How To Deploy Funds For Innovation

How To Deploy Funds For Innovation

by October 21, 2016
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In the previous post we talked about how one can think about the amount to be invested in Innovation by comparing the investment to the premium of a call option.

This post is about how to deploy capital, possibly in a cleverer way.

Let’s start with describing the status quo in most Financial Services companies briefly:

– There is an annual budgeting process (and still multi year initiatives)
The budgeting process sometimes is so slow that projects cannot even spend enough in the time given which in turn results in management pulling the funds and stopping potentially good projects (bizarre but I have seen it).

– Projects get approved by (central) committees of different seniority levels depending on size. Therefore the approval process can take a while… months sometimes.

– Scope definition and the project’s financial estimates require a lot of investigation. In the end the full amount of the project’s worth gets approved before starting analysis work. As a result projects often ask for high dollar amounts at very early stage… that’s quite risky.

 

In the context of Corporate Innovation these four points make fast progress of initiatives almost impossible.

 

– To address these issues we propose a capital deployment model for Innovation efforts in Financial Services firms that follows the StartUP / Venture Capital model with multiple funding rounds:

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The key to keep in mind here is the iterative deployment of capital. Similar to a startup that gets funding in smaller and growing chunks as risk decreases we believe this to be the right model to be applied inside financial services firms as well.

– Small amounts to ideate using methodologies like Design Thinking may start the journey

– As concepts are developed prototypes may be required to show internal stakeholders the value proposition

– The third stage may involve getting feedback from the external customer for which further funding is required

– Once an idea has some customer validation a real product build can commence and a larger organization and possibly technology spent is required.

In order to facilitate a quick decision making process and avoid long waiting periods we recommend to have a VC partner like group that can deploy capital at each stage. Ideally they are empowered to take decisions within 48 hours for their portfolio. The Project Owner (like a Startup CEO) in turn gets the freedom to spend the funding he has “raised” until the next milestones is (or is not) hit. Alignment of interest and empowerment are therewith given.

It is important to realize that as with startup funding there is always an option to abandon. For more information with regards to (real) optionality please refer to this good MIT deck.

Of course the devil is in the detail and all of the above is easier said than done; especially Financial Services companies with existing and often stiff processes. But there is hope.

This article first appeared on LinkedIn Pulse

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