lean startup co. - the roi of innovation...
TRANSCRIPT
© 2017 Lean Startup Co., LLC. All rights reserved.
Dave [email protected]
Hugh [email protected]
11.1.2017
© 2017 Dinadesa LLC
The ROI of Innovation
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
— Mark Twain
Finance Raises
Discount Rate for Risky
Projections
Product Increases Risky Projections to Get Positive
NPV
Finance Raises Discount Rate
for Risky Projections
Product Increases Risky Projections to Get Positive
NPVNPV Death Spiral
NPV Death Spiral
So… No ROI?
The Company’s Money
You
The Accounting is the Problem
-50000
-25000
0
25000
50000
75000
100000
Start Dev Launch Growth Maturity Decline ...EOL
Growth Profit
Grow ProfitInnovate
Grow ProfitInnovate
Profitability Stability Efficiency
Grow ProfitInnovate
Growth Revenue Market Share
Grow ProfitInnovate
Grow ProfitInnovate
Costs
Extra Credit: What do we do with costs
in a large organization?
We Need Innovation Accounting
“Innovation Accounting is a way of evaluating progress when all the metrics typically used… are effectively zero.”
— Eric Ries
Grow ProfitInnovate
Costs
Grow ProfitInnovate
Optionality
On Innovation
Innovation is Not Homogenous Continuous (sustaining) is high certainty Discontinuous (disruptive) is low certainty.
The Test is Certainty
Innovate Grow Profit
Build Grow Profit
Kno
w
Innovate Grow Profit
Build Grow Profit
Grow Profit
Kno
wAs
sum
e
Innovate Grow Profit
Build Grow Profit
Grow Profit
Kno
wAs
sum
e
Innovate Grow Profit
Build Grow Profit
Grow Profit
Kno
wAs
sum
e
Innovate Grow Profit
Grow Profit
Grow Profit
Kno
wAs
sum
e
Innovate Grow Profit
Grow Profit
Grow Profit
Kno
wAs
sum
e
Cer
tain
ty
Time
Growth
Profit
Low
High
Innovate Grow Profit
Grow Profit
Grow Profit
Exec
ute
Expl
ore
Profit: High Certainty Both Growth and Profit Pure Execution
Innovate Grow Profit
Grow Profit
Grow Profit
Grow: High Certainty Growth, Low Certainty Profit Mix of Execution and Exploration
Exec
ute
Expl
ore
Innovate Grow Profit
Grow Profit
Grow Profit
Innovate: Low Certainty Both Growth and Profit Pure Exploration
Exec
ute
Expl
ore
Innovate Grow Profit
Grow Profit
Grow Profit
Exec
ute
Expl
ore
Traditional, Linear
Lean, Iterative
Certainty
Applicability
High certainty: Traditional accounting Low certainty: Innovation accounting
Grow ProfitInnovate
Grow ProfitInnovate
Grow ProfitInnovate
Transition Before Growth Stalls
Grow ProfitInnovate
Transition after Growth Known
Grow ProfitInnovate
Grow ProfitInnovate
ProfitInnovate == Grow
NPV Fails Under Uncertainty
Static and Inflexible Requires Large Up-Front Investment Encourages Obfuscation Slows Decision Making
Metered Funding
Metered Funding Implies that Value Comes from the Ability to Choose
Traditional Accounting Values Assumptions Innovation Accounting Values Knowledge Knowledge Informs the Choice
Innovation Options
Innovation Options
Measure value of optionality, not cost. Precede the main investment. Provide a positive ROI without the NPV Death Spiral. Based on well-known option pricing models.
Metered Funding
Metered Funding
Grow ProfitInnovate
Grow ProfitInnovate
MVPPre-MVP
Build
MVP
Impl
emen
t
Ideation
Gro
wth
Innovation
MVPPre-MVP
Does this idea fit strategically?
Does this idea warrant Growth?
Impl
emen
t
Ideation
Does this idea warrant an MVP?
Judge Fit
Value Proposition, Business Model Canvas, CAC/LTV Targets
Duration in Days
Investment in Hundreds
MVP
Build
MVP
Ideation
Gro
wth
Judge Conversion
Acquisition, Activation
Problem/Solution Fit
AdWords, Kickstarter, LOI, MOU, Pre-Orders
Duration in Weeks
Investment in Thousands
Pre-MVP
Does this idea warrant an MVP?
Pre-MVPIdeation
Gro
wth
Innovation
Judge Growth
Retention, Referral
Product/Market Fit
Build/Measure/Learn, Split Testing, CustDev
Duration in Months
Investment in Tens of Thousands
MVP
Does this idea warrant Growth?
Ideation Pre-MVP MVP
Goal Strategy Fit Problem/Solution Fit Product/Market Fit
Metrics Quantity Conversions Growth
Tactics Meetings Kickstarter, AdWords, LOI, MOU, Pre-Orders
BML Loop, A/B Testing, Customer Development
t Days Weeks Months
$Ks .1 - 1 1 - 10 10 - 100
Innovation Option Application
Simple and Discrete Metrics and Goals Clear and Articulated Built-In Expiration Clear Covenants for Both Product and Finance
Enables Corporate Governance
Who Processes the Applications? Growth Boards
Growth Boards
Accountability Clearinghouse Funding Decisions
Corporate Governance
Ideation DashboardWeek 1 2 3 4Starting Cash $ 1000 $ 750 $ 500 $ 250
Net Cash Flow $ (250) $ (250) $ (250) $ (250)
Ending Cash $ 750 $ 500 $ 250 $ 0
Ideas Processed
5 5 5 5
Pre-MVP DashboardWeek 1 2 3 4Starting Cash $ 5000 $ 4800 $ 4000 $ 2500
Net Cash Flow $ (200) $ (800) $ (1500) $ (2500)
Ending Cash $ 4800 $ 4000 $ 2500 $ 0
Conversions 0 5 5 90
MVP DashboardMonth 1 2 3 4Starting Cash $ 20000 $ 15000 $ 10000 $ 5000
Net Cash Flow $ (5000) $ (5000) $ (5000) $ (5000)
Ending Cash $ 15000 $ 10000 $ 5000 $ 0
Conversions 200 400 700 1200
Retention 0.8 0.8 0.8 0.8
Assumption 4 8 10 12 13 13
Users are interested in learning more about their insurance benefits
Users are willing to enter in their phone information to receive a call from a
representative
Users will answer that call and engage with the representative on their benefit
profile
Users will convert and begin accepting the new insurance benefits
Users will continue their benefits past the initial one-month trial period.
