The late Stephen Hawking famously said that “intelligence is the ability to adapt to change”.

If you’re reading this, then it’s no secret that the world is changing fast thanks to Moore’s Law and its impact on technology and consequently, the way we do business. The challenge for organisations that were founded in the previous Century is updating their way of doing business to suit and stay competitive. Failure to adapt ultimately results in extinction.

Such organisations are responding with their balance sheets. Investment on digital transformation alone is set to hit US$7 trillion worldwide by 2021, according to IDC. However, big investments open the door for costly failures, and 84% of digital transformations go on to fail. Organisations are investing big on innovation initiatives that are said to build a culture of innovation but ultimately amount to little more than innovation theatre, despite their best intentions.

As human beings, we tend to optimise for the easiest solution, the one that carries the least cognitive load. As Chris Chatham writes, Occam’s Razor - the principle that the simplest solution tends to be the right one - is actually a medieval relic. “It is literally a historical artifact: William of Ockham employed this principle in his own 13th century work to topics resistant to scientific methods.” He says the continuing use of such thinking in science is akin a cardiologist resorting to bloodletting when heart medication doesn’t work.

It’s time to move past the medieval and borrow a page out of Robert Sapolsky’s book Behave, in which he says that “we have to think complexly about complex things”. Wow, who would’ve thunk?!

Building a culture of innovation goes far beyond merely capturing ideas, which after all, are nothing more than a commodity. Anybody with an ounce of pedigree in the creative, entrepreneurial or innovation domains will tell you that it’s the execution that counts.

When it come to building an innovation culture, you’re essentially dealing with, not just ideas but also (amongst other things):

• Conflicting policies and procedures
• Conflicting values
• Inadequate resources
• Internal politics and misalignment of incentives
• Employee psychology and cognitive biases
• Fickle customer appetite and the deceptive ‘counterfeit yes’
• Technological change and barriers to adoption
• Stakeholder buy-in challenges
• Getting the business model right (!)
• Limited funding and time to pursue ideas; and
• Short-termism.

‍

As cognitive biases go, we tend to ‘anchor’ or stick to the first piece of information that we hear. As such, most innovation initiatives amount to doing what everybody else is doing - that is, idea challenges and the like - the corporate innovation equivalent of said medieval bloodletting.

The script: set up a central platform to collect ideas, tell your staff to submit ideas, have senior executives pick winners, hand out prizes, rinse and repeat.

Occasionally, winning contributors will receive funding to pursue their idea - but rarely time or non-monetary support - and anybody who knows anything about venture capital investment is that even after significant, painstaking due diligence, for every ten investments, seven fail, and the ones that do succeed endure countless evolutions of their business model and often take years to begin to smell success. In fact, as Christina Farr writes, a typical VC firm will track between 6,000 and 9,000 new companies each year and many teams will meet with 2,500 such startups, investing in just 20 of them, and still hit a proverbial home run only 10% of the time.

So what chance do large corporations with no track record of early stage innovation have of getting it right 100 percent of the time?

That’s not to say that idea challenges can’t be useful - but a tool is only as good as how you use it - and this particular tool tends to be used ineffectively and delivers lots of misleading and easy to interpret as positive indicators (such as the number of ideas generated) that ultimately don’t deliver any sustainable value (such as the number of ideas that resulted in implemented, demonstrably measurable value adding outcomes).

We tend to value much more those things in which we have invested great effort, despite the actual value of those things, in order to quell any cognitive dissonance we may otherwise experience. Corporate executives all over the world are patting themselves on the back with a job well done because they invested weeks, if not months, into preparing and facilitating a flashy idea challenge that ultimately resulted in zero ideas delivering any real value to the firm or its customers.

As Francisco Saez writes, “this dissonance, very common in different aspects of daily life, can lead us to make big mistakes. A company director can continue with a strategy that is a disaster just because he has spent many hours developing it and putting it into practice”.

Just some problems with the simple solution that is an idea challenge: 1. employees aren’t trained to come with 'good' ideas2. clear objectives or types of innovation sought aren't defined3. employees aren’t forced to think critically about the business model4. the selection criteria is flawed (often decided by the highest paid person’s opinion or the popularity contest that is employee votes, not actual customer behaviour - as such, ideas that are selected are usually not very good ones)5. iterating on ideas is not truly supported (initial ideas usually suck)6. little money or time is made available to pursue ideas further

7. employees grow disgruntled at the lack of feedback received if their idea isn’t selected and then have little incentive to contribute to the next idea challenge

8. intrapreneurs grow disgruntled at the lack of tangible, measurable outcomes and leave to pursuit of an empowering environment elsewhere9. ideas and observations of 'what could be betters' happen all-year round, not just during the super magical creative window that is an  idea challenge.

