Risk is so very misunderstood, especially in the world of corporate innovation.
To keep the fear of innovation risk at bay, I always tell innovation leaders to think of themselves as a savvy investor, one who takes calculated risks and mitigates appropriately. Then I remind them that investing isn’t a crapshoot that ends with an empty bank account. More often than not, following established investment principles leads to income and wealth, and it can do the same for your company if you take the time to understand how to hedge your bets.
That said, even the best investment strategies ebb and flow through wins and losses, which is also true for innovation. That’s where failing forward comes into play. When I say fail forward, I mean being fearless about experimentation, knowing when to pivot or stop a solution in its tracks and always having more ideas in the pipeline to move on to.
The crux of innovation risk and failing forward is knowing that failure is part of the game, planning for it and not letting those failures stop your momentum. This gets to the heart of what is so very misunderstood about innovation risk and reward: Most organizations expect an unreasonably high success rate and don’t plan well for failure.
Before I jump into my observations on innovation risk and reward, take a look at this chart where I’ve compared actual innovation risk and return to perceived innovation risk and return in both corporate and venture capital, the boldest and most successful of all investment models. Here’s a summary:
Cowboy Zone is high risk, and Button-Up Zone is low risk.
Venture Capital is perceived to be high-risk-high-reward, but venture capital is actually low-risk-high-reward.
Corporate status quo is perceived to be low-risk-high-reward, but corporate status quo is actually high-risk-low-reward.
In my experience working with organizations that want to innovate more successfully, I’ve found that most think they’re in the low-risk, Button-up Zone. They think this for a couple of reasons: 1) Because they only invest in a few projects at a time and 2) Because they don’t invest in high-risk projects. They believe this strategy keeps their innovation dollars safe from squandering, but in reality, most of these organizations fall into what I call the high-risk, Cowboy Zone.
They fall into this zone because of the very reasons they believe their strategy is low-risk. So, as your organization’s lead innovation investor, the next question becomes how do I get out of Cowboy Zone?
The answer: You become an expert at hedging your innovation bets.
This is something that corporate innovation teams generally don’t do very well, but it speaks more to their ecosystem than their abilities. The unreasonable expectations put on innovation leaders may cause one to believe that Innovation status quo is low-risk-high-reward. This couldn’t be further from the truth. In reality, status quo as it exists today is far riskier than any other respected investment model.
It was when I was at Mark Cuban Companies that I realized venture capital may just be the polar opposite of today’s innovation status quo and that the high-risk-high-reward assumption that goes along with venture capitalism is actually all fallacy. Venture capitalists do such a good job at mitigating risk through diversification and experimentation that most see great success.
You can read more about how corporations can innovate like Silicon Valley in this blog post, but in the meantime, keep these risk fallacies in mind as you develop your resource allocation strategy.
Risk Fallacy #1:We can’t invest in many more projects. That would be irresponsible.
Wrong. It’s likely your innovation status quo is telling you to pour your resources into just a few projects at a time, but investing in many projects - maybe dozens at a time - is a big part of hedging your innovation bets. In venture capital, investors live by the power law, which is when a small percentage of startups in a portfolio capture a large percentage of the returns. They do this to mitigate risk and increase their chances of investing in a startup that makes them big money and pays for their entire portfolio. This is the same reason why we recommend investing in many ideas instead of just a few.
Risk Fallacy #2: We’ve already put a lot of money into this idea. Let’s see it through.
Wrong. You should never throw good money after bad, not in life and not in innovation either. Corporations tend to ignore signs of failure and keep going (and investing) as if everything is coming along as planned. This is the opposite of failing forward. In venture capital, investors use the concept of standardized check sizes, giving smaller checks to early-stage startups with those checks getting bigger and bigger as the startups show more and more growth. If they don’t show growth, no check. Organizations can (and should) adopt a similar standard for investing. If a project doesn’t meet predetermined milestones, no check for you.
Risk Fallacy #3: We should avoid high risk projects. They cost too much and may fail.
Wrong. Even if your company has low risk tolerance, some of your resources should still be allocated toward blue sky projects. You should decide up front how much resource you want to allocate toward incremental vs non-incremental initiatives, and perhaps make it a goal to increase non-incremental investments over time. I wrote all about how to decide on your resource allocation strategy here.
Risk Fallacy #4:We should only invest in crowd favorites. Let’s vote to validate!
So wrong. Voting isn’t validation, and it actually puts you at a much greater risk for failure. To properly validate, you first need the right process for your project, not a one-size-fits-all workflow, and certainly no voting! At Productable, we take a pipeline management approach to decision-making, setting up pipeline phases and using experimentation methodology such as Lean or Design Thinking to validate.
Understanding and mitigating innovation risk ultimately leads to a higher return on your innovation investment and is one of the biggest differences between companies in the Cowboy Zone and Button-Up Zone. First, make it your goal to get out of Cowboy Zone. Then take steps - like adopting Portfolio Innovation - to get on the high-return end of the Button-Up Zone.
Rachel Kuhr Conn is an entrepreneur, intrapreneur, researcher, world-traveler and lifelong academic dedicated to making true transformation easier for all. She founded Productable after perfecting her own innovation process for Mark Cuban’s portfolio of startups and is on a mission to help the world’s largest organizations drive fearless experimentation.
Learn how to hedge your innovation bets.
The Ultimate Guide to Portfolio Innovation
In the ebook, you'll learn all about how portfolio innovation sets leaders like you up for success. You'll discover how to apply basic principles of investing to your innovation strategy to mitigate risk, prioritize resource allocation and execute on desired outcomes.