How to Reduce Innovation Risk While Increasing Impact

Innovation Strategy
Business Building

In the world of startups and venture investing, understanding and weighing risk is core to assessing any opportunity. For corporate innovation, assessing risk is just as crucial, if not more so, given the attachment to a going concern.

Innovation initiatives need to see success early, and success is all about asking and answering the right questions. It really is all about the questions, not the answers, as success is present in validation and invalidation, both.

By highlighting the categories of key risks that any new business will face, we’ve laid the groundwork for identifying and shaping the questions that can be converted into testable hypotheses. In effect, how you go about answering a question is the means to advancing your venture to market.

Note that the following list of questions is fitting for opportunities that have already answered the first BIG question – is there a compelling pain point, an under-served job-to-be-done to solve for?

Also, keep in mind that the strength and relevance of individual risk factors wax or wane as you progress. You can’t and shouldn’t be testing questions in all 10 of these at all times. You should prioritize certain risk factors for specific phases in the evolutionary journey of a new venture. As you move downstream into the market and the venture evolves, your answers to each of the underlying key questions will need to be successively more detailed.

1. Market Timing Risk – Does it make sense to pursue this now?

Two dimensions here. First, what are the headwinds? The tailwinds? Are they growing or abating? Second, what is the maturity level of other players in the space? The saturation? The competitive environment can inform answers to questions in many categories, but it starts here with these.

2. Market Adoption Risk – Is the market accessible?

Continuing from the competitive environment thread above, can we enter the market? And, if so, can we acquire customers, affordably and in a timely manner? Do our relationships, our brand, our positioning carry weight that make this easier, or are we just like any startup in the wild, starting from scratch?

Alternatively, if the market does not yet exist, or is very early, are we confident that it will form? Why?

3. Market Size Risk – Is the market big enough to provide the returns we need?

Multidimensional as above, but what does the market landscape (current or future) look like — how big? Any dominant players? How long did it take them to get there? What growth rates, past and projected? Understanding the physics at play in a market space in conjunction with what a new venture has to accomplish by when will spare you from wasting time and money on something that doesn’t have the potential scale behind it.

4. Execution Risk – Can we deliver this experience to users? Can we staff the venture adequately?

New ventures require new skills, from sales to delivery, so we have to be realistic about the layered costs of acquiring those new skills to provide a consistent customer experience. Corporations have many resources already to potentially bring to bear, but there is a risk of transplant rejection if too many (or the wrong type of) new resources are necessary.

5. Technology Risk – Is the technology accessible and customizable? If not in-house, can we partner favorably to get it?

Testing before building is key to learning WHAT to build. If the technology is new to your business then incorporating it into your new venture means partnering with someone (PLEASE explore partnering first before merging/acquiring) who has close to what you’re looking for, and customizing their offering; if nothing exists, then you have to build it, which requires a highly disciplined process to satisfy that innovation R&D effort (if that’s too big a stretch, it’s time to move on to the next venture).

Alternatively, if your success relies upon a new technology maturing to some usability threshold (e.g. gen AI), that is too risky! Make sure your vision works based on what is usable today, even if you have a grander vision of where it could go in the future – as a very successful investor once told us, “If it doesn’t work in the short term, it doesn’t work.” This is particularly true in the context of corporate innovation (and we’d argue should be more true of all entrepreneurship…).

6. Business Model Risk – Do the economics seem favorable?

Early in an innovation project, it’s impossible to get quantitatively definitive, but you can start to size up costs to deliver the new offering, as well as create high-potential revenue models that maximize the future value to customers, partners and your organization, that enable you to get directionally predictive. If you can model out actuals or those derived from comps, begin to accumulate real data against those, and show directional gains that expose win-win-win potential, then you should proceed. I think many new ventures (scaled businesses too, for that matter) get metrics really wrong, whether startup or corporate innovation.

7. Platform (Strategy) Risk – Is it complementary or competitive to the core business?

There’s no wrong answer here, but your organization needs to be aware of the consequences of whichever answer it gets; knowing the core will lose ground to an internal offering is hard to stomach, though it’s sometimes the best option (especially in established businesses where the core is shrinking), so make sure this aligns with your corporate growth strategy. Furthermore, a new offering can extend a line of business, or it can open up a completely new one. Handling these two scenarios differs dramatically, so be realistic about how stretchy you’ll ultimately be asking your company to be.

8. Venture Leadership Risk – Are leaders open to feedback? Are they candid about the state of the venture?

Knowing when pivoting is necessary (or shelving, or even *gulp* killing) is really hard. You get so focused on a path and commit fully to it, but venture management has to recognize when change is necessary and how to handle it if it is. Is leadership willing to accept failure as learning?

9. Financial Risk – How much will it cost to achieve our learning goals?

Having line of sight to your next round of funding is critical in the corporate world too; if you spend everything you’ve got before or right at the next funding milestone then you run the risk of dying in the decision-making lag (which can be even more severe in the corporate context). Thus, you need to know your organization’s willingness to spend on getting you from seed to commercialization, and how you’re tracking against those expectations.

10. Defensibility Risk – Do we have favorable control points? What is the likelihood of lawsuits… of other regulatory challenges?

If your organization doesn’t have a defensible position then your right to play is no different than any other organization – small or large. Find what uniquely advantageous position your company can take and make sure nothing compromises it as you make your way to market. The regulatory part is obvious, just be aware of the potential trouble you can get in entering uncharted territory.


Clay Maxwell

Managing Partner

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