applying start up concepts to enterprise innovation · applying start-up concepts to enterprise...

Applying Start-up Concepts to Enterprise Innovation Abstract Why does so much of the truly disruptive innovation occur outside of large enterprises today? It is because it is difficult for an established company to innovate as historic success builds barriers that perpetuate the way things are instead of what they could become. The implications of digital transformation and the associated benefits of innovating are rapidly accelerating as technology is becoming infused into every aspect of business. Emerging technologies fuel innovation while innovation drives new emerging technologies. But how does this translate in a large enterprise?

Building a sustainable enterprise innovation program requires a fundamental change in thinking. It starts with establishing an “entrepreneurial-like” model for product and business owners in the enterprise. This report covers four aspects of innovation that are not typically addressed as part of a digital transformation program; mindset, focus, risk management, and financing. While these are not mainstream “technology” topics, how an enterprise approaches these subjects can accelerate or stifle innovation.

TechVision has been looking at innovation and digital transformation for a while, producing reports such as “Enterprise Innovation,” “The End of EA and IT as We Know It,” and “Organizational Transformation is the Key to Digital Transformation.” This report continues our focus on innovation with specific recommendations for IT and business leaders. Future reports will define a new reference architecture for innovation, applying startup tools and techniques to accelerate enterprise innovation, architectural and organizational topics such as microservices and DevOps, and others as they emerge. It is time to leverage entrepreneurial skills within the enterprise to achieve sustainable innovation.

Author: Gary Zimmerman Principal Consulting Analyst/CMO [email protected]

mailto:[email protected]

Applying Start-up Concepts to Enterprise Innovation

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2 © 2017 TechVision Research, all rights reserved www.techvisionresearch.com

Table of Contents

Abstract .................................................................................................................................................................................. 1

Table of Contents ............................................................................................................................................................... 2

Executive summary and key advice .......................................................................................................................... 4

Introduction ......................................................................................................................................................................... 6

Customers ......................................................................................................................................................................... 6

Performance .................................................................................................................................................................... 6

Position .............................................................................................................................................................................. 7

Model .................................................................................................................................................................................. 7

Talent .................................................................................................................................................................................. 7

Digital Transformation ............................................................................................................................................... 8

Process innovation ....................................................................................................................................................... 9

Customer experience innovation .......................................................................................................................... 9

Product innovation ...................................................................................................................................................... 9

Disruptive innovation .............................................................................................................................................. 10

The innovator’s dilemma ....................................................................................................................................... 10

Recommendations ..................................................................................................................................................... 11

Comparison of two worlds. ........................................................................................................................................ 11

Mindset ................................................................................................................................................................................ 12

Entrepreneurial Thinking ...................................................................................................................................... 12

Entrepreneur ............................................................................................................................................................... 14

An Entrepreneur’s day ............................................................................................................................................ 15

Product Owner ............................................................................................................................................................ 16

Product Owner’s day ................................................................................................................................................ 16


Focus ..................................................................................................................................................................................... 19

Managerial Focus ....................................................................................................................................................... 19

A gap between plan and actual – Performance problem ................................................................... 19

A gap between actual and possible – Opportunity ............................................................................... 19

Entrepreneurial Focus............................................................................................................................................. 19


Risk Management ........................................................................................................................................................... 20

Enterprise Risk Management ............................................................................................................................... 20

Customer Risk ............................................................................................................................................................. 22

Obstacles and Challenges .................................................................................................................................. 23

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Technical and Operational Risk .......................................................................................................................... 23

Market and Financial Risk ..................................................................................................................................... 23

Focus Risk ...................................................................................................................................................................... 24

Startup Risk Management ..................................................................................................................................... 24


Finance ................................................................................................................................................................................. 26

Traditional Business Case ...................................................................................................................................... 27

Traditional accounting ............................................................................................................................................ 28

Internal rate of return ........................................................................................................................................ 28

Net Present Value ................................................................................................................................................. 29

Startup Business Modeling.................................................................................................................................... 30

Business Model ...................................................................................................................................................... 30

Minimum success criteria ................................................................................................................................. 31

Traction ..................................................................................................................................................................... 32

Validating Traction .............................................................................................................................................. 32

Innovation Accounting ....................................................................................................................................... 33

Innovation Options .............................................................................................................................................. 34


Conclusion .......................................................................................................................................................................... 36

About TechVision Research ....................................................................................................................................... 38

About the Author ............................................................................................................................................................ 39

Other related TechVision Research works ......................................................................................................... 40



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Executive summary and key advice

For most enterprises, the future is becoming less and less predictable. The rate of change and the impact of these changes are growing exponentially. Changing to survive and to prosper is not just consultant speak, it has become a reality for most businesses. Customer preferences change, competitors gain traction, and new technology emerges that invalidate years of success. Just ask Nokia, Research in Motion (blackberry), Yahoo, Kodak, Blockbuster, and dozens of other market leaders that are no longer competitive in the market they once dominated. Every company must scan the environment for fault lines in the foundations of their business model. Once faults are detected, be prepared to take action; because those faults foretell a destabilized future; making what was once predictable, unknown.

Innovation is one of the areas that everyone talks about, but few have been able to properly balance innovation and core products and services. “If it ain’t broke, don’t fix it” is a dangerous path given the disruptive change today and for the foreseeable future.

The best way to handle an unknown future is to make the organization fungible through digital transformation. But transformation isn’t just about IT, it’s about flexibility in product portfolio, delivery channels, monetization, organizational structure, and competitive response. This flexibility is required to foster the innovation necessary for continued success.

There will, of course, be brand new disruptive enterprises established over the next decade; but there is also an opportunity for existing category leaders to embrace innovation build on the advantages they already have. This is where Wall Street meets Silicon Valley; where established companies figure out how to properly embrace innovation as a sustainable competitive advantage.

But it’s hard for an established company to innovate because a company’s success builds barriers that perpetuate the way things are instead of what they could become. In business school, you were taught to always listen and respond to the needs of your best customers, and focus on those innovations that promise the highest returns. Overcoming these barriers, requires going beyond creating a fungible organization. It requires changing our mindset, and our perspectives on focus, risk management and finance.

As business executives our natural mindset is to think of things in terms of predictable outcomes brought about by a familiar frame of reference and bounded by our existing business model. But an unknown future requires a different perspective as we outline in the Mindset section of this report.

Operational leaders focus on managing the differences between plans and results. As the environment changes, our focus changes as to one of keeping the business aligned with market needs. We discuss this approach in the Focus section of this report.



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As managers and stewards of the business, we must also manage risk. When the future is predicable, managing execution and measuring ROI is a proven method of managing risk. When dealing with the unknown, managing risk should be seen in terms of managing acceptable loss. We describe this approach in detail in the Risk Management section.

Finally, as managers with fiduciary responsibilities, we focus on keeping things on time and within budget. In an environment with an unknown future, investments should be focused on removing risk before building out full capacity. We provide details on innovation accounting in the Finance section of the report. This is an example of how innovation needs to be better embedded into existing business processes to improve the prospects of real innovation in the enterprise.

We recommend that leaders reserve a pool of resources for innovation so that internal entrepreneurs (intrepreneurs) can innovate without having to fight the inertia of an organization optimized to execute in the existing model. Use that pool to invest in innovation as modeled by venture firms. Place many small bets rather than a few big ones and continue to iterate. That increases the overall chance for success when the future is unknown.

Keep in mind that the dog-eared startup mantra “fail fast” is not about failure, it’s about validating assumptions, and changing course as you progress towards your goals. Innovations should be managed using different measures of success and to some extent, different planning cycles. The early parts of the innovation cycle are not about revenue contribution, they are about removing risk. Rewards for success should be focused on meeting the metrics associated with removing that risk. Investment cycles should be tied to the milestone attainment, not just the corporate budget cycle.

While there are no guarantees that these recommendations can deliver success, they can provide a way to identify and remove the risks encountered along the path to the future, predicable or not. They can also mitigate the risk of being the next Blockbuster.



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Introduction

So what is innovation? We’ll start with a formal definition.

nnovate - in·no·vate / ˈinəˌvāt / verb Make changes in something established, especially by introducing new methods, ideas, or products. Introduce something new, especially a product.

