The special needs of innovation
Seedcorn or start up
Assessing the risks in your project
Innovation is the most difficult area of business funding both for management and for investors and lenders. The word conjures up images of competitive advantage and profitability but equally it goes hand in hand with punting and unassessable risk. As one senior Californian venture capitalist said "the beaches are littered with the wreckage of failed parallel processing companies" (parallel processing was one of the great "blue sky" hopes for technical innovation in the cvomputing industry it has still to live up to its potential).
REDUCING THE RISK
As discussed in Chapter , the prudent venture capital investor always seek to reduce the risk in an investment to the absolute minimum. Therefore he looks for a management team with an excellent track record, tried and tested production or operational technology, predictable markets and a product with proven success in those markets. These are the characteristics of the attractive buy out, buy in and even straightforward start up investment. They are not the characteristics of an investment in innovation.
If the investor cannot minimise risk by investing a business in which all the elements have all been proven, as he patently cannot in a proposal to invest in innovation, what risk can he reasonably seek to eliminate? Faced with the volatility of new technologies, how does he, with limited direct technical expertise, test the viability of the assumptions behind the product, market or production technology?
At the least he can ensure that those elements which are not part of the innovation, not least management, are proven. This is especially true of management where the control and direction of a business which is developing, producing and then marketing an innovative product is particularly critical. The management should have had previous experience in innovation and be aware of the pitfalls of product development, the need for testing the market and even, where necessary, educating it. They must have the breadth of relevant experience to understand the technology with which they are working and the markets which they are addressing.
He want to see the management making sure that innovation is limited to furthering the aim of the business. It is all too easy to allow enthusiasm to overtake a development project and add innovative features to a product or service when proven features would better meet the need of the market and give the optimum competitive advantage. He will want to see that the development process is properly controlled using appropriate project management systems and that the management are able to demonstrate
progress against budget and how they are dealing with variances.
An equity investor will want to see the earliest possible proof of the product's potential in the market place.
Finally, the issue of defensible advantage.
