At a recent virtual gathering for members of the InnoLead network, executives discussed how innovation is funded in their organizations. Contributors joined in from a variety of industries — financial services, fast food, healthcare, engineering/construction, retail, consumer packaged goods, and airport operators. To create a safe space, we promised to keep company names confidential, but notes from the gathering are below.
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- Members are looking to answer two questions:
- Where should the funds come from?
- How much of the funds should be allocated from the core budget, and how much should be initiative-based (or ad hoc)?
- “How you fund things depends on why you’re doing it more than what you’re doing,” one innovator said. “If you’re looking to disrupt yourself, the business units won’t want to do it. They want to sell more widgets, so if that’s the case you need a separate fund and have to have the CEO…support it. If you’re looking to optimize, the business units should be involved.”
- One innovator advocated for having a fund that is not a part of the annual budgeting process. “It allows you to pursue opportunities mid-year, instead of having to wait until the next year because there is no budget. Innovation should not be tied to the annual budget cycle.”
- The hardest aspect for innovators was moving from a budget earmarked for experimentation, and accessing a larger budget for commercial roll-out and scale-up. Often, there is a period before the budget for production is approved, which can slow down the go-to-market process.
- “[When we are] going from a proof-of-concept that everyone agrees is good and people decide to move forward, it takes too long to go from the ‘yes’ to getting approved budget. The standard process is too long and too old-fashioned.”
- Some companies have set aside “scale-up” funds to help ideas grow. Other companies take a venture approach, where business units or outside investors can put money toward setting up new concepts as internal, or truly independent, startups.
- The venture funding model comes with challenges at big companies. While startups in the Valley may have many angel investors and venture capitalists funding projects, the number of people who are available to fund you within a big company are limited.
- Convincing people ahead of time to siphon off a venture fund is a somewhat successful, but the innovator needs to constantly sell why this is a good idea.
- In situations where the business case already exists, and approval to scale has been given if the project meets agreed-upon criteria, securing budget is easier.
- “I don’t raise funding for a new venture without the presence of a business unit sitting next to me… If we prove [revenue potential], I’m going to need business unit funding for the next phase, in 2022 or 2023. I need…go-to-market support from that business unit,” one innovator in financial services says.
- The challenge: You can’t have ideas that could cannibalize the business. But this tactic works for getting support for adjacencies.
- Horizon 3 and breakthrough ideas often require a different source of funding. Senior leaders need to understand why it is a good idea to ring-fence and protect funding that is dedicated to different horizons.
- One engineering company has defined pools of money that its business units can put toward innovation. “They’re required to report on each time they have a quarterly business review,” the executive said. “They’re not able to reallocate the money to someplace else, and they are not celebrated for not spending the money.”
- Some teams have an operational budget that allows for setting up experiments. If an experiment yields a significant opportunity, that team can take the idea and pitch to an internal investment committee that has control over funding.
- One company has a fund at a corporate level that allows them to invest in promising new technology, without having to justify the need for a return.
- One team switched from having a general innovation fund to a fund with earmarks for the company’s innovation horizons. The innovator on the call noted that the constraints help the team use the money and have a better understanding of what their investment should be. “[The original] fund didn’t have enough structure to get used, and it wasn’t clear in terms of governance how you got access to it and what innovation actually was,” the executive said.
- Teams still have trouble determining a benchmark amount for innovation budgets. A bigger company may spend $100 million on startups in AI, but smaller companies may not have that ability. Most companies don’t have an R&D line item to benchmark against.
- Some companies focus on R&D, or put innovation under R&D, while other companies call innovation different names. That makes finding out how people are spending on experimentation challenging.
- One innovator suggested that in his network, most teams are spending between two and seven percent of revenue.
- “If you’re benchmarking against known competitors, that’s a problem,” says another participant. “You need to benchmark against the big tech companies, or startups that are investing tens of millions of dollars in their product development
Some types of innovations are easier for the business units to understand (a new product); however, putting money towards something intangible (like cultural change) is harder. The same challenge exists between the horizons of innovation. Horizon 1 initiatives that influence the day-to-day operations are easier to secure budget for than more transformational projects.