process risk | Launch Tomorrow

Earlier this week, I was on the Yeukai Business Show talking about risk management in the context of startups. Yeukai was a great discussion partner, and pulled a lot of stories out of me. This is probably the more “storified” version of my work on risk management and experiments. As someone who spent 15+ years in financial markets and now almost 10 on innovation, I wanted to share the key learnings.

So if you want to learn how the foundations of identifying your biggest risks and being able to predict profitability and increase your confidence levels, pop over there and have a listen.

You'll discover:

The process of mitigating risk and cutting losses
The common reasons for loss and bankruptcy among tech startups
The impact of proper risk management, as well as 3 different ways to mitigate risk

If you want to find out more, check out Your First Startup Experiment to get even more tools and techniques on this topic.

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This week I just wanted to draw your attention to an old article on Harvard Business Review about budgeting in established companies for innovation.

Here, on average, is what they estimated they were currently spending: 85% of their resources on day-to-day operations 5% on incremental improvements that produced faster, cheaper, better sameness 5% on small sustaining innovations 5% on big, disruptive innovations When we asked the managers what a better proportion might be, their answers were: 75% on day-to-day operations 5% on incremental improvements 10% on sustaining innovations 10% on big, disruptive innovations.

Personally, I find this intuitive, because of asset allocation is part of my background in finance. In situations of partial randomness, like in the financial markets, the amount you allocate defines your expose to particular risks and profit drivers.

relative and absolute allocation matters when deciding a budget

You can’t control in advance whether an investment will go up, down, or sideways in value. But you can choose how much you allocate, both in relative and in absolute terms:

Relative: Relative to the budget as a whole, what % is allocated to each innovation initiative? Also, what is the relative pool of money allocated to each type of innovation?
Absolute: How much money are you putting in? In other words, are you ok if you lose 100% of it?

The big challenge really, with budgeting for innovation in established companies, is that it’s typically done on an annual basis. Whereas new product development occurs on a much shorter cycle time. That way you are making big decisions about funding without the benefit of market feedback and other considerations which are critical tactically.

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Let’s talk about risk

How to budget for innovation