So why such a focus on innovation today? In 1965, the average tenure of companies on the S&P 500 was 33 years. By 1990, it was 20 years. It's forecast to shrink to 14 years by 2026. Studies suggest that about 50 percent of the S&P 500 will be replaced over the next 10 years through bankruptcy, merger and acquisition, and disruption.

What does all of this mean for leaders and organizational decision makers? First, it's a reminder of a general principle first articulated in the Harvard Business Review: A company cannot endure in the long term without reinventing itself. Which means leaders have to be vigilant for "fault lines"--the weakening foundations in your business model, or the shifting needs of your customer base. Fault-lines include your business model, customer needs, performance metrics, industry position, and ultimately, internal talent/capabilities. The fault lines focus on the fundamentals: whether the business serves the right customers, uses the right performance metrics, is positioned properly in its industry, deploys the right business model, and has employees and partners who possess the required capabilities1. To discover these faults, you need to continually seek the answers to these questions.

Customers • What are the top unmet needs of your customers? Do they vary across different

types or groups of customers? • Do customers you don’t currently serve have emerging unmet needs? If so, does that

signal an opportunity that a new competitor could seize? • Are your customers loyal to your product, or are they captive for lack of other

options? Would they defect if they could? • As a B2B company, do the needs of our business customers conflict with those of

end consumers? • Could emerging technology simplify how end consumers’ needs are met?

Performance • Do you understand what your customers really value? How well does the

performance of your product or service match the customer’s definition of value? • Will the customers of tomorrow define quality differently from the way today’s

customers do? • How closely do your customer satisfaction and financial metrics correlate? Are your

1 “Knowing When to Reinvent Detecting marketplace “fault lines” is the key to building the case for preemptive

change.” by Mark Bertolini, David Duncan, and Andrew Waldeck, Harvard Business Review, 2015

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customer satisfaction scores as strong as your financial indicators? • Are you measuring units and volumes, or outcomes? If outcomes, are you measuring

ones that matter to your customers, or ones that matter internally? • Do your products or services have more features or complexity than most of your

customers value? • Is there a new metric that aligns with the needs of future customers?

Position • Are regulatory, technological, or other external developments lowering barriers to

entry to your industry or changing how your current customers consume your products?

• Are external forces diminishing the value of your role in the industry? • Is a disruptive technology emerging that could significantly change the cost-value

equation in a major part of your industry? • Are your customers starting to bring your services in-house or to outsource them to

someone else? • Is your industry expanding to include new kinds of competitors? • Is there consolidation among major players—signaling that it’s becoming harder to

make money in the traditional way?

Model • Is at least one emerging competitor in your industry following a different business

model—even if at the moment that model looks financially unattractive? • Is the way you make money aligned with how value is created for customers? Are

customers balking at price increases or added fees?

• How durable are the key components of your existing business model—things like the customer value proposition, resources and processes, and the profit formula? Are any at risk of being undercut by external forces or new competitors?

• Will the strategic assumptions that underlie your existing model—assumptions about risk, differentiation, and growth—hold true as your industry changes?

Talent • Will you be addressing customer needs that require new skills to be brought on

board? • Do you have enough emerging leaders who are excited by the prospect of

transformation? • Have your company and industry struggled to attract tech-savvy talent? • Do the leaders of your business view talent as their responsibility, or is it relegated

to HR? Once faults are detected, is the company willing to innovate, even if the current business metrics currently show success? If so, by what means do they change?



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TechVision has developed a methodology and workshop to walk organizations through an innovation assessment and action plan. Reading, understanding and considering the advice in this report is a great starting point and there will be more to come. TechVisision also works directly with clients in helping organizations move towards a more innovation-centric model. We’ll now look more deeply into the big prize: Digital Transformation; and then consider how this is achievable via consistently executed innovation programs.

Digital Transformation For many, the faults described above are the forcing functions for digital transformation. We at TechVision Research have written several pieces on the topic. It is a main focus of most enterprises, and many have projects in place expected to last for years. Digital transformation helps an organization to keep pace with emerging customer demands now and, if sustained, in the future. Digital transformation enables an organization to better compete in an economic landscape that's constantly changing as technology evolves. To that end, transformation is necessary for any business, nonprofit or institution that seeks to survive into the future. But it’s not just about the application of technology.

Galen Gruman, Executive Editor, InfoWorld said it best when he wrote, “What should digital transformation mean? The key is in an ugly word that "transformation" weakly implies: "fungibility." Fungibility means the ability for something to be changed. That's not the same as the ability to change something; fungibility is an intrinsic characteristic, not a force imposed by an external source. Transformation is the act of making substantive change; fungibility is the intrinsic ability to be substantively changed.” In the end, enterprises need to be fungible.

What does that mean in practice? It means you design the business so it can easily change. In IT, we create fungibility in process and organizational structures through agile development and DevOps. We create it in the applications through API platforms, Microservices, and Data-centric architectures. We build out a set of identity services that provide flexibility in engaging internal and external parties, “things” and relationships while maintaining proper privacy protection. We create it in infrastructure through Cloud and containerization deployment strategies.

Companies are no longer building software or running IT strictly for cost savings and operations, but rather IT has become the primary driver of business innovation. Embracing this shift requires everyone in the company to rethink the role and impact of IT in their day-to-day experience, including product innovation. Successful companies will earn significantly more revenue from digital products, will deliver those products more profitably, and maintain a better P/E ratio than their “analog” competitors. And once you've digitized your products and services, new possibilities arise. Your products are not simply digital copies of the originals, and in fact can provide more value and engagement when they are not. The more fungible you make them, the more engaging they become.

How do we apply the same notion of fungibility to all aspects of innovation? How do we create products that are fungible based on market changes? How do we create fungibility in



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the way we market to our prospects and support our customers? By appropriately infusing customer focus, business model flexibility, and risk reduction into our projects the way startups do.

While fungibility is key to long term viability, not all innovation projects demand disruption. Development efforts fall into four general categories, each carrying a different level of predictability and therefore risk. We’ll now take a look at each innovation category.

Process innovation Process innovation may sound comparatively dull, but it is the bread and butter of corporate innovation. In most large companies, lots of people are involved in internal processes that allow the company to run smoothly and legally. These are the people in middle management, human resources, accounting, finance, administration, customer support and the like. In general, they recognize processes that do not work well and have ideas about how to make those processes more efficient. Innovating around their ideas improve efficiency and help companies save money.

Customer experience innovation Customer experience innovation refers to all aspects of corporate-customer interaction, including: marketing, sales, delivery, customer service and everything in between. Although this comprises a diverse range of activities from advertising to after-sales service, the focus should always be the same: how to better serve your customers. Better marketing can provide more information to customers as well as remind existing customers that they made the right choice by selecting your products. Better after-sales service can make all the difference between a making a single sale and developing a long-term relationship of multiple sales.

These days, as there is less and less to differentiate one product from another, customer oriented innovation is one area where many companies try to differentiate themselves from the competition.

Moreover, every act of innovation generally requires customer experience innovation to ensure value is successfully delivered to the customers.

Product innovation When most people think of corporate innovation, they think of product innovation, in particular, launching that stunning new product that brings in billions in revenue, makes them industry leaders and puts them on top of the Fortune 500.

While such innovation is noteworthy, it is not the only path forward. It is equally important to solicit incremental product innovation from your company. Small improvements in your product are not only easier to come by, but can help keep you one step ahead of the competition. Moreover, small improvements are easier to sell and generally do not require big changes in your business. These are the sustaining innovations that make up the bulk of a product’s roadmap.

But when that big idea for a radically new product – the one that will take the market by storm – comes, it can push you into an unknown future.



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A radically new product also demands an innovative marketing approach that will allow you to bring the product to market successfully. Introducing a radically new product to your customers is in large part about educating your customers to your product and helping them realize how much they need or want your product. And a radically new product may change how you company delivers value to the customer. Each of these impacts add risk to the effort.

