Stop Asking Your Team to Innovate Like Entrepreneurs… Until You Make Decisions Like VCs

Corporate innovation teams are taught in their organizations, and in the media and classes, to act like entrepreneurs navigating risk in a new venture or idea. But entrepreneurs usually work in partnership with their Venture Capitalists (VCs), because together they can better squeeze out the risk and thus both win. So why do we expect our corporate innovators to tackle risk alone?

An executive innovation leader at one of the nation’s largest non-profits who was developing a new diabetes prevention service noted how her team acted perfectly like entrepreneurs (building on customer needs, testing new revenue models & channels in-market with early prototypes), but the leadership team did not show up as the accompanying VCs:

“ New leadership came in right at the end of the project, and decided the project was beyond the guardrails of how much the company was willing to stretch. The new service had high marks externally, but not internally. We realized this boiled down to communication & accountability—the nuances of which we should have seen coming.”

The missing piece of the innovation puzzle: helping leadership teams learn to act like VCs. Only in this way can companies de-risk paths to new revenue streams.

3 Ways Successful Leadership Teams Channel this Inner VC

1. Investing > budgeting

As one innovation leader in a major athletic apparel firm describes:

“What we’re doing is investing, which is fundamentally different than budgeting…but we’re asked to force an investment process into a corporate budgeting exercise. We don’t have a budgeting process that is optimized for investment like a VC would, and so that is incredibly challenging, because we have a lot of perverse incentives.”

As most folks know from experience: people are incentivized and act in accordance to their source of funds. Most funding happens in organizations through a budgeting process where teams look at the activities they will execute for the next year (or more) and request the cost of that execution. This process works well for executing on the core business, that looks largely the same year after year, and the budget process rightly allows for control and stability.

But innovation is about exploring through testing, and then making decisions on the next round of activities based off learnings from those tests. The results of the tests vary, making the next round of testing variable. VCs invest in entrepreneurs through milestone-based funding for rounds of tests delivered in tranches over time. But the next tranche of funding is only given if the results of the test show that the new idea, concept or venture has traction with customers and the market. Innovation done through traditional budgeting can waste money and time on concepts that aren’t getting market and customer traction. Though investing is a smarter way to spend resources in innovation, it does require a different set of decision making protocol that should be discussed in advance as a joint leadership & innovation project team and requires practice to get right.

2. Advocate > judging

Advocating doesn’t mean thinking all innovation projects are great and should move forward. Advocacy is the mindset that VCs use when creating the metrics, or ways to assess, in the investment cycle described earlier.  Milestone-based funding cycles rests on advocacy: it’s less about “is this data good or bad?” and more “what does this data tell us about what we should do next?” If the innovation team of a logistics firm ran an in-market test to gauge response rate on an email to drivers about a new coaching program, a judging approach might say, “The response rate was < 10%, so this new idea won’t work.” Instead, a VC-minded leadership group would respond, “Do you think trying a different channel, like texting, might yield another result? What are the cheapest or fastest ways to test that?”

Advocating is really a more nuanced way to manage risk, meaning it works because the leadership team (VC) and entrepreneur (innovation team) together are really focused on testing the key assumptions their new venture rests upon. Innovation teams and leadership teams work together to put metrics against assumptions (i.e. to demonstrate traction with customers, 25% of drivers need to respond). And then, when assessment time comes around, advocacy provides the flexibility to respond in a more nuanced way (let’s try one more channel, and if that doesn’t get a 25% response rate and other assumptions aren’t being proved true, we should shelve this new idea).

An innovation leader at a major financial institution described advocating as part of a growth, or learning, mindset that is not just essential, but a responsibility of leaders in charge of growth through innovation.

“Leaders need to take responsibility too. It’s a leader’s responsibility to have a learner’s mindset about innovation and how it’s different from how we manage the core part of our business. When they fail in that respect, it sets the innovation team up for failure, too.”

3. Portfolio view > Project view

Executives responsible for innovation-driven growth should always be thinking about the collection of their efforts as a portfolio. VCs don’t just invest in one or two innovation projects (startups), they create a portfolio (fund) that includes a variety of projects. They invest in a collection of startups because:

a) They know that they have the capability to support and scale them and

b) They are counting on some startups in the portfolio succeeding and others not succeeding. Success is usually defined as an exit from the fund, via purchase or IPO.

Most innovation teams are like the entrepreneurs: highly focused on their 3-4 startup(s), all at varying stages: some, just ideas, others, concepts, MVPs or maybe even ventures. The mistake is that their leadership teams view the projects individually also, rather than looking at them as a strategic portfolio of growth efforts. Leadership team should think more like how VCs think: about the collective financial returns of a portfolio, which can only result from scaling and exiting.

Manage your portfolio of innovation projects 

Ensure that they produce the financial returns your firm expects.

1. Say no to projects that don’t provide the financial returns your investors demand.

Good leadership teams have some sort of measurable goal around financial growth. To do this, they say “no” to project requests that don’t fit this mission (teaching, as an example). It’s most difficult to say “no” in early stages of a corporate innovation function as the number of ideas and pitches grow quickly, as peers learn about this new innovation function. Many innovation teams take the number of interested internal partners as a sign of value, but then they quickly realize that taking everything on diluted their ability to run a tighter portfolio well. They also say “no” by shelving projects when in-market testing does not demonstrate traction with customers or with a profitable business model. Hanging on to projects that aren’t showing traction because they are “favorites” or are good for PR actually distracts resources from projects that are showing good results in in-market testing.

2. In an organization, scaling & exiting only happens with a business unit. 

The good part about innovating inside an organization is that there are resources— monetary and know-how—on how to scale and make money off a product or service. Innovation leadership needs to think of business units as their “exit”— where they’ll make the financial returns expected of them by their organization. Here’s how an innovation leader at a leading science and manufacturing firm gets 100% commitment from the business unit upfront, which is key to ensuring a strong exit:

“I’d have folks in the business who would want to come work with me and the innovation team, and I would ask them 2 questions:
‘Have you put any resources against the project yet?’
If not, I would say, ‘I can’t start until you put funding in.’ Making them invest served as a concrete way to know that they were serious about seeing these kinds of projects through because they had skin in the game.
‘Is this in your long-range plan? Are you making promises to senior management about getting this done?’
If their answer was no, I would say, ‘OK, I can’t start the project.’

So, as you ask your innovation team to act like entrepreneurs, ask yourself, “am I and other members of the leadership team acting like VCs, like true growth partners? How can I take steps towards investing, creating a portfolio view, and advocating in partnership with my innovation team?” We think you’ll find this to be the missing piece to your corporate innovation puzzle.

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