and capital provided by the core business, you’re unstoppable… right?
Well, not quite. Let’s look at why.
The three words no innovator wants to hear
Since the beginning of the year, there has been an increased focus on cost-cutting in businesses. This has led to innovators banging their heads against the wall, frustrated about how many ideas are getting stuck in the pipeline because they’re not getting funding.
We’ll lay out a familiar scenario. You’re at the incubation stage and need to get your sponsor, finance team or senior leadership on-side to secure investment in acceleration and build an MVP.
You’ve carefully gathered all the puzzle pieces together, everything you should need to secure the funding you need, covering:
- The market and problem size
- The deep customer pain or unmet need you’ve discovered
- The amazing solution you’ve been working on
- The product vision, MVP and tech roadmap
- Potential GTM and monetisation strategies
- An operating and execution plan
- Governance frameworks
But then the business turns around and says the three words you never want to hear:
‘Not right now.’
And their reason? Because you can’t provide predictable forecasts for ROI.
Nothing is more gut-wrenching than working on a tonne of propositions that customers have told you they want and that you know how to build, just for the business to say no because they’re not convinced by your numbers or because they don’t meet your company’s goals for ROI.
Herein lies the rub: how can you build predictable forecasts for ROI on a proposition that hasn’t been created yet?
That’s just not how things work.
Most of the time, you don’t know how an opportunity will play out until months or even years have passed. It's worth remembering that even Uber, Netflix and Airbnb couldn't give predictable five-year forecasts early in their journey.
So, how do we escape this paradox where we need funding to prove the forecasts but need the forecast to get the funding?
The solution: think like a venture capitalist
Unsurprisingly, our solution doesn’t lie in ‘being more start-up’.
Instead, your organisation should adopt a financial philosophy centred around venture capital-style risk-taking.
In innovation, where the level of uncertainty is high, you need to get your sponsors comfortable accepting failure and expecting several outsized winners that ultimately pay for the failures ten times over.
That means getting them to think like VCs.
Using a venture capital mindset to invest in your internal portfolio of ideas will lead to much higher strategic and financial returns.
How to internalise the venture capitalist philosophy
A brief history of venture capital
Interestingly, the concept of venture capital is a little older than most people realise. Today, VC is more closely associated with the dot-com boom (and bust), but you can trace its roots all the way back to 1946 when the American Research and Development Corporation began writing checks for very early-stage, high-risk companies.
VC is a good thing because thousands of companies with world-changing ideas wouldn’t have been funded without it. Traditional investors wouldn’t look at any ideas that couldn’t be proven with a 5-year ROI forecast.
From early investment in the tech companies that defined the late twentieth century to growth in newly emergent spheres such as SaaS innovation and social media, we have much to thank VC for.
The financial philosophy of the venture capital industry is very different from traditional investment strategies but is also very different from how companies invest in their own internal projects. So, what can we learn from this philosophy that bypasses uncertainty?
The characteristics of the VC philosophy
The VC philosophy is made up of three key characteristics:
- It’s all about high-risk, high reward: VCs know that most of their investments will fail, but the outsized returns from those that succeed offset the losses.
- They think long-term: They know startups can take years to develop, grow, and mature before becoming profitable, so they place long-term bets.
- They spread risk with a diversified portfolio: They’re not just interested in ideas that solve one problem; they’re interested in lots of ideas that solve lots of different problems.
If your company wants to succeed in getting its own disruptive, high-growth, high-value ideas to market, you need your sponsors to internalise this philosophy.
What challenges are corporate innovators facing?
It’s no secret that most execs greet discussion of venture capital in an enterprise setting with exaggerated eye-rolls. Or, talk of how that style of investing doesn’t work for corporations.
But we’ve just proven the critical role VC plays in helping early-stage new ideas transform markets. Simply, great ideas don’t get to market without VC. And VC doesn’t make money without great ideas getting to market.
Without venture capital, the innovation system collapses.
When we work with clients that haven’t figured out that fighting for funding using a traditional investment approach doesn’t work yet, we see them struggling with three issues:
- Extremely large variations in outcomes: More innovation projects fail than succeed. Fact. Our job is to decrease the risk involved by finding those 1 in 100 winners. But this variability makes outcomes difficult to predict. Without venture-style investing, too few projects are funded to level out that volatility.
- Poor average results: We often meet clients who are hesitant to invest in great ideas because they’ve had their fingers burnt by innovation projects where they've over-invested. But without investing in innovation again, the average outcome will never improve.
- Inefficient resource allocation: Innovation projects have disparate risk profiles, time horizons and success criteria from BAU projects, so they can’t be funded in the same way. When they are, inefficient resource allocation further exacerbates both the volatility of outcomes and the average results.
This shows why discarding the skills, methodologies, and learning of almost a century of venture investing is a huge mistake.
So, how do you actually embrace venture capital as an approach to winning funding and begin winning at corporate innovation?
The seven key principles of venture-based investing
The good news is that the principles of venture-based investing are pretty easy to grasp. We’ve boiled them down to seven key steps you can implement within your company.
- Assemble an investor-driven board
First, you need to assemble a team of investors inside your company. At Future Foundry, we call teams like these the ‘innovation board’. Your innovation board is typically made up of a group of senior executives who act as your internal VC.
They become the fiduciary for the company's overall investment in your ideas, connecting your innovation team to those who hold the purse strings. This is why it’s important to select people who:
- can step out of their traditional managerial roles
- adopt the mindset of an investor
- advocate for growth
- encourage strategic risk-taking
- guide you as an innovation team on what you need to prove to raise investment in your ideas at different checkpoints
Yes, this will be a big change in mindset for some leaders. But creating a team of supportive and investment-driven executives who can guide your efforts is crucial for successful corporate innovation.