Disruptive innovation Disruptive innovation is rare because it is about fundamental changes in how a company operates. And in a large company, that is about the most difficult task of all. This is the most difficult type of innovation in that it displaces an established order, disintermediates players within a value chain, and fundamentally changes customer behavior. Netflix is held up as the ultimate example of disruptive innovation. First it disrupted the video rental market by replacing brick and mortar stores with websites and mail order. Then it disrupted its own business model when it shifted from mail order delivery to video on demand streaming. It’s now experimenting with original programming as a way to distance itself from on-demand competitors.

When we venture beyond the comforts of sustaining innovation into radically new product or disruptive innovation, we run into something called the innovator’s dilemma.

The innovator’s dilemma It’s hard for an established company to innovate because a company’s success builds barriers that perpetuate the ways things are instead of what they could become. In business school, you were taught to always listen and respond to the needs of your best customers, and focus on those innovations that promise the highest returns. By adhering to these best management practices, companies create what Clayton Christensen calls the innovator’s dilemma. Companies must reinvent themselves through disruptive innovation, but can’t because what makes them great becomes a barrier to change and is what will ultimately cause them to fail.

• The focus of an established firm is to execute an existing business model — to make sure it operates efficiently and satisfies its customers. Anything that’s counter to that focus is met with resistance.

• With little tolerance for risk, established firms want their new ventures to produce revenue “right out of the gate” in a predictable way.

• Established firms tend to not have established processes in place to nurture and develop innovation, and in fact, the enterprise is stubbornly efficient at killing the innovation completely before it has time even to be fully invented.

• From a personnel perspective, a manager can suffer tremendous career setbacks if



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they support a failed project. If it failed because of the technology performance, then it’s less harmful, but if it failed because there was no market for it, it’s highly damaging and personally risky.

• Even if the company decides to pursue a new technology, its own cost structure and value network can cause it to fail. That’s because it’s built to support the existing technology.

• Established firms try to take the new technology and push it onto their existing customers, which typically reject it, while the new entrants find a new market, or new type of buyer for the technology.

While not all companies are to the point that they require disruptive innovation, all established companies exhibit resistance to change. This can make innovation and new product development efforts frustrating, expensive, slow, regulated, and ineffective. At its best it’s like swimming against the current, at its worst it’s Napoleon’s Waterloo.

That’s why the burden of innovation has been largely ceded to startups. Large corporations and established businesses are expected to out-think their rivals, but more often we see that they rely on minor product updates or acquisitions in place of more radical innovation.

But, corporate entrepreneurs (intrepreneurs) have assets and capabilities that give them advantages over startups. There are many startups that could probably be blown out of the water if a large company decided to compete instead of acquire. Established companies have substantial assets that, if leveraged, can provide significant unfair advantages over startups trying to tackle the same opportunity. The key is unlocking those assets, and unlocking those assets requires fungibility in the way you carry out innovation.

Recommendations • Enterprises need to continue to scan the environment for faults. When faults are

detected, quickly evaluate whether they can be addressed within the existing business model (sustaining innovation) or require something more disruptive.

• Minimize risk to existing customers and revenues by isolating discovery and development efforts so as not to impact the core business until necessary.

• Look at digital transformation, not as just an IT transformation but as effort to create a fungible enterprise.

Comparison of two worlds. There has been lots of work over the last few years to explore what startups are doing to be successful and what enterprises can do to adopt those practices. Most focus on the tools used to create experiential learning and market validation. Often, they deploy simple models to articulate the “what and how” of discovery. But these simple views of how these practices should transform the enterprise do not take into account the disruption they could cause in a company with a successful business model. At TechVision Research, we believe the particular situation (or fault profile) and type of innovation should guide when these startup practices are used. The rest of this report describes four areas where the



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enterprise and startup models diverge and provides recommendations on when to apply aspects of each model. The table below outlines the areas covered.

Startup Enterprise Mindset Effectual / creative Causal / predictive Focus Meeting market need Managing the gap Risk Management Lean experiments Gate reviews/contingencies Finance Innovation Accounting Traditional Accounting

Table 1

Mindset Most of us prepared for a future we expected, and yet the future isn't working out as planned. As leader in the business, you are wrestling with constant growth demands, disruptive technologies, and new competitors who seemingly come out of nowhere to upend your industry. All of this can be confusing and upsetting. This is not how we were told it was going to be. Growing up, we were led to believe the future was predictable and we learned the steps with dealing with a predicable universe.

• You forecast how the future will be.

• You construct a number of plans for achieving that future, picking the optimal one.

• You gather the resources necessary to achieve the plan.

• And you execute the plan to make that future a reality.

We are so indoctrinated in this way of thinking it is our default approach for every problem. It works well when things are established; not so well when the only constant is change. If your company is not redefining itself, it soon will; if not, it may eventually cease to exist. So how do you cope with this brave new world? You have to stop thinking like a manager and start thinking like an entrepreneur.

Entrepreneurial Thinking This difference in thinking that is used by entrepreneurs has been researched extensively by Saras D. Sarasvathy's. Her work identified that when making decisions and determining a course of action, entrepreneurs use effectual reasoning whereas managers use causal reasoning.

The management-preferred causal reasoning sets a tangible goal and then seeks to secure the best possible means/resources to achieve it. The entrepreneur-preferred effectual reasoning evaluates the uniqueness of the means/resources that the entrepreneur can access and then leverages the unfair advantage attached to those means/resources to determine the best possible fit for an as yet to be determined goal.

The word “effectual” is the inverse of “causal.” In general, in MBA programs across the world, students are taught causal or predictive reasoning – in every functional area of



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business. Causal rationality begins with a pre-determined goal and a given set of means, and seeks to identify the optimal – fastest, cheapest, most efficient, etc. – alternative to achieve the given goal.

The make-vs.-buy decision in production, or choosing the target market with the highest potential return in marketing, or picking a portfolio with the lowest risk in finance, or even hiring the best person for the job in human resources management, are all examples of problems of causal reasoning.

Effectual reasoning, however, does not begin with a specific goal. Instead, it begins with a given set of means and allows goals to emerge contingently over time from the varied imagination and diverse aspirations of the founders and the people they interact with.

While effectual reasoning lets the goals emerge, we at TechVision believe the goals are still in support of the corporate strategy. For instance, if the enterprise detects a fault in its business model foundations it may have to rethink its approach to the market. The leadership knows they need to reshape the model. That sets the strategy. They may not yet know what shape the end-state model will take and that’s when entrepreneurial thinking can provide an advantage.

This table shows the different approaches taken based on Sarasvathy's thinking style.

Effectual Causal Start with your means – When entrepreneurs set out to build a new venture, they start with their means; who they are, what they know, whom they know. Then, entrepreneurs imagine possibilities that originate from their means.

Pre-set groups or opportunities – Causal reasoning works inversely by assembling means (resources) after a goal is set.

Focus on the downside risk – Expert entrepreneurs limit risk by understanding what they can afford to lose at each step, instead of seeking large all-or-nothing opportunities, they choose goals and actions where there is upside even if the downside ends up happening.

Expected return – Causal reasoning first targets a return then works to minimize associated risk.

Leverage contingencies – Expert entrepreneurs invite the surprise factor. Instead of making “what if” scenarios to deal with worst-case outcomes, entrepreneurs interpret bad news and surprises as potential clues to create new markets.

Avoid surprises – Causal reasoning works to minimize the probability of unexpected outcomes.



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Effectual Causal Form partnerships – Expert entrepreneurs build partnerships with self-selecting stakeholders. By obtaining pre-commitments from these key partners, early on in the venture, experts reduce uncertainty and co-create the new market with interested participants.

Competitive analysis – Causal reasoning presumes that keeping things “close to the vest” reduces competitive and reputation risk.

Control v. Predict – By focusing on activities within their control, entrepreneurs know when their actions will result in the desired outcomes. An effectual worldview is rooted in the belief that the future is neither found nor predicted, but rather made.

Inevitable trends – Causal reasoning accepts that established market forces will cause the future to unfold.