10. ideas can’t actually be built

11. Idea challenges do little to vet the person or people behind the idea to determine whether this is something they can actually drive (incidentally, the number one thing venture capitalists consider when evaluating investment candidates)

As discussed, venture capitalists know that most of their portfolio is going to come up doughnuts, no matter how compelling the idea or how talented the team behind it. As a result, they place lots of small bets, which has been shown to materially increase their likelihood of success so that they can generate a high enough return on investment on the winners to cover all of the so-called losers.

As such, organisations serious about innovation might want to consider borrowing from the world of venture capital and rather than invest in the one-off idea challenge, and other gimmicky programs, establish a central pool of funding to empower people and invest in their ideas all year round. This way you are supporting the exchange of ideas, the development of new capabilities and talents, the uncovering of new information and data and hopefully, picking some winners along the way.

A $10 million venture capital fund will generally invest between 25% and 40% of its fund into first round deals and save the rest for ‘follow on’ or subsequent rounds of funding into those startups that show the most promise.

Here’s what the typical VC funding funnel looks like and the likelihood of startups securing funding in subsequent rounds. As discussed above, the due diligence that goes into the first round of funding is massive (incidentally, the likelihood of becoming a billion dollar unicorn is 1%).

An internal corporate innovation fund shouldn’t be all about ROI - it should be about empowering who people with the desire to try, to learn, to build resilience and adaptability. At the same time, if we are to gather sustained support for innovation initiatives from both employees and senior stakeholders, then we need to start demonstrating results, so it’s about balance. Taking this approach gives you a lot more likelihood of balance than once off idea challenges.

As such, the first round of funding could be made available to anybody who can take the time to come up with an idea that aligns with a defined strategy, completes a lean canvas or a one page business model that outlines the key assumptions underpinning the idea which demonstrates that at least some critical thinking and effort went into it (and separates the intrapreneurs from the people looking to get out of doing any work). If you must have a checkpoint, perhaps somebody with a little more of an entrepreneurial mind than a senior executive who has never built anything from the ground up reviews the idea to make sure it’s not something silly like, say, Netflix for cats, and approves it. You might find that 50% of ideas pass the initial ‘sniff test’. If it’s not approved then feedback should be given as to why.

A realistic internal innovation funnel might look a little more like this.

Say you are an organisation with 1,000 employees and normally invest $100,000 into an idea challenge, and want to explore re-allocating that to an internal fund. You’d set about $50,000 aside for your seed investments with $50,000 on follow-on investments. Here’s what you might end up with.

You might be thinking that you can’t do anything with $200. Like startups, ideas or teams will only receive additional funding if they can validate that some of the key assumptions underpinning their ideas are valid. A seed round prototype and test could be something relatively low-fidelity such as open-ended customer interviews, online ads tied to a landing page or something to that effect. This doesn’t need to cost a lot of money. We’re looking for some indication of validation and market appetite in the first stage.

To support this you’d want to make some kind of capability building program available to employees. This doesn’t need to be expensive. For the more progressive, self-starter employees, books and an online repository of content, would suffice. If you must call in external facilitators to run training programs, do so, but have them create webinars and content that people can access later and throughout the year.

Subsequent stage tests would obviously require that higher fidelity prototype are developed. The purpose, it must be stressed, is not to build the bells and whistles finished product - it’s hard to do so with the limited funding provided - but the funding is supposed to help teams effectively test whether or not their assumptions around the problem, solution, customer segment and business model building blocks (such as distribution channel, revenue model, marketing channel) are true or false.  If they are true then perhaps there is a case to be made to double down on investing in that idea. However, we will never know the answer to this if we never get out of the proverbial building.

Limited funding requires financial diligence on the part of the team testing the idea and much has been written on the curse of receiving too much funding up-front. One of the biggest problems with receiving large bags of money before your idea is validated is that you spend it on the wrong things and then it becomes a costly failure which has all sorts of repercussions inside a large firm.

Of the third round ideas, one or two might have demonstrated enough early traction and validation to secure a larger investment from the firm but that investment would be based on customer-driven, validated assumptions - not the highest paid person’s opinion or some kind of internal popularity contest.

Taking this approach, you’ve not only addressed some of the key problems underpinning idea challenges and other initiatives that ultimately amount to more smoke than fire, but you’ve also tested 250 ideas, empowered all of our people, gathered lots of new information and data that could prove useful, and have made customer-behaviour informed investment decisions. You’ll also have a better understanding of the character attributes of the people behind the ideas and determine whether they have what it takes to drive innovation at your firm.

I’m not proposing that this approach is perfect by any means - it’s not, when it comes to innovation there is no perfect approach - but it’s an order of magnitude better than many existing programs that do little to support a sustainable and effective investment in the development of an innovation culture and the delivery of genuine value, and often do more harm than good. Most of all, large organisations employ about 40% of the workforce - by taking this approach, we’re helping to unlock talent that is otherwise sitting latent, embroiled in a web of corporate politics and theatre.

For more on this ‘metered funding’ approach to corporate innovation, download the The Business Case Alternative ebook.

‍