Week
Assumption 4 8 10 12 13 13
Users are interested in learning more about their insurance benefits
Users are willing to enter in their phone information to receive a call from a
representative
Users will answer that call and engage with the representative on their benefit
profile
Users will convert and begin accepting the new insurance benefits
Users will continue their benefits past the initial one-month trial period.
Measure ThisWeek
Assumption 4 8 10 12 13 13
Users are interested in learning more about their insurance benefits
Users are willing to enter in their phone information to receive a call from a
representative
Users will answer that call and engage with the representative on their benefit
profile
Users will convert and begin accepting the new insurance benefits
Users will continue their benefits past the initial one-month trial period.
Measure This
And This
Week
Assumption 4 8 10 12 13 13
Users are interested in learning more about their insurance benefits
Users are willing to enter in their phone information to receive a call from a
representative
Users will answer that call and engage with the representative on their benefit
profile
Users will convert and begin accepting the new insurance benefits
Users will continue their benefits past the initial one-month trial period.
Measure This
And This
NOT This
MVPPre-MVP
Build
MVP
Impl
emen
t
Ideation
Gro
wth
Innovation
- +
+ False Positive (Type I Error) True Positive
- True Negative False Negative (Type II Error)
Pred
icte
d
ActualDiagnostic
GO was Wrong GO was Right
GO Failure Success
NO-GO
Opportunity Benefit
OpportunityCost
Assu
mpt
ion
KnowledgeIdea
Accurate bad news is infinitely superior to inaccurate good news.
Summary
NPV Death Spiral Three Phase Product Lifecycle Types of Innovation Metered Funding/Options Innovation Stages/Applications Growth Boards/Governance
Backup
iCAC / iLTV Dashboard
What are we testing?
Growth Assumptions (CAC) Profit Assumptions (LTV)
Grow ProfitInnovate
Innovate Grow Profit
Grow Profit
Grow Profit
Kno
wAs
sum
e
CAC LTV
Innovate Grow Profit
CAC LTV
iCAC iLTV
Kno
wAs
sum
e
iCAC
Total Cost of Acquisition Acquisition: Units of Value Total Cost: Cash
Acquisition
Units of Value Single-Sided market: Whoever Pays Multi-Sided market: Reason Money is Paid
Cost
Total Cost (Fixed + Marginal) In the Long-Run, all Costs are Marginal Simpler, Unambiguous
Cash Only Nothing Else Matters
iCAC
Concrete Number Should go Down with Time
(Will go down precipitously if you are riding the hockey stick) Normalized Measure of Progress
iLTV
Always an Estimate Composed of Two Parts: Current Value Future Opportunity
WOM/PROM
Implications
Non-linear growth can only come from WOM PROM shifts the curve, it doesn’t change its shape.
(Meaning: better marketing doesn’t fix crappy growth; it only makes crappy growth come sooner.)
Technology Adoption Lifecycle
Rodgers
Innovators Will try new because it’s new
Early Adopters Will try new if it solves a problem
Early Majority Will try new only if other people are using.
Implications
First 16% only need PROM. Early Majority need WOM. If Innovators and Early Adopters churn out, you have the Chasm. WOM is driven by your product
MVP Threshold
The WOM/PROM ratio Need to Get this Above 1.0 Don’t Fund Until You See It
Innovation Options
Innovation Options
Measure value of optionality, not cost. Precede the main investment. Provide a positive ROI without the NPV Death Spiral. Based on well-known option pricing models.
Trinomial Pricing Model (Boyle, 1986)
$5M
$5M
$100M
$5M
$100M
$0M
$5M
$100M
$0M
$5M
$5M
$100M
$0M
$5M
$35M
$2M
$5M
$100M
$0M
$5M
$35M
$2M
$65M
$15M
$4M
$1M
$5M
$100M
$0M
$5M
$35M
$2M
$65M
$15M
$4M
$1M
$5M
$100M
$0M
$5M
$35M
$2M
$65M
$15M
$4M
$1M
$5M
$100M
$0M
$5M
$35M
$2M
$65M
$15M
$4M
$1M
Run the Numbers
$5M
$5M
Proposed: $5M
$5M
$100M
$0M
Proposed: $5M
$5M
$100M
$0M
Proposed: $5M
Range: $0 - $100M
$5M
$100M
$0M
Proposed: $5M
Range: $0 - $100M
$5M
$100M
$0M
Proposed: $5M
Range: $0 - $100M
$5M
$100M
$0M
Proposed: $5M
Range: $0 - $100M
$5M
$100M
$0M
Proposed: $5M
Range: $0 - $100M
$5M
$100M
$0M
Proposed: $5M
Range: $0 - $100M
Terms: 4 Iterations/Year
$5M
$100M
$0M
Proposed: $5M
Range: $0 - $100M
Terms: 4 Iterations/Year
$2M
The Math
+
+
<— Current Option Value
Value Adjusts as You Iterate
Exercise
Expire
Pivot
The Difference
NPV: Deliver
OPV: Determine