Table 2

Sarasvathy describes an entrepreneurial environment where the innovator is free to define the future. Established businesses must operate in a world of investor expectations, where the market rewards growth and predictability, often quarter by quarter. And not every innovation effort requires an entrepreneurial mindset. Causal thinking is implied in many improvement efforts, especially those associated with lean and six-sigma techniques. Those disciplines analyze existing processes to remove defects and eliminate efforts that do not produce customer value.

We believe there needs to be a balance between effectual and causal thinking across the different types of innovation efforts. That said, we also caution against betting on assumptions based on strictly managerial thinking. Those assumptions can cause you to miss addressing the faults we described in the introduction to this report. Let’s contrast the entrepreneur and an enterprise product owner to illustrate the extremes.

Entrepreneur The term “entrepreneur” is a French origin which means “go between” or “between-takers.” An entrepreneur is a person who creates a new enterprise by assembling available means (labor, technology, and capital) for production purposes. He/she assumes all risk and uncertainty, in order to achieve profit and growth of the business venture by identifying new opportunities and combining resources for the purpose of capitalizing them. He/she innovates new ideas and business processes. The entrepreneur’s primary functions are

• Bring visions to life

• Raise money and support

• Make money

• Take risks



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An Entrepreneur’s day Neil Patel is the Co-Founder of marketing startups KISSmetrics and Crazy Egg. In one of his blog posts, he shares what his typical day looks like:

6:45 am – the start of the day – before I even get out of bed in the morning, the first thing I do is grab my phone to see all my missed calls, text messages, and emails that I need to respond to. I usually respond to everything while lying in bed.

7 am – the workout – every morning I try to hit the gym. My workout isn’t that rigorous. I usually lift some light weights, run on the treadmill while watching TV, and then head into the steam room to relax.

8 am – getting dolled up – although I am a guy, it takes me a while to get ready in the morning. From showering to styling my hair, I spend around 30 minutes every morning getting dolled up while watching CNN.

8:30 am – the most important meal – While eating, I go over what I have to get accomplished for the day, and I what items in need to delegate.

9 am – communicating with the world – I get bombarded with so many emails every day, that I spend hours in my inbox, reading and responding to emails. Most of my emails are from people asking for help, people asking for money, or people who are looking to meet up or schedule a call with me.

10 am – talking people’s ears off – if I don’t talk on the phone, I don’t end up closing deals. So, for two hours in the morning, I try to talk with potential clients and other entrepreneurs to figure out how I can grow my company’s revenue or bring more cash into the business through other means.

12 pm – enjoying a free lunch – I typically have lunch meetings with perspective clients on a regular basis. Many of these meetings don’t result in new revenue for my startup, but the few that close have a big impact on the business.

1 pm – communicating with the world – whether I have a lunch meeting or not, I am always backlogged with emails. So, for another hour, I respond to emails and work on setting up meetings and calls for upcoming days.

2 pm – random crap – I always have random stuff that comes up within the day that I need to complete. I usually do it during this time to give myself a little break so that I don’t get burned out.

3 pm – talking people’s ears off – a few hours of phone calls during the morning isn’t enough. I usually spend the next 2 hours on phone calls or in-person meetings.

5 pm – happy hour – happy hour is truly the highlight of my day. I love drinking while shooting the sh*t with potential clients. I try to do this on a daily basis. If I am unable to do a happy hour meeting, I am typically checking emails.

6 pm – communicating with the world – as usual, I am back to emails. I really enjoy helping other people as people helped me when I was a new entrepreneur with no money. So, for



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me, emails aren’t a chore, they are a blessing.

7 pm – my last meal – I usually don’t have too many dinner meetings. I typically eat out with friends.

8 pm – communicating with the world – responding to emails again…

9 pm – living a peaceful life – from writing blog posts to hanging with friends to just relaxing and watching TV or even finding out ways to help local non-profits, for the rest of the night, I just chill. All of the things I mentioned help me relax and feel happy, which relieves most of my stress.

11 pm – communicating with the world – if I am still awake, which I usually am, I end my night writing more emails and falling asleep in front of my computer screen.

The entrepreneur’s day is long and outwardly focused. It is all about growing the business or helping others grow theirs. Most of all, it shows that startups are conversations, not capital projects. There are many similarities to “product owners” in large enterprises and we’ll describe the product owner task list next.

Product Owner In the modern tech company the product owner (manager) can best help the organization figure out what to build, ensure successful delivery, and incorporate user learning back into the company to further improve the strategy and product.

The product owner gets the things done through leveraging corporate resources and the efforts of others, with the aim of accomplishing business objectives efficiently and effectively. The primary functions of a product owner are to:

• understand the market,

• develop product strategies,

• create usable product development documentation,

• bring products into (and out of) markets

• develop customer relationships,

• and bridge every department that touches the product.

Product Owner’s day While this isn’t attributed to any particular product owner, it is typical of how product work is accomplished within the enterprise.

8 am: Wake up and check the Outlook mail app on my phone to make sure there aren’t any high priority issues that popped up overnight. Immediately after, I usually check my company’s Slack to see if I got any new direct messages from anyone that need to be immediately addressed.

I remind myself what a terrible morning habit it is to wake up and be reactive to email / Slack but it’s something I haven’t been able to avoid lately. I stretch for 20 minutes while



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listening to a podcast, and then hop onto my laptop to read some industry news and blogs to make sure I’m up to date.

9 am: I head into the office and eat some breakfast while checking my Asana (where I keep track of personal tasks) to see what P1 items I need to get completed for today. There are a few comments/feedback on a feature spec that I sent out the night before that I need to spend some time addressing or taking into consideration when editing the spec.

After 30 minutes, I take some time to respond to a few Zendesk tickets containing feedback sent in by our users. A few tickets contain some ideas for features and I make sure to document those ideas in our backlog to be prioritized later.

10 am: First meeting of the day. There’s a recurring product owner weekly sync where the product owners get together and talk about what they did last week, what they have going on this week, and any questions they might have for the rest of the group.

It’s a good way to get all the product owners aligned at a high-level on what’s going on or what we need to look out for since a lot of our products have a ton of overlap when it comes to user workflows.

10:30 am: Every week, one product family presents a product review to company executives and the rest of the product team. During the product review, a product owner presents an overview of recent launches and any available metrics, upcoming launches, top user needs, and a view of the broader product roadmap.

This week is my product family’s turn to present so I spend some time updating some slides and pulling relevant metrics and insights from Mixpanel / querying our database.

12 pm: I want to make sure that I’m not too swamped for the week so I grab lunch from the kitchen and spend the lunch hour working at my desk and occasionally taking breaks to respond to a few personal emails.

1 pm: For most software teams, updates to products are made in “releases” and within each release, there are a set number of tasks in the form of JIRA tickets (JIRA is a tool used by many engineering teams to document, plan, and assign task / improvements / features / bug fixes) that should be completed.

To make sure that all code changes are properly accounted for and tested before releasing live on production (in simple terms, code in “production” is anything that is live for users), our engineering team does a code freeze at the beginning of the week at which point it’s up to product owners or quality assurance (QA) to start testing any JIRA tickets that were slotted for the release.

I spend some time testing any tickets that are relevant to my product family to make sure that they are working as intended in our products and then close out the tickets or re-open any tickets that I notice still have bugs or need extra work.

2 pm: I head into another cross-functional team meeting for my product family. This meeting brings together any relevant stakeholders for the product family including members of the Engineering, Design, and Operations teams. Every team provides quick



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updates on the status of the projects they are working on and we collectively discuss any roadblocks or ongoing issues.

2:30 pm: We are in the process of re-designing our product family’s mobile web-app and the designer on the project has already completed a prototype on Invision to test with users. Our goal is to sit down with a few user volunteers and conduct a few usability tests to see what parts of the re-design could be improved.

I’ve written a test script of questions / tasks that we’d like to ask users to complete on the prototype and I spend an hour reviewing the script with the designer to make sure I’ve covered all elements of his re-design.

3:30 pm: Another work block to finish up some ongoing tasks for various projects. I answer a few questions from an engineer about some spec details for a feature he’s working on and check in with our Operations team to review a launch email that we have queued up for that feature launch later in the week.

5 pm: I finish up my slides for the product review slide deck, review some changes suggested by my program manager.

