Every industrial company already runs a venture fund - just without the rules (2/6)

If innovation outcomes cannot be predicted upfront, funding decisions have to stop being project approvals and become probabilistic bets. At that moment, the management domain changes from operational planning to portfolio allocations. 

Yet most companies never acknowledge the transition. They still ask each initiative to justify itself individually, even though statistically only a minority of ventures will succeed. In this obviously paradoxical world, they demand certainty from activities whose economics are defined by uncertainty. 

In an industrial world, machines are expected to perform as planned. Variation is noise. Deviation is undesirable. Contrast that with new technology ventures where most create little to no value, and only very few lead to disproportionate outcomes. And if returns concentrate in very few successes, evaluating initiatives individually guarantees systematic underinvestment in winners and overinvestment in mediocrity. 

Projects are being evaluated by expected ROI, NPV and payback periods. Those metrics are appropriate when variance is small. But with high uncertainty, the expected value does not equal the average outcome and managers unintentionally end up favoring safe outcomes, resulting in incremental projects being passed and transformational ones being failed. 

Funding innovation outcomes requires a mental shift from funding initiatives to funding learning paths where capital is released to answer progressively expensive questions: 

1. Is it technically possible? 
   
   
2. Does anyone need it? 
   
   
3. Will they pay? 
   
   
4. Can it scale? 
   
   

Because success is concentrated, funding decision must compare options, not plans. Persistence without evidence of progress and customer traction destroys returns, killing projects early increases returns. The purpose of an innovation portfolio is not to avoid failure, but to make failure cheap enough so that success becomes more likely. 

Once innovation behaves like a portfolio, the organization needs new rules: 

• Who decides continuation? 
  
  
• When is stopping success? 
  
  
• How independent can the teams be? 
  
  
• What replaces annual budgets?

Those questions are governance questions, not innovation questions.


Next article (3/6)

Why culture programs fail and governance determines behaviors