By Jonathan Bertfield, Lean Startup Senior Faculty
Managing a portfolio of innovation teams is key in deploying Lean Startup at scale. Digesting the evidence they present demands a shift in how leaders operate. What’s going on in the minds of growth board members as they make investment decisions?
When we convene a growth board, we have a clear outcome in mind: Identify the opportunities in our pipeline that are worthy of continued financial support. The innovation teams that can demonstrate traction in the market get funding; those who can’t, don’t.
On its face this is a simple proposition, so the job should be easy for growth board members. But over four years supporting and coaching dozens of innovation growth boards in large corporations and government agencies, I’ve seen that it’s actually anything but. Let’s examine where growth board members tend to struggle and how to mitigate those challenges.
Breaking down the growth board mindset for more effective innovation teams
For the purposes of this post we’ll use Angela as the name of our growth board member. One way of visualizing what’s going on in Angela’s mind is to think of the decision process as a juggling act. In that scenario, these are the balls that Angela and her fellow growth board decision makers have in the air:
- Evidence from startup teams about traction emerging from their experiments.
- Legacy market knowledge competing with new market and product realties.
- Alignment of the opportunities to the strategic vision and Innovation Portfolio.
Let’s look at them one by one:
Evidence from the innovation team
As Angela listens to a presentation, she’s asking herself two key questions:
- Does the evidence being presented make the case they’ve found the appropriate level of traction to validate the stage of development they’re in?
- Have they reduced the risk of further investment enough to justify the funding they’re asking for?
In the early stages of innovation, this evidence might confirm that the team’s ideas about the customers’ problem are correct.
Often this evidence is gathered through small scale conversations and surveys with customers, as in this example from a team at a household appliance company. They’d been running discovery interviews supported by simple sketches to find out if customers responded positively to the idea of using technology to manage their kitchen pantry. The evidence they were asking the growth board to consider as support for their progress was strong feedback from interviewees that pantry management was a significant problem for them and they might be interested in using an as yet undefined technology solution to alleviate it.
As a team moves through their learning journey and gets closer to scale, the nature of their evidence shifts to more quantitative data such as churn rate of customers, revenue and margin. For example, one team at a food services company had been running multiple pilots with a farm data service in an early market. The evidence they were asking the growth board to consider was the customer acquisition data: how many customers converted from free trials to paid pilots; how willing were those customers to recommend the service to their farming peers; and overall customer acquisition costs. Their goal was to demonstrate that they’d identified customers in an appropriately sized market and had a strong understanding of how to sell to them profitably. In other words, they’d found a path to product-market-fit.
In both examples, the growth board’s job is to consider the evidence and make a funding decision.
But this can be difficult because Lean Startup asks leaders like Angela, who have been trained to think quantitatively and assess spreadsheets and multi-tab business plans as the starting point of an investment review, to instead think much more qualitatively and conceptually. The methods are designed to help avoid jumping too quickly to a focus on revenue when we don’t yet understand if there’s even an opportunity substantial enough to care about.
Both teams above are focused on understanding whether customers share their perspective on value, rather than on actually selling or generating revenue. They’re using willingness to sign up for an in-home trial of a kitchen appliance, for example, as a proxy for future willingness to purchase a working version of the prototype they saw in a research lab. Angela has to digest data from a relatively small number of customers interacting with the artifacts the team created, and come to conclusions about whether or not it indicates a potentially much larger marketplace of customers. It takes time to get comfortable with that mindset.
Legacy market and product innovation knowledge
Angela and her team are in their positions as decision makers because of their deep industry knowledge and experience. Many of them will have spent a decade or more operating in that market space and that experience is highly valued by the company. The challenge is that in the context of building an innovation portfolio, that industry knowledge may at best be irrelevant. If the innovation thesis being managed by the growth board is focused on transformational opportunities, with entirely new markets and new products, that legacy knowledge may in fact be an actual blocker. The new market dynamics are not the same as the old market. The new tech is not the same as the old tech.
For one team at a financial services company this issue was all too evident. While the company’s core revenue was predominantly focused on supporting traditional brick and mortar retail sales, the team was pursuing an opportunity focused on direct-to-consumer sales. If successful, it had the potential to cannibalize revenue from the current cash cow of the company. Meanwhile, Angela’s bonus and medium term financial goals are all tied up in supporting the existing business model. How does she operate in a process whereby she is asked to objectively evaluate an opportunity that seeks to disrupt her current business and personal livelihood? Without proper mitigations in place, Angela is required to evaluate the evidence being presented to her in the context of how it matches up against her understanding of how her current business operates. In other words–is this fledgling opportunity with zero customers worthy of my attention and investment compared to the businesses in my current portfolio that are generating substantial revenues today? This mismatch is compounded by the fact that while Angela has decades of experience building products and services in the current paradigm, she has a relatively thin understanding of this new landscape the team is venturing into.
Alignment of company innovation strategy and vision
Angela has digested the team’s evidence from their various experiments. She’s heard a crisp and jargon-free explanation of the new technologies involved in the opportunity. She and her colleagues have a strong sense that this opportunity has established traction in the marketplace and has legitimate long-term growth opportunities. That leaves the final juggling ball: looking at how the team’s business idea meshes with the bigger picture.
Firstly, does this opportunity align with the strategic vision established by the business? It’s of no use for Angela and the rest of the board to give a greenlight to our earlier example of a data service for farms, if in fact the organization’s strategy is focused entirely on hardware or has a stated desire to move away from farms as customers. If the company is going in a very different direction then despite its evidence of traction, the team should not get funded.
Secondly, how does this opportunity compare to the other investments in the company portfolio that target a similar opportunity? For any innovation portfolio to be effective it has to include lots of small bets early on in the product lifecycle because Angela and her colleagues–like all of us–don’t have a magical gift that lets them choose only winners. The evidence of traction we discussed earlier should inform where investments are made. If our household appliance example is part of a larger portfolio of innovation bets in the space, then we have to assess its progress both against its own merits of traction and whether we have enough opportunities that have the potential to expose one or more winning outcomes. Conversely, if we are over-indexed in a particular space – every one of the 2 dozen startup teams in our financial services portfolio is targeting blockchain, for example- then the growth board needs to be really clear on how it reacts to yet another team pushing for inclusion in the portfolio. Not only does that team need to demonstrate traction, it needs to demonstrate more traction or a bigger market opportunity than the other opportunities that are already in the portfolio
Mitigations to help growth boards and innovation teams build an effective portfolio
With these challenges in mind here are some powerful mitigations we can target for ensuring that our innovation growth boards are given the best opportunity to succeed.
- Show patience. Ease your growth board members into their role. Starting with a small portfolio that grows over time gives leaders time to flatten the learning curve and get comfortable with these new paradigms.
- Identify financial thresholds at each stage of a product life cycle. This makes the level of capital risk associated with each decision clear to the teams and the growth board members.
- Have teams provide a substantive pre-read ahead of a growth board meeting. This is especially critical for those new market/new technology transformational opportunities where educating the decision makers is a key activity.
- Document your innovation strategy. It’s hard to understand if an opportunity aligns to an innovation strategy if you don’t have one. Create clear guidelines for both the innovation teams and the growth board itself.
- Carve out space at the start of each growth board to remind leaders about the current portfolio balance. Consistent and transparent reviews of the current portfolio will make our portfolio analysis decision easier.