How to marry innovation and finance?
This is Fred
He is an innovator (also known as a product guy in the large company he works for). He has a brilliant innovation idea that could have a huge impact on the market.
This is Claire
She is a finance manager (also known as an investor in startup world). Fred knows that working with Claire from the very beginning of his project will make it easier to get her buy-in later.
Fred is doing his calculations and according to his educated guesses here are his opportunity estimations:
Best-market size: $100M
As an expert in his industry and after his research, Fred evaluates the best-case scenario of market revenue at $100M.
Scale investment: $10M
Fred, as an experienced manager, is very good at budgeting costs and he approximates the cost of building the product at scale to serve this market as requiring a $10M investment.
Duration: 8 months
Fred thinks that to get evidence of the product–market fit, he would need about 8 months with a team of three people: Fred, Beth (a designer) and James (an engineer).
Frequency: 4 times
He thinks that 2 month intervals (8 months / 4) would be a good pace to make reports to the review team about the progress of this project.
As said before, Fred wants to seek Claire’s views and keep her aware of the project. Fred is smart enough to understand that the new initiative is not just his stuff, but is a common project where both the product and finance teams need to be involved. Engaging and working with Claire from the very beginning will make it easier to get her buy-in later.
You can think of this approach as a lean way to make internal (for established organizations), or external (for start-ups) customer discovery with investors to get a validated progressive buy-in and to avoid the “Ta-dah! Moment” and discover that nobody buys into your idea.
Fred inserts the four values described above into the Excel file (which you can download from the link below), clicks on the “Calculate” button and obtains the Lean Finance Board, ready to be printed. At the moment, Fred lets the search investment parameter be void.
Fred starts to discuss these values with Claire, who really appreciates the money-oriented financial model, and after some negotiation, they agree that the project seems interesting but they cannot yet dedicate a three-person team (Fred, Beth and James) for more than 6 months on this project. However, Fred does obtain the expected budget to manage the planned expenditure for the search phase. The whole financial amount to finance the search phase would be at most equal to $1M. They keep the frequency equal to 4 moments of confrontation with the review team. The search investment had been estimated to $1M.
Fred and Claire now know how to protect their innovation initiative investment of $10M (the scale investment) by “buying” an innovation insurance (the search investment). The purpose of buying this innovation insurance is to protect their investment from being wasted while covering the expenses of learning and decreasing the uncertainty, typical of new initiatives at a very early stage.
If you are wondering what exactly was the story you just read ….
Federico Mammano, an Entrepreneur, Lean Product Management Hacker, Innovation Enthusiast & Speaker, and Creator of VR platform True Reality, has sat on both sides of the table (product vs finance), and he has had to face the challenge of getting a new idea initiative off the ground many times from both perspectives (innovation vs investment) for more than a decade.
Federico has been able to find a practical way to minimize the competition against luck, to make impartially better decisions based on sound evidence, and to get finance and product people speak the same language.
His past experience in the financial derivatives market helped to figure out how best to approach this issue and find a more scientific and structured process, which led to the creation of a one-page visual canvas called the Lean Finance Board.
Read the detailed overview by Federico about the Lean Finance Board and you will learn how do you get the finance people and product people speak the same language with a finance option pricing model applied to the lean innovation process, all laid out in a one-page visual canvas together with an Excel file, ready to use.