6:30 pm: Head home for the day.

The product owner’s day is scheduled and inwardly focused. It is powered by support applications and internal meetings. It is about keeping the projects on track and efforts coordinated.

Each of these illustrations shows an extreme. Entrepreneurs outwardly focused to the exclusion of internal coordination, product owners inwardly focused, missing out on the opportunity to understand the market. The truth is somewhere in between. Entrepreneurs need to spend time working process and finances. Product owners need to spend time “outside the building,” and thinking in more effectual ways. Product owners and leaders within enterprises need to find the balance between traditional product thinking and the entrepreneurial mindset.

Recommendations • You can’t predict a future that is unknown. Resist the habit of using causal thinking

to areas that require effectual thinking.

• New products may require new business models based on how the customer wants to engage. Product owners may need to think beyond the features of their product to other aspects of the business model in order to succeed.

• Focusing exclusively on items external to the business can invite internal mechanics to break down. Focusing exclusively on internal efforts can cause you to miss changes in the market. A balance of external and internal attention should be maintained in order to keep things progressing.



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Focus Managerial Focus Managerial focus is the way we view the world while it is predictable. Leadership sets the direction for the company and commits to investors to deliver results. Those commitments cascade through the layers of the organization as strategic and tactical plans and goals. Every time managers take an action or make a plan, they do it with the belief that if they take the actions they envision, they’ll get the results they need. But sometimes the plans and actions miss the mark, more often than not for the bad, but sometimes for the good. In established enterprises where predictability reigns, company problems are first seen as gaps.

A gap between plan and actual – Performance problem

When a manager sees a gap between what was supposed to happen and what actually did happen, between objective and accomplishment – the manager knows there’s a problem. Sales below quota, profit margins lower than plan, market share losses, products that don’t deliver the ROI promised are all first recognized as gaps. These gaps are the problems that must be addressed to meet the expectations of investors. These become the target outcomes managers marshal their resources to achieve.

A gap between actual and possible – Opportunity

Managers also see gaps between performance and possibility. These gaps are what we call opportunity. Opportunities represent areas where an organization can exceed expectations. Sales could be higher, margins better, customers happier, product growth ahead of plans are also first recognized as gaps.

These gaps drive the next round of plans and actions around products, sales and marketing. And the plans and resources are ultimately reflected in the budget. For many enterprises, the end of the fiscal year, for most it’s November, is budget “lock-in” season. Organizations around the company are explaining how they are going to contribute to the company strategy and next year’s corporate revenue and profit goals. As a product owner, you’re “singing for your supper;” asking for budget, explaining the progress you’ve made, and committing to your targets. Once the budget is set, as John Steinbeck says in Cannery Row, “the world is once again spinning in greased grooves.” You begin executing your plan, managing the schedule you created, resources you have been allocated - all focused completing your objectives. You are in control.

Entrepreneurial Focus Successful entrepreneurs know that no startup ever has enough time or money. If it takes too long for you to align the company with a market need, you run out of money and lose your business. That’s what ultimately defines the entrepreneur’s focus, aligning the company with a market need before running out of time and money. That means the successful startup must focus on customers and market from Day One. Why? Because more startups fail from a lack of customers than a failure of product development. Entrepreneurs know they aren’t in control, the customer is.



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To be truly successful, an entrepreneur needs to be ruthless with time management, opportunity management, and resource allocation. One of the most important, yet hardest skills of management is learning to say “no." Successful entrepreneurs have learned this mantra through time and experience and they tend to focus on things that add value, to them and their enterprise. Things that don’t matter – either immediately or in the longer run, are tuned out.

“People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully. I’m actually as proud of the things we haven’t done as the things I have done. Innovation is saying no to 1,000 things.” – Steve Jobs

Instead of having ten ideas in the brainstorming stage and not taking any significant steps forward on any of them, they instead take one idea and run with it until they have a minimum valuable product2 and see what happens to it.

And they know that if their product release is perfect, then they’re probably late to market. They believe the business world prefers agility and speed – it’s willing to work through imperfections to gain advancement, so they focus on the core need and address that well.

Recommendations • When working on sustaining innovation within the scope

of the current business model, minding the gaps is a good way to go. The focus is on execution and contribution.

• When working on new products or disruptive innovation where the business model is uncertain, focus on finding the right business model that delivers value to your target market.

Risk Management Enterprise Risk Management Risk assessment and mitigation in corporations is a highly complex topic. And rarely are the answers exact, no matter how much effort is expended to assess the types and levels of risk. At the enterprise level, the following objectives apply;

• protect value, for example, by ensuring a certain target rating, avoiding large losses or default, and avoiding volatility in the P&L.

• drive profitability and growth by using risk-management techniques to generate value, as reflected in a rising P/E multiple, as well as increased profit and return on equity, and encouraging controlled risk taking in innovation or R&D and investments.

2 Most literature calls this minimum viable product, not minimum valuable product. The shift in terminology matches the shift in thinking from customer utility (viability) to customer value.



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• ensure regulatory compliance, protecting the enterprise from negative regulatory intervention and avoiding penalties such as product-liability or safety claims.

• provide stability and continuity, ensuring the independence of the enterprise, avoiding unpleasant surprises for shareholders, providing a sustainable workplace for employees, minimizing negative externalities for society at large, and maintaining the confidence of business partners.

While Enterprise Risk Management addresses overall corporate risk, for many companies, innovation risk management is ceded to the business units. While innovation risk is more focused than corporate risk, half or more of corporate risk emanates from missteps in innovation efforts.

Earlier we described the different types of innovation efforts, process, customer experience, product, and disruptive innovation. Each type of innovation carries risk, but as innovation efforts move beyond applying technology to existing process, the risks increase.

In his work, Christensen replaced the term disruptive technology with disruptive innovation because he recognized that few technologies are intrinsically disruptive or sustaining in character; rather, it is the business model that the technology enables that creates the disruptive impact. Netflix understands the importance of a changing business model and the risk it implies and it has driven their evolution.

Figure 1 – Innovation Type Determines Risk

Businesses that are engaged in innovation are bound to be faced with risks, and it will be up to them how to manage these risks so as not to hamper the future plans of the business for growth and development. As shown in the above diagram, the risk increases as the unknowns increase. Improving known processes is clearly less risky than new product or disruptive innovation, but all present risks to revenues, brand, and market position if mishandled.



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Risk is traditionally mitigated through management of the development effort using a combination of business case management, and phase gate reviews associated with the new product development process. The business case, as initially presented, is rarely revised and becomes the program plan of action. So once approved, the risk shifts from business model (are there enough customers willing to buy what I’m building?) to technical risk (can I build this on time and within budget?), and the business model risk shifts to the final stages of delivery, when most of the investment is complete.

Figure 2 – Enterprise Risk Management

However, this is not the best way to manage risk, because technical risk, while important, is in the hands of the enterprise. The majority of new product development risk lies outside the enterprise.

Customer Risk Customer risk is a misalignment between the product and customer requirements. Simply put, the product may not be what the customers want and/or need. This misalignment is considered to be the main risk faced by businesses when it comes to new product development.

This risk is higher when you base your ideas for a new product merely on a whim, or without conducting enough market research. Businesses that are not in touch with their customers are also likely to suffer from this. For example, a business may decide to come up with a new product simply because they got hold of a new technology for it. Just because you can do it does not mean you should.

One problem often encountered by product developers is deciding on what features must be included in the product. Too few features may not deliver the expected value to customers while too many features move the product to a more sophisticated, but narrower position. There is a need to pinpoint exactly what these relevant features are, but doing so can be difficult without talking to customers.



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Obstacles and Challenges

Like any worthwhile activity, the process of finding and validating market problems is difficult, and time consuming. You need to spend time “outside the building” talking to and interacting with the market. There are a number of challenges you may face when trying to confirm your beliefs about the market:

• You may have difficulty getting “permission” to get outside the building to observe prospects and customers. Or you might only be “allowed” to visit customers when helping sales.

• You don’t have time to visit or talk to customers because you are being pulled in too many directions.

• You have a technology that people (inside the company) are convinced is a product, but which does not solve a market problem.

