Introducing Innovation Power Law
Imagine you’re a successful entrepreneur with a sizable chunk of extra funds you want to invest - let’s say $1,000,000 - and you’ve decided you want to try your hand at angel investing to help other entrepreneurs build their startup visions.
You’re not the gambling type who’s going to go all-in on a single bet. You’re much smarter than that, so you decide to diversify your interests, spreading your million over multiple startups.
You make 10 startup investments, each at $100,000. Being a savvy investor as well as an entrepreneur yourself, you know that most of the startups you invest in will fail, but you also know that the ones that succeed generally win big.
In venture capital, this risk mitigation strategy is known as Power Law: When a small percentage of startups in a portfolio capture a large percentage of the returns. Venture capitalists live by Power Law, and they do so to diversify their interests and successfully hedge their bets. (Read about what angel investor and expert Jason Calacanis says about the strategy here.)
Traditional Power Law translates perfectly into innovation investment strategy. At Productable, we call it Innovation Power Law, and we use it to help our partners mitigate their own innovation risk and get a better overall return on their dollar.
In my experience as an innovation consultant for billion dollar companies, I got to witness first-hand all the things these companies did right and also all the things they did wrong when driving innovation. Across the board, misallocation of resources was always a biggie. Over and over again, I saw huge companies working on only a small handful of innovation projects at any given time. I’d say companies that worked on half a dozen ideas at a time would be considered progressive.
Part of the reason I started Productable was to change this mentality and approach. Instead of focusing on a small handful of ideas, organizations that use our platform invest in many ideas at a time - think dozens - with the expectation that a small handful of ideas will scale into real, revenue driving solutions. Just like in venture capital, the winners pay for the losers many times over.
In the most simple terms possible, Innovation Power Law is all about diversification. Just as a budding angel investor wouldn’t dare sink a million dollars into a single startup - or on a personal investment level, you wouldn’t sink all your retirement funds into a single stock - we coach our innovation partners to spread their dollars out over dozens of projects to mitigate their risk.
Benefits of Diversification Through Innovation Power Law:
You no longer have to focus on just a few ideas at a time. More often than not, innovation leaders face the dilemma of which ideas to fund and which ideas to kill. Status quo forces them to go all-in on a few projects a year, but Innovation Power Law and the Productable approach to innovation changes that. Start with a diversified (and plentiful) portfolio of ideas then use a sustainable innovation process to validate and decide which ideas move forward.
You no longer have to expect every idea to scale and succeed. Going all-in on a few projects a year creates the unrealistic expectation that all or most of those projects will succeed. Afterall, you did just sink your entire budget into a few ideas, so they better! Innovation Power Law fixes this. We set the expectation that at least 60 percent of your innovation projects will fail, most of them in early phases of development. Planning for failure is a huge part of hedging your innovation bets and getting closer to the big win.
You no longer have to make huge kickoff investments. In today’s innovation reality, going all-in on an idea means contributing huge amounts of time and money from the get-go. You invest blindly without having properly validated the idea. Thinking back to that budding angel investor who’s backing startups for the first time, do you think that investor would give a million to a startup without proof of concept and validation through the right piloting efforts? No. The startup only gets a small chunk to get started and has to prove itself to get more.
Innovation Power Law sets the expectation that a small percentage of ideas will produce a large percentage of the returns for any organization, just like in venture capital investing. Buying into this approach allows you to experiment more without blowing your budget on just a few ideas. This is innovation, after all, not the racetrack.
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.