Building an Innovation Measurement Framework that Demonstrates Corporate Value
How big companies measure success is very different from how you measure progress and success of new growth initiatives or ventures. Inherently, this is something we all understand, but very few companies do so effectively. While a big company reports on revenue, profitability, price-to-earnings ratio, stock price and other key metrics (often focused on what investors care about), a new venture has none of these things. Even if a new venture has revenue, it’s immaterial to the overall performance of the larger company, because it’s so small.
So the challenge remains: How do you measure progress for a growth innovation project, venture or initiative? The answer is to focus on two key questions:
- Are things progressing well with the new venture or not, and should we keep investing or not?
- How and when will the new venture have an impact on the overall business of the larger company?
1. Are things progressing well with the new venture or not, and should we keep investing or not?
It’s possible to answer the first question through the application of a simple analytics framework, more focused on how startups measure progress.
Specifically, in Lean Analytics, which I co-authored with Alistair Croll, we created the Lean Analytics Stages, which represent the different stages that a startup (or new corporate venture) should go through in order to succeed. In addition, we defined the “gate” you go through in order to move from one stage to the next.
Big companies are already at the Scale stage; they have already won and grown into a massive organization. But new growth ventures start at the very beginning Empathy stage; regardless of where they come from–either founders in a basement ideating or corporate innovators building within a large company.
- Empathy: This is the first stage in any new innovation venture, project or initiative, where most of the data you’re collecting is qualitative through user research. You haven’t built anything yet, and you are trying to validate the problem and the target market. Unfortunately, many startups and corporate innovators go through this stage too quickly, without getting a deep enough understanding of the opportunity. To learn more about the tools and methods you can use to understand the opportunity, and validate a problem and potential solutions, we put together this Highline Beta toolkit.
You can also download our guide on how to conduct effective user interviews below.
- Stickiness: This is when you build a minimum viable product (MVP) and put it into users’ or customers’ hands. At this stage, you are able to start measuring quantitative data, with a focus on usage. Usage is a proxy of value–if someone is using the product it’s reasonable to assume they’re getting value (although you still need to engage them qualitatively to understand why.) Most startups and corporate innovation projects fail at this stage, even if they continue, because they haven’t really solved the problem in a meaningful way and demonstrated significant enough value creation for the end user/customer.
Note: In the Stickiness gate, we say “…that users will adopt, keep using and pay for.” In this context, “pay for” may not be with money, because we’re not trying to prove we can generate scalable revenue or build a profitable business. “Pay for” means there has to be an exchange of value that’s proven, which can be in the form of dollars (a user takes out their credit card and is willing to pay), attention and/or data (the latter two which you believe you can leverage and monetize in the future
- Virality: This is the stage where you move from early adopters to later adopters. You’ve proven that people get significant enough value from your solution and now you have to demonstrate an ability to acquire more users/customers in an effective way. Although this stage is called “Virality” it doesn’t necessarily mean your solution needs to be viral. A B2B enterprise software solution may not be viral, but you still have to demonstrate your ability to sell more. The metrics at this stage are focused on customer acquisition.
For a corporate venture, this may be the time to leverage your large, existing user/customer base to acquire more users/customers cost-effectively. You may have tapped into that existing user/customer base beforehand as well, but now is the time to try and scale acquisition.
- Revenue: At this point you have a solution that’s creating significant value and customer acquisition channels that are working. Now it’s time to focus on the economic engine of the business. You may have been charging before this stage, but now the “math has to work.” The metrics here become much more focused on the economic underpinnings of the business; i.e. customer lifetime value (CLV), average revenue per user (ARPU), payback period, etc.
If you can demonstrate real traction and financial growth (albeit perhaps not profitability just yet), you have product-market fit. Product-market fit is a term that’s thrown around quite liberally, and everyone has a slightly different definition. In my experience, people declare they’ve achieved product-market fit too quickly and then prematurely begin to scale. Product-market fit means you have the right solution (proven through usage / Stickiness stage) for the right market (proven through user/customer acquisition / Virality stage.)
Note: It’s important to recognize that a new growth initiative or venture within your organization is not going to have meaningful revenue for a while. Your company may be generating billions of dollars in total revenue; a new $10M annual recurring revenue (ARR) business isn’t going to make a dent on the financials. Despite how hard it may be to achieve that type of financial result, and how long it might take, it becomes difficult for an enormous company to recognize the potential value.
