Maximizing ROI for Corporate Innovation
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My presentation at the 2018 IO Summit in Lincoln, NE. How can companies maximize their return on corporate innovation investments? (1) Stop using the wrong valuation calculations and (2) Don't copy the wrong things from traditional startups.
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Maximizing ROI for Corporate Innovation
- 1. SEAN AMMIRATI PARTNER | BIRCHMERE VENTURES ADJUNCT PROFESSOR | CARNEGIE MELLON UNIVERSITY Maximizing ROI for Corporate Innovation May 30, 2018 @SEANAMMIRATI WWW.SEANAMMIRATI.COM
- 2. 52% of S&P companies have disappeared IN THE LAST 15 YEARS 61 YEARS 1955 lifespan 17 YEARS 2015 lifespan
- 3. Why? What got you here, won’t get you there!
- 7. Every company needs to be entrepreneurial! How?
- 8. Entrepreneurs create the world the way it ought to be!
- 10. Now I spend time convincing others to do the same INVESTING AT BIRCHMERE VENTURES TEACHING AT CARNEGIE MELLON UNIVERSITY WRITING & SPEAKING ABOUT INNOVATION
- 12. We believe startups can exist and thrive anywhere, including in large corporations.
- 13. We believe startups can exist and thrive anywhere, including in large corporations. But the processes and tools to create these startups are different from those needed by the proverbial one in a garage.
- 15. Stop Using the Wrong Valuation Calculations Don’t Copy the Wrong Things from Traditional Startups How?
- 16. Precursor to Valuation: Market Sizing Total Addressable Market: what is the universe of customers who could use your service Served Available Market: who can you currently reach with your sales and marketing channels? Target Market: your likely customers
- 17. “Market size: How big will the company become if it took the whole market?” - Tim Draper “ What is the first thing you look for in an investment?
- 18. Thinking About Valuation Applying traditional corporate financial models (e.g., IRR, NPV) to internal investment decisions for innovation projects is an inherently flawed exercise.
- 19. Thinking About Valuation Applying traditional corporate financial models (e.g., IRR, NPV) to internal investment decisions for innovation projects is an inherently flawed exercise. Likelihood of Result Financial Result
- 20. Thinking About Valuation Transformative innovation projects tend to end up in the extremes: the long right tail is full of great successes, but the highest part of the distribution is at and near zero. Likelihood of Result Financial Result
- 21. “The Babe Ruth Effect” of VC - Chris Dixon Percentage of 10x investments http://cdixon.org/2015/06/07/the-babe-ruth-effect-in-venture-capital/
- 22. “The Babe Ruth Effect” of VC - Chris Dixon Percentage of 10x investments http://cdixon.org/2015/06/07/the-babe-ruth-effect-in-venture-capital/ Percentage of $ losing investments
- 23. Thinking About Valuation We don’t want to use models designed for predictable expansions and cash flows. But there are finance tools designed to value higher variance activities. We apply options pricing theory to a gated innovation management approach to more accurately value corporate startups. We call it Option-Gate.
- 24. Option-Gate Model Applying traditional corporate financial models (ex: IRR or NPV) to internal investment decisions for innovation projects is an inherently flawed exercise.
- 25. Option-Gate Model The model inputs are divided up into two parts: 1. Marketing Sizing 2. The path to validating the hypotheses which have to be true for the business to be a success The model output centers around a valuation number. This number corresponds to what the idea would be worth if it were priced as a call option today.
- 26. Don’t Copy the Wrong Things…
- 27. Don’t Copy the Wrong Things…
- 28. Other Tools We Are Developing
- 29. Corporate Startup Canvas A compliment to the Business Model Canvas. When thinking about new startups within established businesses, we believe there are additional ingredients that need to be thought through and validated.
- 30. Pitching Innovation to the C-Suite The C-Suite Canvas walks you through a hypothetical set of executives and what they care about to help better prepare corporate entrepreneurs.
- 31. Use of These Tools Any feedback on these tools is welcome as they are all in a state of “public beta.” Try them out at CorporateStartupLab.com/Tools