• The amount of learning you get from any individual customer or market interaction is usually small. It requires many such interactions to start to surface the weak signals that indicate significant market problems.

• There will be a lot of back and forth between your ideas for solutions, problems to be solved, the market you want to attack, and the technology you can bring to bear.

• It is hard to find customers to interview; you are not sure where to start. This is especially true for startup efforts that don’t yet have a customer base.

• Some customers only want to talk to you about how existing features can be improved or new features they want. This is legitimate feedback, but often does not reflect a deeper underlying new market problem that will enable you to grow sales or expand your market.

Getting past the obstacles is paramount as managing customer risk is key to innovation success.

Technical and Operational Risk The business may be developing an entirely new product that will provide new and better benefits to customers. It may also decide to modify its existing product by adding new features that will make it more appealing to the market. In these cases, it is probable that there will be technical processes that will have to be performed. These include the need for new technology or even new tools, machinery or equipment.

It is also inevitable, in most cases, that they have to deal with operational risks. For instance, there may be components that have to be supplied on a regular basis, and sourcing these materials can be a problem. Or significant process changes within the enterprise can cause disruption in service impacting customer experience.

Market and Financial Risk You can never do away with this risk when developing a new product. It is possible that the



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new product that you have developed will not be able to generate enough demand at a price that will bring profit for the business. The cost of production, as well as the costs of marketing the product, may not be covered by the selling price. This is the market risk, an external risk inherent in any new product development effort.

The high utilization of resources during the product development stage is also a downfall for most companies. Under the assumption that they will get better results if they throw more resources into the program, they will end up spending more than they should have. Thus, costs become unreasonably high. This is a financial risk associated with mismanagement.

Focus Risk There is the risk of starting product development too soon. A new technology enters the market, and the company immediately proceeded towards developing a new product based on that technology. This is an example of a product in search of a market.

It also happens when the company is still in the middle of pre-launching one product, and it is already starting another one. Bright shiny objects like new technologies or exciting product concepts are alluring, but can cause a company to lose focus and spread resources too thin causing risk to product success.

Managing risks in product development can be summed up in a few points:

• Most of the risks emanate from outside the company. Touch the market often throughout the new product development effort in order to avoid surprises at the end.

• Technical and operational risks are effectively managed through program plans and phase gate reviews.

• Maintain focus and discipline to avoid cost overruns and diversions.

The internal focus on program progress must be balanced with external confirmation, and the ability to manage both is required for desired outcome. Sustaining innovations can be managed most effectively using the company’s established risk management practices. Following the best practices outlined above will keep innovation efforts on the predetermined path to success. But what if you are contemplating something more radical or disruptive? What if the path to success is less clear? You may need to tackle the risks differently.

Startup Risk Management Entrepreneurs view risk differently. People who have started one or more ventures will tell you: You need to know how much you are willing to lose before you even start thinking about starting something new. And you need to do everything possible to make sure you don’t exceed that figure.

Successful serial entrepreneurs adhere to the basic principles of risk management: If you’re going to play in a game with uncertain outcomes,



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1) don’t pay (bet) more than what you can expect as a return, and

2) don’t pay (bet) more than you can afford to lose.

Both of those ideas can be summed up with the phrase “Acceptable Loss,” a concept where you consider the potential downside of whatever risk you are about to take—such as starting a new company or some other venture that is going to consume a lot of your time, capital, or other assets—and put on the line no more than you find it acceptable to lose should it not turn out the way you want. Innovators, whether entrepreneurs or intrepreneurs tend to follow this process.

“What am I willing to invest to take this step?” Successful innovators generally don’t try to calculate what they will ultimately get from their efforts, and instead ask “What can I afford to lose” if the next step doesn’t turn out as expected. Given the uncertainty inherent in their work this “acceptable loss” frame of reference represents a powerful offset to the traditional notions of “expected return” that stop most efforts before they ever begin.

Entrepreneurs consider money, time, opportunity cost, etc. as the primary categories for consideration alongside the intensity of their desire in determining whether or not to take the first step. It is quite different for intrepreneurs where the most significant investment (and risk) criteria they consider is their social standing and relationship capital within the organization. Their peers and their supervisor become the important gatekeepers to risk taking.

“Who can I bring along with me?” Entrepreneurs are constantly looking for ways to spread the risk. Making deals for free or low-cost assets and resources, getting customers to invest prelaunch, finding sources of capital without giving up ownership are all ways to spread risk. Intrepreneurs must do likewise by looking for employee partners and supportive managers as they build support and resource commitments for their evolving idea. You want to have enough support and resources around you to soften any loss in this step.

Act now. Remain open to what happens when you act and its implications for your next step. Build your next step on what you learned and the result you just achieved. This Build-Measure-Learn cycle is the proven and safe recipe for innovator success. Form the habit of acting your way into the future with low-cost, low-risk steps using the means you and your network have readily at hand. Over-planning and over-thinking are not nearly as effective. Entrepreneurs are often supported by the discipline of staged venture capital for this work. Intrepreneurs instead use their support networks to explore their learning and build support for what comes next.



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Figure 3 – Startup Risk Management

Using these tactics means is that risk is incrementally lowered as the program progresses. The external risks of customer, market, and competition are addressed in the early stages of development. Experiments are run that are guided by the notion of acceptable loss and the plans are adjusted accordingly. But the experiments are not just for learning. If done properly, they help determine and eventually ensure the viability of the product well.

Recommendations • All innovation projects are not the same. Recognize radical or disruptive projects;

the ones that could change the existing business model early on. Use a simple one-page business model canvas to document fundamental assumptions that need to be tested.

• For projects that work within the current business model, existing innovation and risk management processes should be leveraged to deliver the project.

• For projects that have the potential to change the business model, use the concepts of acceptable loss and the build-measure-learn cycle to make progress and incrementally reduce risk.

• We can summarize this with an overarching lesson enterprise leaders can take away from entrepreneurs when considering investments in innovation; “Make sure you are playing to win rather than playing not to lose”

Finance Finance helps management decide on the most effective use of the firm’s scarce resources. Every idea seems promising, but there isn’t an entry on the balance sheet for potential; we must measure in dollars. And every investment is homogenized into similar models and formulae so that comparisons are easily made.

Managers are typically apprehensive about investing in any project, unless they are confident that the final product will generate revenue for the company. This apprehensiveness tends to limit approval on high risk innovation and push investment into



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sustaining innovations that support the existing business model, product set, and organization.

Figure 3 – Existing Business Model

Companies of any size view wasted time, effort, and money as frightening possibilities, especially for organizations that prefer control and predictability. The executive sponsor and accounting manager expect the innovator to know how to bring the idea to life within budget and start generating revenue quickly. The answer to allay these corporate fears is, of course, the business case.

Traditional Business Case A business case captures the reasoning for initiating a project or task. It is often presented in a well-structured written document, and is generally approved through conversations or presentations. The logic of the business case is that, whenever resources such as money or effort are consumed, they should be in support of a specific business need.

Figure 4 – typical business case

The business case is part of every new product development (NPD) effort and is the focus



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of early gate reviews. It can be as large as 40 – 50 pages, but few people read it from cover to cover. It is broken into sections corresponding to the audience; schedule and staffing for Development, go-to-market for Marketing and Sales, risk assessment and contingencies for Risk Management, and so forth. The individual departments review their sections for impact and clarification. The executive summary focuses on the decision maker and while the other sections are there for backup, the investment decision is made based on a presentation of the materials at the executive summary level. The finance section, the numbers, are generated with the help of the finance organization, who tend to run the product owner’s assumptions through their formulas to ensure the format is consistent and calculations are correct. The executives are satisfied they can compare this project to any other the company has in review, because finance has homogenized it.

Figure 5 – Financial Case

Part of the homogenization process is the development of the metrics that are used to evaluate the merits of the project. In an established business, those are generally gleaned from traditional accounting models.

Traditional accounting Traditional accounting is a codified set of principles by which the financial affairs of a business are reported. These accounting principles developed over time in response to the needs of businesses and the requirements of governments, and they have become quite complex but necessary to operate modern businesses. Every project is subject to the review of the finance organization. In most companies, the investments are measured by internal rate of return (IRR) or net present value (NPV).

