No Innovation Is Immediately Profitable
5 June, 2015 / Articles
The meeting was going swimmingly. The team had spent the past two months formulating what it thought was a high-potential disruptive idea. Now it was asking the business unit’s top brass to invest a relatively modest sum to begin to commercialize the concept.
Team members had researched the market thoroughly. They had made a compelling case: The idea addressed an important need that customers cared about. It used a unique asset that gave the company a leg up over competitors. It employed a business model that would make it very difficult for the current market leader to respond. The classic fingerprint of disruptive success.
With five minutes left in the meeting, it was all smiles and nods. The unit’s big chief (let’s call her Carol) loved the concept, and in principle agreed with the recommendation to move forward. “I just need to see one more thing,” she said. “Can we talk about your financial forecasts? You’ve told me it’s a big market, but I’m not sure yet what we get out of this.”
The team members smiled, because they were prepared. They knew — and they knew Carol had been taught — that detailed forecasts for radically new ideas are notoriously unreliable. So they instead turned to their best guess of what the business could look like a few years after launch. They detailed assumptions about the number of customers they could serve, how much they could make per customer, and what it would cost to produce and deliver their idea. Even using what seemed to be conservative assumptions, the team’s long-term projections showed a big, profitable idea. Of course there were many uncertainties behind those projections, but the team had a smart plan to address critical ones rigorously and cost effectively.
Carol began to look impatient. “That all sounds good,” she said. “But can you double-click on the next 12 months? We can’t afford to lose money on this for more than nine months. When do you turn cash-flow positive?”
The team had estimated it would take at least two years of investment before there was any chance of crossing that threshold. They were being careful to stage investment, since they knew their strategy would change based on what they learned early on in the market, so they expected to keep early losses modest. But there simply wasn’t a realistic way to meet Carol’s request.
My six-year-old daughter Holly and I debate the existence of unicorns, and Carol obviously would come down on Holly’s side. After all, she was seeking a disruptive idea that would deliver market magic; flummox incumbents; leverage a core capability; was new, different, and defensible; and produced financial returns immediately. Would that such a creature existed!
It’s not really Carol’s fault. She was running a business unit coming off a turnaround, and she had steep financial targets to hit over the next 12 months. If the momentum continued, she was in line for a promotion within the next 18 months. If momentum stalled, well, she faced a different outcome.
The simple truth is that Carol wasn’t in a position to absorb the early-stage losses that developing a disruptive idea almost always requires. As much as we like to believe in overnight success stories, most start-up businesses fail, and those that don’t typically go through a fair number of twists and turns before they find their way to success.
Every company should dedicate a portion of its innovation portfolio to the creation of new growth through disruptive innovation. But companies need to think carefully about who makes the decisions about managing the investment in those businesses. If the people controlling the purse can’t afford to lose a bit in the short term, then you simply can’t ask them to invest in anything but close-to-the-core opportunities that promise immediate (albeit more modest) returns.
That doesn’t necessarily mean pulling all disruptive work to a skunkworks-like home far away from your current operations, because that approach can deny your new-growth efforts access to unique assets of your company, like its brands, technology, market access, or talent. And certainly scaling the business will likely involve the existing business. But to have any hope of disruptive success, early-stage funding has to come from a budget that allows for a long-term view.
Ideally in this case Carol’s boss would have created a central pool of resources to test out early-stage ideas. Carol should have a say in how those funds are deployed on ideas that her unit will ultimately have to invest in to scale, especially since her staff will be called on to contribute to up-front work. But she shouldn’t have to feel the financial pinch from initial investments in software development, early marketing, and so on.
If Carol’s boss wasn’t willing to take the short-term hit, then frankly the company shouldn’t waste time pursuing disruptive ideas. That choice has long-term repercussions. But it can be very clarifying for staffers who would otherwise just end up frustrated that, as they get closer to toeing the first mile of disruption, their sponsors find ever more creative ways to say no.