- Scale: Scale means a lot of different things, and depends a great deal on a startup or corporate venture’s strategy. For example, you may decide to go after new geographies. Or scale your sales team 10x. Or turn your solution into a platform that others will leverage (think: Salesforce), so you become the central hub for many different activities.
For corporate innovators, this is definitely the point in time when you need to figure out the longer term relationship between your new venture and ‘the mothership’. If that’s not clear to everyone involved, there’s a very good chance that you may be at the cusp of scaling but not have the resources to execute, because the investment is high, but the return on investment is still unclear.
To figure out if things are moving well with a new venture or not, you need to first determine the stage you’re at. And then you need to decide what metrics matter at that stage in order to determine if you’re making rapid enough progress to move forward.
The specific metrics for your venture will depend on what type of business you’re building. A consumer mobile app is going to have different metrics than an enterprise B2B solution. A 2-sided marketplace will have different metrics than an e-commerce business.
In Lean Analytics we evaluated 6 different business types in an effort to demonstrate the different metrics that are relevant at each stage.
This is by no means exhaustive, and many new ventures or businesses are a combination of models. For example, you might have a 2-sided marketplace mobile application, or an e-commerce business that relies on user-generated content. And in the context of SaaS businesses, there’s quite a bit of variety, including freemium, free trial, etc. You have to understand how your venture works (its business model and all the components of the business model) to pinpoint the metrics that matter at a specific stage.
The most important takeaway for large companies is that you need to build a framework for assessing whether or not to keep investing in new ventures in your portfolio that accounts for both different stages & different types of ventures. Based on those two variables, what you measure will change, but the decision to move forward or not will be made more objectively clear and the story around why can be more seamlessly told.
2. How and when will the new venture have an impact on the overall business of the larger company?
Once you have a framework in place for assessing and comparing new ventures within your innovation portfolio, the next question is to figure out when those new ventures will have a meaningful impact on the core business.
Unfortunately, this is a very complicated question and we can’t pretend there are easy answers. A few key things to keep in mind:
- A new corporate venture can’t survive on revenue-generation alone; it needs to provide additional strategic value back to the core business. This can include: strengthening existing customer relationships, expanding into new markets and expanding the overall portfolio of products and services.
- Focus on stickiness and usage. If there’s one hill I would personally die on it’s this one. If you can build something that people use and keep using (and ultimately pay for in some way) you have a chance at building a winning business. Even if it doesn’t scale to the degree you were hoping for, this approach is often so different from how a big company builds and launches new innovations that it can have an incredible impact on the core business.
- Building a new venture takes time. It takes startups an average of 7 years to go public. If a new corporate venture can leverage the scale of its mothership successfully it may get to real scale faster, but this isn’t always a given.
- Despite the time it takes, building new ventures in a rigorous way, and applying the Lean Analytics principles will exponentially increase the volume and quality of learnings for the company, which can be hard to measure, but can be extremely valuable. Learnings generated through rapid iteration and testing in-market, and using a structured innovation approach (including measurement) can have a massive impact on the core company’s strategy.
The best corporate innovators commit to taking a portfolio approach when building new ventures and determining their value back to the core. Some ventures, if successful, will get spun into the core business somewhere, tuck-ins that create new, incremental value. Some ventures, if successful, will become standalone business units, and may need to be spun-out into net new entities. Some ventures will fail, but the learnings will be immensely valuable, and can still feed into the macro-company strategy, or even lead to potential startup partnerships, investments and acquisitions. Building new ventures within a corporate context isn’t exclusively about building new billion dollar businesses; there’s an immense amount of additional value that can be leveraged.
What does your innovation system look like?
As leaders within our organizations we tend to easily dial in on processes, checklists and outputs to build and measure our innovation system that helps us build new ventures. The question then becomes: Does this truly add value back to our organizations, or are we focusing more on these processes, task-lists, outputs and versus outcomes that drive real value?
We’ve put together an innovation Measurement Dashboard that builds on Lean Analytics, a book Founding Partner, Ben Yoskovitz co-authored with Alistair Croll to help you demonstrate the value from your innovation initiatives back to your organization.
Click here to download and start using it today.