A little while ago I read a book called “The future of management” by Gary Hamel. Besides the fact that it is a great book full of nice metaphors and examples for management issues, I liked Hamel’s opinion on venture capitalists in relation to innovation:

“Innovation follows a power law: for every 1,000 oddball ideas, only 100 will be worth experimenting with; out of those, no more than 10 will merit a significant investment, and only two or three will ultimately produce a bonanza. Venture capitalists understand this arithmetic. In a given year, a typical VC firm will review thousands of business plans, meet with hundreds of would-be entrepreneurs, invest in a dozen or so companies, and then hope that one or two of them will become the next Google, Cisco, or Amgen. Few managers, though, seem eager to acknowledge the inescapable arithmetic of innovation.”

Innovation Funnel
This actually means that venture capitalists understand how to utilise the innovation funnel. In a structured innovation process, a lot of ideas need to go into the innovation funnel and along the different stages of the funnel the quantity of ideas goes down and the quality of the ideas goes up. In this way, the innovation funnel provides organisations with a staged process for innovation. To use the same amount of ideas that Hamel mentioned: out of the 1000 ideas that are brought in, the 100 best ideas are selected and get a little time and funding to be developed a little further; at the next stage, these 100 ideas are rated at stricter criteria so that the best 10 ideas will go into the following stage. At the end the one or two best ideas will be developed into actual products or services and all the other ideas and knowledge gathered along the process are stored. In any case it is important not to bet on one horse from the start. Diversification of the ideas is needed. As Hamel puts it:

“Executives, like VC’s, must invest in a portfolio of strategic options, and must resist the temptation to prematurely focus their resources on one or two ’surefire’ ideas. It’s a numbers game. While the median return on a VC’s portfolio may be close to zero (many, if not most, ventures will ultimately fail), the average return can be eye-popping — thanks to the disproportionate effect of one or two runaway successes. The lesson is clear: to build an adaptable company, managers need to worry less about weeding out low-probability ideas, and more about building a diverse portfolio of nonincremental strategic options.”

Innovation Chimney
Our experience shows us that a lot of companies do not follow the stage gates in the intended way. A lot of companies do still collect a large number of ideas. But after the idea collection phase, higher management selects a couple of ideas that get full funding. What you see in such a process is that people responsible for a project/idea more or less connect their career to the project. As a result ideas do not get killed, because that has a very negative connotation. A lot of projects end up floating around. My colleague Jaap Linssen recently wrote an interesting blogpost about the terminology used in the decision to stop a project/idea. For an effective idea management process it is critical that the attitude in organisations towards stopping projects/ideas changes. Although the project might get stopped, still a lot of lessons are learned along the process that can help other projects.

Idea management VC style
To optimise the idea management process in an organisation, it should be implemented in the ‘VC way’. Let ideas actually evolve through the innovation funnel and as part of that process organisations should change their attitude on stopping projects.