Advising on Investing in Innovation

Advisory boards are often required to advise on potential investments in innovation and therefore require strategies to implement. In a recent executive insights webinar, Certified Chairs™ Dr Maren Schweizer and Nigel Hennessy shared pitfalls to avoid and the strategies to employ when navigating the innovation investment space. So, how to evaluate a good investment in innovation? Due diligence on potential investments can be a hard and subjective process, particularly for companies that are pre-profit.

So why do companies fail, and some succeed?

There are many reasons a start-up may fail, including a poor or badly constructed value proposition for the customer, employing the wrong sales channel, creating a revenue model that is not attractive, and the list goes on. Overall, it comes down to a poor or badly defined commercialisation strategy. In the 16 start-ups Nigel has worked with over his career, at least 2 companies (cleantech and water management companies) failed because they were just too early.

How to evaluate & DECIDE what is a good investment in innovation?

Due diligence on potential investments can be a hard and subjective process, particularly for companies that are pre-profit. In fact, due diligence is so subjective that it can be left up to the observer to determine whether a business is a good or bad investment.

Create a Digital Twin

Nigel recommends creating a “Digital Twin“ of the potential investment and model its success. By comparing a new company against a best-in-class business, you can create a correlation measure which should provide a level of understanding of the likeliness of success or failure. It may also provide some guidance on the strategies to improve the company’s likelihood of success.

This model provides a measure between the company and the ideal company, say Apple or BHP, and a weighted score dependent upon the correlation level. It allows you to test strategies for commercialisation and re-assess. As such it creates the opportunity to see how a likely strategy will change the company. It can also be done at a more incremental level by considering products and services within a company.

Within the business world, at one stage or another, you’ve most likely encountered the “Cobra Effect“. A product of linear thinking that illustrates the unintentional negative consequences when a reward or incentive is offered to solve a problem. For example:

• Vapes were introduced as a safer alternative to smoking, but now it’s a $20 billion market causing the next generation to be addicted to nicotine.
• Airbus made its flights quieter for a better flying experience, but it resulted in amplifying the cabin noise of passengers and the toilets.

To avoid the Cobra Effect, take a holistic approach, rather than a selection criterion. Dr Maren recommends using a “Bermuda Triangle” model, focusing on markets, policies, and ecosystems to ensure that your investment has the desired impact.

Investing in innovation is not easy, there’s always a risk and there are no guarantees of returns, but Advisors and Chairs are there to provide organisations with the best strategies for success. Whether you’re a start-up, big corporate, or member of an advisory board, employing tools like the Bermuda Triangle model and the “Digital Twin” can improve your chances of successfully investing in innovation.

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