Venture capitalists are good at finding, choosing, and bringing the creative ideas of others to market. They have good judgment about which ideas and value propositions will work. They can project how potential ideas may play out within the organization and in the marketplace. If innovators “pitch” their ideas and value propositions, leaders in the venture capitalist role are the ones who “catch”; they are the authorities who will decide the fate of the innovators’ dreams.
Your Role as a Venture Capitalist
As a venture capitalist, you’re a disciplined risk taker. You understand that not every idea will develop into an innovative solution, bring the company new customers, or generate greater return from existing customers. You look for new and fresh ideas, but also for innovators who make a credible overall business case for why the organization should support their efforts. You evaluate whether ideas meet an important customer need and whether the ideas respond to a significant market opportunity.
Inside companies and teams, innovation leaders in the role of venture capitalist often clarify the innovation challenge. They typically go a step beyond the direction-setting role. Direction setters identify the opportunity in the marketplace and make it clearly visible, but the venture capitalist secures the funding and resources for projects, shows that these resources are available, and issues the invitation to innovate.
Leaders in the venture capitalist role may create an innovation challenge or deliver an “innovation brief” in person, in writing, or through online video. The brief communicates the call for innovation, clarifies the resources available, and informs innovators about the process to develop and pitch their value propositions.
Playing the role of venture capitalist means you are able to:
- Find and allocate time and funding to invest in innovation projects.
- Identify strategic areas or specialty fields to fund, while staying open to unexpected opportunities as well.
- Organize and launch an innovation campaign.
- Communicate an innovation brief that gets people inspired about submitting their ideas.
- Determine the merits of an idea and its value to a customer.
- Evaluate the strength of a value proposition and business case, particularly compared to other alternatives.
- Determine a project’s overall ROI, where “return on investment” includes financial as well as other potential kinds of returns.
- Mentor innovators once you have given their projects initial funding.
- Sponsor the implementation of big game-changing projects as well as incremental improvements.
Establishing an Innovation Portfolio
Playing the role of venture capitalist also requires you to be comfortable establishing an innovation portfolio that works similarly to an effective stock portfolio. The portfolio should contain a mix of incremental improvements and revolutionary ideas for existing and new customers, and should balance risk across these ideas.
Some ideas should offer a quicker and more certain return, some would offer a medium-range timeline or amount of risk, and a few more ambitious projects would be long term and much less predictable. Any one idea might not succeed, but the portfolio at the end of the year should show a strong positive return on investment.
Recognizing When it’s Time to Pivot
Most venture capitalists believe a great team in a big market can often figure out how to build a successful company. Many times, venture capitalist initially invests in a start-up with a specific solution and business model, but in the course of growing the company and taking products to market, they and the start-up’s founders discover that the market potential is not nearly as strong as they had predicted. In many instances, the business searches for and finds a completely new solution or business model. The founder team can pivot to launch a whole new version of the solution. The business that ultimately succeeds may barely resemble the initial business that was funded.
As Eric Ries describes in his book Lean Start-up, an important part of the venture capitalist role is to recognize when it is time for a project to pivot and to test multiple alternative business directions quickly, to see if there is one that could ultimately succeed with customers.
Still, there are times when a new venture will fail, and venture capitalists know how to deal with this as well. They launch many start-ups and monitor all of them to see if they are achieving their expected milestones. When a new venture does not hit its numbers and a pivot is not possible, they cut losses quickly so they can fund the winners.
Venture capitalist may make a number of initial investments and then rapidly reallocate resources when needed. The common summary is that for every ten investments a venture capitalist firm makes:
- Three to four are losers (−X)
- Four or five are “zombie companies,” which don’t die out but don’t grow either (1X)
- One to three are winners (superstars that produce 20X or more in return)
Looking Beyond the Present
While innovation leaders inside companies need venture investing skills, they also may have a wider range of success criteria than the average venture capitalist. Typical venture capitalists invest in a business to create a company profitable enough to sell or take public so that they can return funds to their investors with a sizable financial profit.
Inside a company, the innovation success criteria are often more complex. Most companies aren’t only bottom-line driven. Innovation projects can claim a broader return on investment that includes elements such as strategic relationship building, brand development, or customer acquisition across the full range of a company’s products or services. Instead of evaluating ideas based only on short-term financial gain for a single line of business, leaders can invest for reputation and status, or for strong connections with potential customers or strategic partners, if they think these will ultimately deliver financial gain for the company as a whole.
In addition, once venture capitalists invest in start-up companies, they don’t simply leave the innovators on their own to succeed or fail. Many VCs play a very active role on the board. They may bring in new staff or leaders. They may participate in the decisions about whether to stay the course or to pivot. They play an active role in ensuring their investments succeed.
Playing the role of venture capitalist goes beyond short-term capital gains and looks strategically into the future. While the payoffs can be big, sometimes they involve decisions that don’t result in immediate returns. In the next installment of the series, we’ll dive deep into the value of mentorship and how it can move the needle in any organization. If you’d rather not wait, download the entire chapter today.
This blog post is part of the Leading Innovation series authored by Laszlo Gyorffy, MS. Laszlo is president of the Enterprise Development Group, an international consulting firm specializing in business strategy and innovation. He also is an accomplished speaker, certified instructional designer and trainer, and co-author of Creating Value with CO-STAR: An Innovation Tool for Perfecting and Pitching your Brilliant Ideas and The Global Innovation Science Handbook. Laszlo recently developed the One Hour Innovator a cloud-based toolkit that teaches people how to successfully generate and champion bigger, bolder, and better ideas.