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Evaluating New Ideas

July 2, 2010

How do you decide if a project is worth the investment? I worked for a company recently that had a general policy about how they spent money. Every category (i.e., Sales & Marketing, R&D, etc) was measured as a percentage of revenue. This works great as operating metrics in a mature business, but it actually prevented the company from investing into new ideas that had no revenue. I find many larger companies struggle to allocate investment dollars to new ideas for this very reason, so I thought it might help to provide some perspective on the issue.

This subject is also timely as I’m working for a company that made a significant investment into a new product and they have asked me to help make it a success. This led to a conversation about how we should measure success. I’ve suggested that the owner treat the product as an early stage investment. So how do you evaluate an early stage investment fairly? I sat through a Venture Capital (VC) workshop recently and the presenting VC listed his criteria. It was very simple, and went as follows:

Team
Great Product
Large Market
Business Model
Timing

The above criterion are a very fair way to decide the odds of a startup being successful, but it doesn’t address the return on investment. Generally, an early stage investor is looking to get 10x or more out of any seed investment within three to five years. These are much bigger numbers than the average company looks to achieve on an operating basis, but seed investments carry much more risk. VCs also aren’t thinking one and done. They are making many investments knowing that only a small percentage will succeed.

We live in an age where most of our leading companies are struggling to innovate. As an example, I live in the Seattle area and this is the most frequent indictment of Microsoft. My experience in larger companies is that they simply don’t think like VCs when new ideas are presented. Every company should set aside some seed money for new ideas, and should evaluate them as early stage investments. If they did they would solve their innovation dilemma and they would have a lot less great minds leaving them to go start their own businesses.

Most people who leave mature businesses to start their own company do so out of frustration, not because they think they are going to get rich. If you want to keep your best ideas and people I suggest you think more like a VC and less like a mature company the next time an employee presents a new idea.

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