- Maintain a hands-off execution approach
While you want your innovation board to be engaged with your work, you need to keep them detached from the day-to-day operations of your individual projects.
This can be a challenge, as corporate executives are used to managing teams. But that is not what they’re needed for here.
Just as VCs don’t involve themselves in the day-to-day operations of their portfolio companies, you need to be free to execute your vision without external interference. There is no time for micro-management; your board must be able to trust your innovation team, only stepping in when you request strategic guidance.
After all, how can they make objective decisions about whether to kill or fund ideas if they’re getting tied up in the minutiae of it all?
- Allocate resources wisely
Perhaps more than anything else, your innovation board should be focused on resource allocation. In this context, resources can include cash, talent or political capital.
Some projects will inevitably fail, so they must make tough decisions on when to pull the plug. That means putting clear evaluation criteria in place to help make informed decisions on which projects have the most promise. In VC terms, this is called an ‘investment thesis’, which helps measure an idea’s potential for profit.
This fosters a culture of accountability within the innovation team. With resource allocation tied to performance, you’re incentivised to deliver results and demonstrate progress. This results-driven culture works to drive the success of the overall innovation portfolio.
- Adopt milestones and stage-gate processes
Continuing with the trend of throwing traditional thinking out of the window, you can’t use conventional corporate models to evaluate individual initiatives.
Instead, your board will need to adopt the VC practice of using milestones and stage gates to assess each project's risk, potential, and value.
This means asking the right questions based on what stage an idea is at. However, innovation boards typically need support from the innovation team to help them understand what these questions are. For example:
- If you’re at the opportunity navigation stage, they may ask about the total addressable market
- If you’ve tested an idea and you want to raise funds to build an MVP, they may ask about the market or problem size
- If you want to launch after an MVP pilot, they may ask about customer acquisition cost, lifetime value and churn rates.
By breaking projects down into manageable stages and tying resource allocation to specific milestones, you can build a disciplined approach to innovation that encourages progress and minimises the risk of wasting resources on ill-fated projects.
- Implement a portfolio mindset
Corporate innovation is a numbers game. The more ideas you test, the more likely you will find the game-changing innovations that’ll drive profits.
For every idea that wins, you’ll likely need to invest in around 99 that fail, so the winner must pay ten times over to level out the average results. Let’s look at a quick example of how this worked out for a real Future Foundry client who adopted a VC-style approach to investing:
- At the navigation stage, they began with 200 opportunities using £200k in seed funding
- Next, they chose 36 ideas to incubate at £100k each
- Of those, 14 projects got a follow-in round for acceleration at £300k each
- Finally, 9 ideas were launched at a cost of £12.15m.
Of the 200 initial opportunities, 191 ideas didn’t make it. This is a 95.5% failure rate.
A high failure rate might seem bad on the outside, but it’s necessary for you to find high-value winners.
In this example, our client’s portfolio produced over £500m in annual revenue, a 25x return on investment. And over half of their revenue was generated by two of the nine launched projects, which is very similar to the pattern of returns seen by venture capital funds.
As a general rule, your investment in innovation should produce at least 10x returns. If it doesn’t, you might not be working on enough ideas!
This shows that by adopting a portfolio mindset, you can:
- Defend your business from the volatility of innovation
- Smooth out the risks associated with investing in individual ideas
- Learn from a broader range of experiments and build valuable insights to apply to future ideas
- Focus on portfolio returns
The board should avoid looking at investments and returns at an individual idea level, instead focusing on the success of the investments made in the portfolio as a whole.
This is a key learning from venture capitalists, who secure funding based on expected returns across their entire portfolio. Your board should raise a pool of capital — from your finance department or CFO — and allocate it strategically without seeking approval from finance for individual projects.
Only by creating a large and diverse portfolio and reviewing its success at this level can you minimise the impact of individual project failures.
- Foster long-term vision and commitment
Your board is probably used to seeing clear evidence of success or failure in relatively short timeframes. Innovation and VC turn this on its head, so the board needs to get comfortable with the idea that meaningful progress will take time.
In our world, outcomes (including individual project profitability or portfolio returns) can take longer to materialise. This means taking a multi-year view when raising capital for the board to allocate rather than a quarter-to-quarter view.
By embracing this long-term perspective, you can:
- make better decisions about which projects to support and allocate resources accordingly
- build an environment that prioritises resilience and persistence over short-term thinking
Success, as we know, is rarely overnight; it’s a process of continuous effort and adaptation. This approach supports that.
Three key takeaways
Phew, we’ve been through a lot today! This is a lot to absorb at once, so we’ll leave you with the three main learnings to take away from today. These will help you get to a place where your ideas are funded and your efforts have a material impact on your company's future.
- Lean is not enough: Most companies have spent the last decade investing in startup methodologies and have yet to see any real benefits. And that’s not because lean is the wrong approach; it’s because it’s not enough. To win at corporate innovation, you need to create an innovation board acting as an internal VC to power it.
- Put an innovation board in place: The people on this board must behave like investors, not operators. If you’re going to keep up with the changing world, you need people in your companies who can embody the learnings taken from over 80 years of VC success and use them to fuel your ideas.
- Place a large number of small bets: This is a must if you want to win at innovation. Rather than placing bets on one or two initiatives at a time, you should spread the risk by placing a much larger number of small bets across an entire portfolio.
By changing your approach to investment, putting an innovation board in place and working on a higher volume of projects, you will get more to market and generate larger returns. And this — after all — is exactly what we’re all shooting for.
So, what’s next?
Ah, we innovation champions are always thinking about what’s next. Now that you know how to get your sponsors thinking like venture capitalists, it’s time to uncover what blockers stand in the way of your innovation growth. Book a call with our team of innovators and lets get cracking on embracing the VC mindset.
Until next time!