Internal rate of return

Corporations use IRR in capital budgeting to compare the profitability of capital projects in terms of the rate of return. For example, a corporation will compare an investment in a new plant versus an extension of an existing plant based on the IRR of each project. To maximize returns, the higher a project's IRR, the more desirable it is to undertake the



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project. If all projects require the same amount of up-front investment, the project with the highest IRR would be considered the best and undertaken first.

Net Present Value

Net present value is the present value of the cash flows at the required rate of return of your project compared to your initial investment. In practical terms, it’s a method of calculating your return on investment, or ROI, for a project or expenditure. By looking at all of the money you expect to make from the investment and translating those returns into today’s dollars, you can decide whether the project is worthwhile. However, there are problems with using traditional accounting for innovation.

Figure 6 – New Product Growth Curve

As shown in the figure 6, traditional metrics like revenue and ROI all track zero to negative at early stages. There’s nothing for Sales and Marketing to do yet, since there’s no offer for consumption in the early phases of development. This relegates financial focus to managing expense to budget.

Product owners work the numbers to make the estimates look good enough to gain approval to proceed. An experienced product owner knows the “hurdle rate;” the return required to get a project approved. While no one sets out to deceive, innovator’s bias tends to color the assumptions, and establishing those assumptions based on optimism is natural.

The business case is built on assumptions that are based in a predictable future. If this is an innovation grounded in process improvement or customer experience, this can work. But if you are trying to build a new product or are working a truly disruptive innovation, the future is unknown. And any assumptions about it are based on the experience of the innovator, and how he/she sees the innovation fitting into established business model.

Finally, the business case is rarely revised and, upon approval, transforms from a decision-making tool to a plan of action. With this transformation, the risk shifts from business model (are there enough customers willing to buy what I’m building?) to technical risk (can I build this on time and within budget?), and the business model risk shifts to the final



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stages of delivery, when most of the investment is complete.

Accurate forecasting requires a long and stable operating history. The longer and more stable the history, the more accurate the forecast. For most sustaining innovation efforts, these tools will work, because they leverage the existing business model.

When dealing with more disruptive innovations, ones that are not aligned with the current business model, there is no history. So, you need to look for ways beyond business plans and traditional accounting to judge an investment.

Building a sustainable innovation program within a large enterprise can be like attempting to mix oil and water. Enterprise leaders are well served to examine and consider entrepreneurial concepts as part of their innovation initiatives. We’ll now review start-up business models that can ultimately be leveraged within the enterprise.

Startup Business Modeling Entrepreneurs are facing many questions when they first start their business. Who are my customers? What exactly are they willing to buy? Can I make money solving this problem? How will my customers buy? And many, many more. The questions are transformed through observation and experience into a set of assumptions. Assumptions that need to be organized, but not invested in until confirmed.

Business Model

Startups use tools as well to communicate. After all, a startup is a conversation. A conversation with customers and a conversation with investors; all meant to prove the innovator’s initial inspiration is correct. There are many ways to explain the business plan at a high level, but the business model canvas is a leading method for startups. The example below is a Lean Canvas. A Lean Canvas is a 1-page business plan template created by Ash Maurya that helps you deconstruct your idea into its key assumptions. It is adapted from Alex Osterwalder's Business Model Canvas and replaces elaborate business plans with a single page business model. Why a single page model? Because it simplifies and prioritizes your assumptions about the business.

Figure 7 – Lean Canvas



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Every area of the business is captured in the model and helps focus efforts on things beyond just product (solution). It also helps prioritize the areas that need to be verified first. Even in established enterprises, the business model helps highlight assumptions in the existing model that need to be tested. To highlight the rest of the investment approach, we’ll use an example based on this business model.

Figure 8 – Example Canvas

In this example, an innovator at a consumer electronics company is thinking of developing a smart thermostat. The business canvas outlines the areas of the business to test. It contains assumptions on basic questions like “who are the target customers?”, “what problems will the solution solve for them?”, “how will we get it to market?”, and many others.

Minimum success criteria

Every effort has to have an end in mind. Even when you’re not confident in the market, you have to set a reasonable objective for the effort. You are not looking for perfect, you are looking for a believable opportunity big enough to warrant further investment. For example, let’s say you want to develop that smart thermostat. You are experienced in developing consumer electronics, but the company has no experience in building and selling home goods. You have to do some “back of the envelope” estimates of market to see if it’s worth pursuing. Why “back of the envelope?” Because there is no corporate history to draw from. A quick Internet search gives you a starting point.

• There are 132M households in the US.

• The average lifespan of the HVAC unit is about 10 years.



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• Housing units are growing at 2.1% a year.

Assuming the best time to sell a new thermostat is when the heating system (HVAC) is installed, there are about 16M HVAC installations per year and at $250 per unit (your guess at pricing based on predicted energy savings), there would be about $4 Billion in opportunity annually. Capturing about 2.5% of the opportunity yields a $100M annual revenue stream, and you want to have that revenue stream online within 3 years. So now you’ve set the minimum success criteria for your product. This back of the envelope estimate is not a commitment, only a set of assumptions to be proven. If the market cannot be proven, it is not worth the investment. The target market is proven over time through measuring traction.

Traction

As mentioned earlier, entrepreneurs focus on aligning the business with the market need. The best way to do that is to demonstrate traction, customers that buy the product. To continue the example, you can set milestones for testing the model and the market. Based on your back of the envelope minimum success criteria of $100M/year, pricing model of $250 (one-time), expected customer lifetime of 10 years, and your expected customer acquisition rate of 2.50%, you will need to attract 43,840 new visitors/day after year 3 to maintain a $100M/year revenue stream.

Figure 9 – Points of Traction

Validating Traction

The funding requested at the beginning of the project is to get you to initial traction, not what it takes to fund the whole effort. And many startups use a 10X model to outline the traction milestones. The means that:

• Within 3 months, 4,000 people have accepted a compelling prelaunch offer. (product / solution fit)

• Within 24 months, 40,000 (10X) people have bought a unit at $250. (market / product fit)

• Within 36 months, you have scaled the business to support 400,000 (10X)



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people buying units priced at $250 and produced at $70.00 per unit. And you have developed marketing channel acquisition capacity to generate at least 43,840 new website visitors / day so the company can close enough business to maintain that $100M revenue stream.

Based on your experience in consumer electronics, you estimate the need for about $10M in total investment to produce and sell enough units to make $100M annual revenue stream. As opposed to asking for the entire $10M in upfront investment, you request $1M be allocated in this year’s budget to find initial traction and start developing working units for year two traction validation. In doing so, you are practicing innovation accounting.

Innovation Accounting

Innovation accounting is a process that allows management to make small incremental investments, while giving innovators the space they need to test their ideas in the marketplace. This is how startups make progress and is a model that enterprises should consider in driving sustainable innovation programs. Risk is mitigated and flexibility is achieved by using available funding to successfully reach a milestone, assessing results and then asking for the next increment to reach a subsequent milestone.

Successful innovation is about combining new ideas with sustainably profitable business models. This definition tells us what innovators should be doing. Creativity is a first step.

The next step is to test whether there is a good business model. That’s where using tools like the business model canvas and traction metrics make sense. As each traction threshold is reached, key aspects of the business model are validated, risk is removed, and more investment is warranted.

This is the structure that managers can use to make investment decisions. Through innovation accounting, the manager and the innovator can work together to transform ideas into profitable business models:

Test Then Scale: It is important for innovators to test their ideas. At the heart of this practice is the principle that no products should be taken to scale before their business models have been tested and validated. Given the three steps we have noted above that demonstrate traction, managers can use innovation accounting to make investment decisions based on each step. In response, the teams can use the resources allocated to demonstrate evidence of customer needs, then the solution, and then the business model. If during these steps innovators can demonstrate traction, then they are ready to scale.

Incremental Investing: Managers can make small incremental investments in ideas based on the current innovation stage. This stops teams from getting a huge sum in the beginning.



