Innovation Capitalists & Social Capital

Satish Nambisan and Mohan Sawhney introduce the idea of the innovation capitalist in A Buyer's Guide to the Innovation Bazaar:

It's smart to look outside your organization for sources of innovation.  But the prevailing methods present unattractive trade-offs.  For example, shopping for raw ideas costs less, yet it's riskier and lengthens your time to market.  Shopping for market-ready products (for example, through an acquisition) gets you to market faster, but it's expensive.

What to do?  Nambisan and Sawhney recommend adding a third approach: shopping for market-ready ideas.  This method falls between the two extremes of shopping for raw ideas and market-ready products.  To use it, find an innovation capitalist firm...

Critically, Nambisan and Sawhney  underscore the importance of the relationship between an acquiror or licensor of market-ready products and innovation capitalist firms:

That is, because of the nature of the innovation capitalist's offering, large client companies need to build and nurture long-term and trusting relationships with selected [innovation capitalist] firms.

In other words, the ability to access the intermediate range of the "external sourcing continuum" (click on image to enlarge), is predicated upon strong tie relationships.  The purpose of this post is to elaborate upon that proposition.  In my firm's experience, there are, in effect, discontinuities in the uncertainty and value curves perceived by client corporations that are a function of decision-makers' time span of discretion.   As a consequence, the critical resource that expands the window of opportunity for an innovation capitalist firm is a portfolio of personal relationships with very senior decision-makers.

Value is relative, personal, and contextual.  A buyer's ability to ascribe value to an opportunity depends on his effective time span of discretion relative to the perceived degree of development of the opportunity.  Effective time span of discretion is a function of a decision-maker's disposition and situation.  By disposition, I mean a person's mindset and skill set.  To the extent that a person is able to tolerate ambiguity and think in terms of option creation versus operational execution, his potential time span of discretion increases, and he can value opportunities that are "less baked".  Situation is mostly, but probably not exclusively, a function of the decision-maker's position in the organizational hierarchy.  The higher a person's hierarchical rank, the longer his potential time span of discretion.  A person's effective time span of discretion is the lesser of the two potentials.

For example, a far-sighted sales clerk would, nevertheless, have a short effective time span of discretion due to his lack of standing in the hierarchy.  On the other hand, a business unit president who values predictability, efficiency, and execution above all might have a similarly short effective time span of discretion.

All other factors equal, an opportunity that falls within a buyer's effective time span of discretion will be deemed actionable and, thus, more valuable.  An opportunity that falls outside of the time span of discretion will be deemed less valuable.  And, I expect the relative value is discontinuous - more of a step function than the smooth curve depicted at left.  For instance, opportunity A would be deemed much more valuable than opportunity B, even though the difference in uncertainty and time-to-market are modest.  For a buyer having the illustrated time span of discretion, opportunity A is "sufficiently baked" while opportunity B is a "raw idea".

My colleagues have found that a typical effective time span of discretion - even for many senior managers at large corporations - is 12 months.  That is, the time span of discretion seems to be correlated with the budget cycle.  Opportunities that are perceived to lie outside the 12-month window are often indiscriminately labeled "future projects" and, therefore, irrelevant and not highly valued.

On the other hand, the same set of opportunities are likely to be perceived differently by a decision-maker with a longer effective time span of discretion.  If their combination of disposition and situation allows them to take a somewhat longer view, they would be more likely to perceive the value of both opportunity A and opportunity B.  Both would be deemed sufficiently baked and, thus, worthy of consideration.

While a buyer's effective time span of discretion is a key determinant of perceived value, so is the perception of where an opportunity lies on the risk curve.  In the face of the abundant uncertainties surrounding a potential product, value is also a function of the buyer's trust in the work done by the seller - the innovation capitalist.  As Henry Chesbrough has noted, the lack of trust may constitute a rational reason for resisting external ideas:

One such component is the need to manage risk in executing R&D projects, especially when the cycle time to complete a project is accelerating...When cycle times accelerate in a project, there is less time to evaluate and incorporate external technologies...

(Ironically, the Red Queen effect (video) encourages companies to become more open to external sources of prospective innovation while, simultaneously, the related increase in industry clockspeed makes it harder for companies to ascribe value to externally sourced ideas.)

For example, let's say that the degree of development (i.e., uncertainty reduction) asserted by the innovation capitalist is represented by point C in the graph at left.  Absent a strong degree of trust resulting from a shared understanding of mutual competencies, resources, and values, the degree of development perceived by the buyer might be point C_P.  That's because in the absence of trust derived from a strong relationship, the opportunity is likely to be perceived as more uncertain and facing a longer time-to-market.  In other word's the buyer would likely perceive the opportunity as less baked than the seller.  So, even if the seller's assertion of the degree of development is accurate in some objective sense, the perceived opportunity might fall outside of the buyer's effective time span of discretion.  Consequently, the perceived value is likely to be relatively low.

In a previous post, I suggested that pitching raw ideas is a viable strategy to the extent that the ideas complement prospective licensees' existing products, supply chains, and marketing capacities.  At first blush, that assertion appears to contradict the time span of discretion hypothesis.  Nevertheless, I think both can hold true in the context of complementary ideas.

Consider an idea, D_I, that, in isolation, might be considered pretty raw.  That is, there is a great deal of uncertainty regarding the idea's commercial viability as a standalone product.  To the degree the concept truly complements an existing product, manufacturing process, and marketing capacity of a licensee, that same idea could be perceived as being almost market ready, indicated by D_C.

In summary, the value of an opportunity presented to a client company by an innovation capitalist firm is relative, personal, and contextual.  More specifically, a client's ability to perceive value is a function of whether or not the opportunity falls within his or her effective time span of discretion.  Furthermore, the shared perception of the state of development of an opportunity is a function of the degree of trust between the innovation capitalist and the client.  Consequently, the window of opportunity for the innovation capitalist model is likely to be related to the number of deep, personal relationships between the innovation capitalist firm and very senior decision-makers at prospective client companies.

The challenges are numerous:

• Strong tie relationships take time to develop and, therefore, are expensive to cultivate and maintain.
• Relationships tend to run between people rather than organizations.  (Though, over very long periods of time, interpersonal relationships do seem to be able to morph into inter-organizational relationships.)  Furthermore, senior managers' tenure at large organizations is becoming shorter.  Therefore, it is risky to try to develop a relationship with a given client corporation by investing in a relationship with a specific senior manager.
• The range of interest of a given senior manager is still going to be relatively narrow, as it is determined by the range of capacities of his or her organization that exist or can be developed during his or her effective time span of discretion.

It strikes me that a viable approach for an innovation capitalist firm to take is to consciously cultivate a dynamic portfolio of relationships with specific senior managers.  No doubt, it's a very difficult course to pursue, but it offers at least three advantages:

• It expands the window of opportunity for playing a valued role in the intermediate range of the external sourcing continuum.
• A portfolio approach mitigates the inherent risk of individual relationships.
• Because such relationships take time and effort to build and maintain, they serve as a very effective barrier to competition.

Comments

[Francesc]

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[Julia]

In order to find market-ready ideas, companies should talk with their customers and even brainstorm with them. Wouldn't it be great if R&D's ideas or the marketing department's ideas matched up with the ideas, needs, and wants of its customers? BrainReactions makes that happen. I am sure there are other companies out there as well.