Every entrepreneur wants to be Steve Jobs. But the Steve Jobs they want to be is the Steve Jobs on stage presenting the new iPhone at an Apple event. Not many entrepreneurs want to learn how to be Steve Jobs the day-to-day innovation grind. Innovators in large companies are not any different. I have found a tendency to value ideas and creativity over systematic management processes. But as Eric Ries rightly points out entrepreneurship is management. Ditto innovation. It’s not all fun and games. In fact, transformational innovation is a brutal “two steps forward three steps back” process that is an everyday gut check.
Leave Me Alone
I often find myself at loggerheads with intrapreneurs. A lot of these folks hate process. They mostly want to be left alone to get on with it. If they engage in any process at all, it’s only with lightweight easy-to-use tools. They are mostly interested in the ‘fun’ parts of innovation: ideation, brainstorming and canvases with Post-It notes and sharpies. Innovation is viewed as a process for creative visionaries only, where the MBA types have no place.
But this perspective is wrong. Innovation has never only been about creative ideation. Ideas are a dime a dozen. Successful innovation is the combination of creative ideas and sustainably profitable business models. So beyond ideation is a systematic process of searching for the right business model to support the new product. This systematic search involves understanding customer needs and their jobs-to-be-done. It involves figuring out the right solution for customers, the right channels to reach them and the right customer relationships to have. It also involves figuring out the right price points and cost structures for profitability. This means an innovation team has to be cross-functional in terms of skills, including those MBA types.
The initial ideation and business model design process is simply a way to capture our assumptions. These assumptions have to be prioritized and tested with customers in the real world. Learnings have to be captured and used to inform iterations and pivots. This entire process has to be managed in a systematic manner that allows innovation teams to track progress. So yes, unfortunately there is accounting involved (i.e. innovation accounting).
Intrapreneurs are right to be wary of corporate management systems. For years innovators have been forced to work in silos and use inappropriate tools for innovation such as business planning and traditional accounting metrics (e.g. accounting rate of return). These traditional management tools are great for executing on validated business models, but they are terrible for teams who are still searching for a business model. Intrapreneurs have reacted to this challenge by arguing against any forms of innovation management. However, there are forms of accounting that are appropriate for managing the search for profitable business models.
In 2010, Dave McClure published a wonderful post in which he described the investment method they use at the startup accelerator he cofounded, 500 Startups. He called the process Moneyball for Startups. The basic investment principles he outlined involve making small investments while teams are searching for product-market fit and then doubling-down after. According to McClure, this process is analogous to card reading at a blackjack table. The small initial investments allow an investor to learn if the product idea has potential before they make further investments. This is quite different from making one large investment based on a business plan.
I call this process incremental investing. It is based on different expectations depending on the innovation team’s progress. There is a hierarchy of knowledge that each innovation team must create on their journey to success. First, they have to get out of the building and confirm that real customer needs or jobs-to-be-done exist. Second, they have to validate that the solution they are creating serves those customer needs well. Finally, they have to find a profitable business model with which to deliver value to customers. This hierarchy of knowledge is not necessarily sequential, but there is no point in creating a solution when customer needs are yet to be validated.
These steps on the innovation journey provide management with a way to make investments and track progress. Since the early stages of an innovation journey are mostly about testing the market and potential solutions, small amounts of money can be invested. As ideas start to show traction, companies can then make larger investments to get to product-market fit and then take the product to scale. Such incremental investing provides companies with a chance to invest in testing product ideas before they are taken to scale. This is powerful because it provides companies with a method to track progress and stop investments in failing projects before too much money is spent.
Incremental investing also provides intraprenuers with the resources they need to work on ideas without having to write long business plans. But this initial investment comes with an expectation that innovation teams have to track and demonstrate progress before they get further investment. For example, intrapreneurs have to provide evidence of real customer need before they get an investment to create a solution. They also need to provide evidence of traction with a great business model before they get further investment to scale. This seems like a fair exchange, given the amounts of money companies are pouring into innovation projects these days.
Inspiration Versus Process
It has always struck me as unreasonable that some intrapreneurs expect their progress to not be tracked and managed. Investments in innovation have to produce returns and executives cannot be expected to keep pouring money into failing projects. This is of-course not to denigrate the value of vision and ideas. Ideas still lie at the heart of innovation. Without ideas and vision there would be no new products to manage. The choice between vision and management is not a dichotomous “either-or.” Rather it is an inclusive “both-and.” Innovation is both inspiration and systematic process.
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This article was first published at Forbes where I am regular contributor.