Originally published on LinkedIn here.
How successful do you think investors would be if their entire strategies focused on one specific investment? What if they kept doubling down even when the investments where showing volatility or negative returns? I know I would not put my money into something like that. It is the same for innovation.
Many organizations double down on innovations that are showing negative returns. Resources get sucked up and they end up with an end product that is mediocre at best. The end result is people get fired, organizations give up on innovation, and other projects get put on the back burner all because of one bad investment. It does not have to be this way. Here is how an investor would look at innovation:
Diversity is king in investing and innovation. Unless someone can see into the future or has insider information, it is always best to diversify investments. Low risk investments provide stability and higher risk investments provide growth potential.
Some investments are not affected much by recessions, others are. Innovation is the same. Some innovations provide big returns but also have a higher risk. Other innovations have lower risks but lower returns.
When we are doing innovation we must strive for a diverse and balanced portfolio for long-term sustainability. This means that instead of throwing all of our resources into one project, we must spread resources around to multiple smaller projects or ideas. If a specific innovation is providing a good upside, we can move more resources into it and pull resources out of projects that are not producing results.
It’s important to never allow all of your resources to get invested into a single idea and know when to cut your losses. To become an active investor in innovation you must continually monitor and adjust your portfolio.
One of the common practices in freelance development is to take a small piece of a project and then hire multiple developers to complete the task simultaneously. This allows you to get a better idea of their capabilities and how well you work together. Once that is complete, you can pick the developer or developers that provide the best result and move in to the next phase. You should take the same approach with solving an organizational problem. In the investing world this practice is similar to hedging.
It appears in innovation when you take different approaches to solving the same problem. Similar to creating a balanced portfolio, this allows you to reduce your overall risk. This is usually a good option when you are looking at a technology solution vs. increasing staff; or looking at two completely different types of technology. Hedging one against the other allows you to test each in a controlled environment and see which one works best. Then you can increase your investment in the one that is showing the most promise.
Following these three tips will not guarantee that every innovative experiment you conduct will succeed, but having the mindset of an investor will ensure that you manage your risk so that in the long-term, you have a better chance at success.