We have since our founding argued that ideas are worthless. What do we mean and how can we as entrepreneurs and innovation specialists say this? Aren’t we the ones supposed to be betting on idea rich organizations?
First let us clarify that ideas are the beginning of all development. If you do not have ideas, you have nothing. However, ideas must be relevant- and if they are relevant they stand a chance to generate value.
To reach relevant ideas you must start in the field of understanding the needs of our existing and non-existing customers. The latter because they are generally more likely to drive disruptive solutions to the table, and disruptive solutions tend to be differentiating and so they bring better margins. Let us call this insight-based ideation. Ideas that solve a need or a problem, whether it be internal or external, creates a market need. Fill this and you have a solution that generates value.
Now ideas themselves are in abundance. Generally any person asked will say they generate 10-30 ideas a day. Few of these 70 to 200 Billion daily ideas (extrapolated to all humans) end up generating any value at all, thus the average idea is worthless. Some, however tend to survive the process of leaving the napkin level and making it to something applied repetitively. This process, we call Innovation. Ideas without Innovation, are just ideas. Innovation without ideas does not exist. This symbiosis is important.
We generally illustrate this as a process where the idea itself is worth a certain score, let us say 100. We then add through various efforts to this throughout the innovation process, reaching a value of any successful Innovation, of 18.600. It might be topics such as planning, contextual design, business modeling, contractual progress in the value chain or client interactions (sales). Each of these efforts are awarded a certain score based on the value it creates. So, again, most of the value is derived from the structured process of defining, validating, developing, modeling, prototyping, launching… that we call Innovation.
Taking bets is about assessing risk and daring to step into these. If you are lucky and skilled you will be rewarded. Luck usually has to do with what you can’t control and how you deal with it, so training leads to luck.
Experience will lead you towards a decision making encompassing a multitude of factors however not necessarily luck being one of them. As you are placing your bets, you are likely making judgments and assessments based on your experience as well as an analysis of some other kind.
Betting on ideas
As investors choose which companies to invest in, they look at lagging and leading indicators. They can be read in any different ways depending on what you want to prove.
A little while ago I was presented a chart over the level of returns created in S&P 500 stocks during the first 6 months of 2015. Here it was said that companies that paid a dividend yielding above 2% to its shareholders had yielded a total negative return of -4.0 %, while the S&P 500 Index had yielded a positive return of +1.2%. Noticeable is that stocks paying no dividend had yielded a total positive return of +6.3% (*Source Merril Lynch)
Now, in this context my interpretation can be slightly different than what possibly was intended when I was shown these numbers.
My point is here, that investors in a market characterized by low inflation, high competition and low interest rates would place their bets on organizations that “need their capital” to grow by developing their own portfolio of ideas or investments. The companies that have proven they can create growth, from which an increased direct yield is expected (at a higher level) when critical mass is achieved, tend to have higher investor attraction and thus higher total yield.
The companies that rather transfer their excess capital to investors, whom then have further challenges in placing these funds, tend to be less attractive. Why? Well, if they can’t access ideas and manage the process of developing relevant initiatives, are all working on a ”die-curve” and will over time be beaten my fierce competition. And if competition is not what kills them, lack of curiosity will; They will be beaten by customers loosing interest in what they offer and how it is offered.
However, organizations that can’t find ways to place their bets on new ideas that make sense, are likely not as attractive long term. They are in the “play not to loose cycle”, rather than the “play to win” cycle.
Now, let me also declare that there is such a thing as a bubble economy. In such, investors keep placing higher and higher bets on stuff that is not ever going to prove its value. If you believe we are in such a state, just go against the market.
– Dariush Ghatan