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It is the request for huge sums that cause managers to pause and ask for all the information before they pull the trigger. It also prevents many ideas from seeing the light of day because the innovator does not want to spend all of his/her personal capital (reputation, relationships) on something that may not pan out.

But if teams only requested small amounts to first test their ideas, it would change the conversational dynamics. Throughout the innovation cycle, progress should be measured based on how well teams are doing in their journey towards market/product fit. This allows managers to stop projects that are not working and double-down on those that are having some success and becoming more attractive to the market.

With incremental investing, companies can now make many small bets, rather a few huge bets. This is transformational because the more bets a company makes, the more likely it is to find something that works to advance the strategy.

Innovation accounting, in itself, is also transformational because it now provides a methodology to manage innovation, whereas before innovation was mostly thought of as a creative process. Now that we know the advantages of making small bets, how do we value those bets so that they can be evaluated as investments?

Innovation Options

In the equity markets, an option is the right — but not the obligation — to buy or sell a security in the future at a price fixed in the present. Financial managers use options extensively to hedge portfolio risk, but they are also present in agriculture (commodity futures), real estate (mortgage locks), air transportation (fuel swaps) and various other industries subject to volatile markets. Basically, wherever there is risk to be managed you will generally find options that manage it. They can be thought of as insurance that provides more certainty in an unknown future. New product investments are no different.

Innovation Options, a concept originally developed by David Binetti, apply the financial option framework to new product development. They precede the normal product lifecycle and do not require specific revenue projections of a classic ROI exercise. However, they still satisfy Finance by providing normalized measures of risk and return that are necessary for effective corporate governance.

Based on three inputs, initial investment, total investment, and market potential, the innovation options framework lays out probabilities of success that can be checked as needed a specified review points.

Checking progress is simple. At the checkpoint, are the metrics positive, neutral, or negative? Continuing our smart thermostat example, if at the three-month review, 4,000 customers have signed up we have a good signal that the we have problem / solution fit. If we see sign-ups accelerating, but we haven’t reached the 4,000 mark it may warrant a neutral rating with a follow up when the threshold is reached. If we aren’t able to get signs of fit through the experiments we’ve run, the investment gets a negative rating and more formal assessment of whether further investment is warranted. The benefit of this approach is that at any review, funding can be discontinued if the metrics aren't met. If at



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the first checkpoint the innovation has not demonstrated traction, you have spent months of effort and thousands of dollars, not years and millions on an idea that isn't proving to provide customer value.

Figure 10 – Innovaiton Investment Tree

In the startup world, companies seek additional investment upon the completion of milestones. At the time of investment, the company value is set in order to quantify the portion of the company the new investors are getting in exchange for their money. In our example, if the smart thermostat was a startup, the initial value of the business would be pegged at $3.2M (a valuation based on the return of a $100M revenue stream minus the investment required and discounted by the possible outcomes). At the successful completion of the first checkpoint, problem/solution fit, the entrepreneur would go to the market for the next tranche of funding with a company valuation of $9.0M. Why the change in valuation? Because the entrepreneur has removed some of the risk in their $100M business. Progress and increased funding are made at each of the checkpoints until the $100M business is almost certain. Internal corporate financing can invest in innovation is the same way. Invest incrementally to reach a milestone with measureable traction and remove risk.

Recommendations • Enterprise business leaders should look to entrepreneurial models to help define

innovation programs.

• As product owner, look beyond the features of the product to the rest of the business model. If you have confidence in the business model, including the market/product fit, customer preference, and ability to deliver, the traditional business case and ROI accounting are all you need.

• Temper the “innovator’s bias” by ensuring the business case contains a “worst case” view of the plan assumptions. Make sure the financial performance at the worst-case level meets minimum performance criteria.



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• If the business model assumptions are impacted by the new product, use traction and innovation accounting to gate investment and reduce risk.

Conclusion For many enterprises, the future is becoming less predictable. The velocity and impact of disruption is accelerating at Internet speed. Changing to survive and grow has become a reality for most businesses. Customer preferences change, competitors gain traction, and new technology emerges that invalidate years of success. Every company must scan the environment for fault lines in the foundations of their business model. Once faults are detected, be prepared to take action; because those faults foretell a destabilized future; making what was once predictable, unknown.

The best way to handle an unknown future is to make the organization fungible through digital transformation. But transformation isn’t just about IT, it’s about flexibility in product portfolio, delivery channels, monetization, organizational structure, and competitive response. And it’s not just about fungible capabilities, it’s about mindset.

It takes tempering that MBA training where...

• You forecast how the future will be.

• You construct a number of plans for achieving that future, picking the optimal one.

• You gather the resources necessary to achieve the plan.

• And you execute the plan to make that future a reality.

With more entrepreneurial traits including...

• making a habit of effectual thinking, discovering the path to success rather than prescribing it.

• focusing the business on meeting an evolving market need, not just minding the gap.

• mitigating risk by viewing it through a lens of acceptable loss.

• And finally, look at incremental investment through innovation finance to make bets on an unknown future.

Leaders should reserve a pool of resources for innovation so that intrepreneurs can innovate without having to fight the inertia of an organization optimized to execute in the existing model. Use that pool to invest in innovation as venture firms do. Place many small bets rather than a few big ones. That increases the overall chance for success when the future is unknown.

Keep in mind that the dog-eared startup mantra “fail fast” is not about failure, it’s about validating assumptions, and changing course as you progress towards your goals. Innovations should be managed using different measures of success and to some extent, different planning cycles. The early parts of the innovation cycle are not about revenue contribution, they are about removing risk. Rewards for success should be focused on



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meeting the metrics associated with removing that risk. Investment cycles should be tied to the milestone attainment, not just the corporate budget cycle.



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About TechVision Research World-class research requires world-class consulting analysts and our team is just that. Gaining value from research also means having access to research. All TechVision Research licenses are enterprise licenses; this means everyone that needs access to content can have it. We know major technology initiatives involve many different skill-sets across an organization and limiting content to a few can compromise the effectiveness of the team and the success of the initiative. Our research leverages our team’s in-depth knowledge as well as their real-world consulting experience. We combine great analyst skills with real world client experiences to provide a deep and balanced perspective.

TechVision Consulting builds off our research with specific projects to help organizations better understand, architect, select, build, and deploy infrastructure technologies. Our well-rounded experience and strong analytical skills help us separate the hype from the reality. This provides organizations with a deeper understanding of the full scope of vendor capabilities, product life cycles, and a basis for making more informed decisions. We also support vendors when they carry out a product and strategy review and assessment, a requirement analysis, a target market assessment, a technology trend analysis, a go-to-market plan assessment, or a gap analysis.



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About the Author

Gary Zimmerman is an experienced executive known for helping companies deliver new offers and expand markets. Accomplishments include launching four companies, 20+ products, building high-performance organizations, and generating millions in sales.

His experience at Neustar, Respect Network, and Sovrin allows him to provide a broad perspective on a variety of subjects including self-sovereign identity, blockchain, enterprise data management, and the data brokerage industry. His experience both enterprise and startup product development gives him a unique perspective on innovation.



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Other related TechVision Research works Why Large Technical Projects Fail and How Yours Can Succeed Author: Joe Teplitz Principal Consulting Analyst Organizational Transformation is the Key to Digital Transformation Author: John Mellars Principal Consulting Analyst Enterprise Innovation Author: Fred Cohen, PhD Principal Consulting Analyst The End of EA and IT as We Know IT Authors: John Mellars Principal Consulting Analyst Gary Rowe CEO / Principal Consulting Analyst


https://techvisionresearch.com/project/why-large-technical-projects-fail/

https://techvisionresearch.com/project/why-large-technical-projects-fail/

https://techvisionresearch.com/project/organizational-transformation-is-key-to-digital-transformation/

https://techvisionresearch.com/project/organizational-transformation-is-key-to-digital-transformation/

https://techvisionresearch.com/project/enterprise-innovation-acceleration/

https://techvisionresearch.com/project/enterprise-innovation-acceleration/

https://techvisionresearch.com/project/end-of-ea-and-it-as-we-know-it/

https://techvisionresearch.com/project/end-of-ea-and-it-as-we-know-it/

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