Platt Perspective on Business and Technology

Innovation, disruptive innovation and market volatility 5: modeling and understanding change and innovation per se 4

Posted in macroeconomics by Timothy Platt on October 8, 2014

This is my fifth posting to a series on the economics of innovation, and on how change and innovation can be defined and analyzed in economic and related risk management terms (see Macroeconomics and Business, posting 173 and loosely following for Parts 1-4.)

I began to more formally outline a basic, simple four quadrant taxonomic model of innovation initiatives and how they can be evaluated for return on investment and profitability risk and benefit in Part 3, which I specifically note here as I do keep referring back to it. And I began to flesh this model out in Part 4, where I discussed how different observer/participants (e.g. business owners, or alternatively venture capital investors) might evaluate the position of a prospective innovative opportunity differently along the timing and risk axes of this graphically depicted model – and how this can and does impact on how they variously strategically and operationally act on these opportunities.

At the end of Part 4 I noted that I would continue to flesh out this model here, addressing some further real-world complications to what at least in Part 3, began as an essentially frictionless model. More specifically, I noted in Part 4 as lead-in for this, that up to here:

• I have written this series entirely in terms out inside business owners and completely outside investors. But the boundaries between inside and outside are not always that clear-cut.
• And secondly, I have explicitly and I add intentionally conflated startups and I add early stage businesses, and established businesses that seek to develop new innovative capabilities of a type and scale that would call for significant new capital investment.

I stated that I would at least start to delve into those issues and some alternative scenarios that arise from them here, and I begin that with a reconsideration of insider and outsider.

• A business founder – the individual who provides the driving force and often the core founding idea behind a new business venture, can be seen as the quintessential insider here. He or she in a fundamental sense is the business, at least at its earliest initial step and before any others can be brought in to help make the founder’s vision a reality.
• An investor who is not themselves that founder, or a member of the insider team that they begin to assemble as they begin to bring others into this venture for their labor and expertise, can be seen as a perhaps deeply involved quintessential outsider.

That is the sometimes oversimplifying model for organizing and understanding participant roles that I have pursued up to here in this series discussion. Now let’s consider some complicating alternatives and I begin with the less obvious starting point for that, and with the owner and founder. And the key word that I need to address here is commitment.

When a new business founder takes what amounts to a leap of faith in breaking away from any other business and work commitments to devote their full time and energy, and their own finances into a new business dream, the above insider understanding essentially always applies and with full force. When a new business founder simply seeks to develop a sideline business as I have in my own experience at times, and certainly when first trying consulting, it can be easy to take a more outsider and even detached approach to this new venture. Speaking from my own experience there, I was still working full time and organizing and managing complex programs and systems in-house with a full time employer. But I still felt drawn to trying consulting to see if this would be a good and even richly fulfilling career approach for me. I saw opportunity to work on fascinating workplace and organizational challenges and with good people who I knew I would enjoy working with and helping. I tried it. But I was working full time in-house so if this had not worked out I was not making as big or compelling a commitment as I would have if I had tried this as my only career option in play. (Yes, I have pursued that approach too as an entrepreneur, which I note here to highlight that I understand this difference from direct experience.)

Now let’s bring this example back to the issues of innovation. When a founder is that quintessential insider, and this is their only currently active and viable work and career path open to them, the single focus commitment that this creates for them adds urgency to how they view any innovation that they would offer as their source of defining value in their new business venture. This impacts on how they see and understand placement on both the timeline and risk axes of the Part 3 model. When a founder, alternatively, does not face this same commitment pressure from having alternative work paths going forward that they could simply stay with, and alternative sources of ongoing income, this can lead to more relaxed and stretched out timeline judgments and a more relaxed approach to risk and benefits too.

Investors prefer to work with business ventures that are built and run by the fully committed, who have fully invested in this venture with everything that they can bring to it. These founders are much less likely to simply cut their losses and walk away if and when complications or setbacks develop – as they always do for any real startup or early stage business.

And as noted above, what might be seen as the basic default for investors is more detached and in ways that parallel the situation of the part-time founder. Angel investors who tend to buy in earlier and at lower levels, and venture capital investors who tend to buy in later and with much larger capital investments both, categorically, tend to invest in portfolios of innovation-defining business ventures rather than putting all of their available investable resources into one such venture. They are like the manager or director who keeps his day job while investing in some particular new innovative venture on the side – for each and every specific entry in their investment portfolio and with the rest of their portfolios offering at least a sense of collective stability and balance.

Angel investors do in fact tend to stay outsiders as far as any direct participation in operations or even business strategy is involved. So for them, the above basic model still tends to apply. Venture capital investors can and often do become much more actively involved and in ways that can mean taking on a much more insider perspective.

• Venture capitalists perform a much more through and rigorous due diligence analysis of any prospective innovative venture that they might invest in and they really look at and get to know the founder of this venture and any core members of their team that they would bring in to help build it.
• And they frequently actively seek to shape that team and this venture’s operational and even core strategic decision making processes as an ongoing part of this due diligence exercise.
• That can mean their requiring that this venture bring in a specific type of Chief Financial Officer as one commonly addressed risk point, or even some specific individual for that position who they know to have relevant and to them crucially important skills and experience for this specific early stage business.
• That often means board of directors participation, and actively working with and mentoring the new innovative venture’s founder and members of their core team. It is fairly common for a venture capital investor to require that they hold control over some specific numbers of seats on a new investment business’ board of directors that they would fill with business stage-specific and industry experts, and for a venture capitalist themselves to want to be directly involved as a board member in this group.

The points that I have already made in earlier postings to this series as to the basic venture capital perspective here still apply, with these investors seeking more rapid return on investments than would usually be demanded by a founder and owner of record. But at the very least, active in-house participation and the ongoing experience of directly working with this venture can lead to a more dual vision here, where the insider’s search for the longer term can become clearer and more compelling too.

• What begins as a simple and straightforward short-term venture capital investment play can even, if circumstances develop appropriately, become a long-term ongoing investment and ownership share venture and with a goal of creating a sustaining, reliable long-term revenue stream.
• That, as a perhaps extreme endpoint alternative to the shorter timeframe venture capital scenario, would definitely be expected to shift how these investors would view and characterize the innovations that define this business venture and how they would classify and pursue them according to the terms of the Part 3 model.

I have been writing this posting essentially entirely in terms of startups and early stage ventures, as built around new sources of innovative potential. I am going to continue this posting’s discussion in a next series installment where I will look at many of these same issues from the perspective of more established businesses, as they seek to develop new innovative business and profit centers. Meanwhile, you can find this and related postings at Macroeconomics and Business.

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