The corporate ‘Innovation Mascot’
Okay, let’s try innovation. We’ll start slow with two to three startups and see what happens.
I have heard this often enough. It seems a logical thing to do, try something first. The problem lies in that people often forget that investing in ideas is, and always will be, a betting game. So the chances of these two to three startups becoming a success are slim, considering the odds that two out of ten will make it big.
Once some of them have stopped, the one or two startups that remain will become the company’s ‘innovation mascot,’ and a lot of money is often invested in ensuring their success. Making decisions on whether or not to keep investing in these mascot startups becomes an emotional decision rather than a rational one based on signs from the actual market (or customers, for that matter). They are cuddled to death, so to say.
VCs have learned this the hard way. They have learned to spread their investment over more significant numbers and hope for that one 100x return. If you look at the numbers of VC investors over time, you will see that investing a large amount of money in just a few startups will give you a more than 80% chance of losing all of that money. Whereas spending that same amount on tenfold more startups will change your chances significantly.
You may have heard this before, but it is still something many people do not realize before they see the numbers. With real investments, these learnings take time and money. To save both of those for you, we have made this helpful tool https://togroundcontrol.com/calculator/
Fill in your innovation budget and try it with a few different numbers of startups. These are scenarios based on real VC investments and their returns over several years. Since investing in startups is a betting game, the Monte Carlo simulation calculates chances of success. It will give you an indication of the likelihood of return. More startups with less investment will provide you with a better chance every time.
You’ll need a more significant number of startups to start with. There is no way to predict the success of a startup. There are a lot of elements that play a role. Luck, timing, talking to the right people, combining the right things. There is no way to control this. There are, however ways to reduce the risk of loss in that portfolio. You can reduce the amount of money spent on startups that look like going the wrong way. Stage gated investment will give you a tool to be able to do just that. Provided that you ask the right questions at the right time, that is.
For a healthy investment portfolio, innovation accounting is a crucial element. It will give you insight as well as a way to get some control over where your money is going. The innovation accounting framework is a great starting point to learn more about innovation accounting.
Esther Gons is the award-winning author of The Corporate Startup & Innovation Accounting. Winner of the 2022 Golden Axiom Business Book Award, 2019 Golden Axiom Business Book Award, and the 2018 Management Book Of The Year Award. She is an expert in Innovation Accounting, Innovation Strategy and Portfolio Management.