Fundamentals of Metered Funding & Stage Gates for Innovation – Podcast Transcript

Innovation Metrics Podcast

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Teaser

But for 99% of the companies out there, customer demand is almost always the biggest risk. So just do that, right? Just implement that process. It’s probably pretty good. If you want the real solution, I think the real answer is…

Innovation Metrics Podcast Intro

Welcome to the Innovation Metrics Podcast, where we bring you the latest on innovation management. We provide insights on how to measure innovation, innovation accounting, and managing the uncertain process of developing new, sustainable, and profitable business models. You can find links to the main topics covered in this episode, and information about the guests and hosts in the show notes, or go to our blog on innovationmetrics.co. Your host is Elijah Eilert.

Elijah 

Hi, Tristan Kromer, welcome back to the show.

Tristan 

Thank you very much, Elijah.

Elijah

So, just as the founder of Kromatic, we will skip a big intro today, we introduced Tristan several times, and just listen to our form episodes for a more elaborate introduction. And obviously, there will be a lot about you in the show notes. And if you want to reach out to Tristan, just check out the show notes and the links below and you’ll be able to get in touch today, we want to talk about what we call meted funding, we want to talk about how we fund innovation projects. And not just one single project. But what does the funnel look like? What does the engine of funding look like? Specifically in larger organisations? That’s ‘gonna’ be our topic for today. So, I guess what we’re talking about is how we make decisions. So how are we making decisions? For, like always, at scale? We have traditionally we have funding approaches like we know how to fund projects in large organisations for many, many decades. And many of us believe that’s not a very, good way anymore, let’s say. And let’s start there really quickly. Like always, we kind of wants to look at the problem a little bit first. So, traditional models of funding, in theory, say that you have to go through certain steps, like in order to you receive some money, and then you receive more money, and then you receive more money. Right. And there are, yeah, talk to us about it. You don’t think so? That’s fantastic.

Tristan 

A number of different ways to allocate funding to different projects, I think you’re referring to the more traditional way where it’s like, I would like to completely reinstall an enterprise resource planning software in my organisation, and the project is going to take four years, and I need $20 million. And then it turns out to cost $40 million, but you’re already two years into it, and you’ve already spent the $20 million. So, we need another $20 million. That’s kind of like the very traditional investment process of large companies for large project planning, right? You ask for all the money upfront. And you’re what Eric Ries would call, you’re entitled to get that money as things go along just by the fact that you are working on the project. It’s not based on kind of the accomplishment or impact that you’re having. Because there is no impact as you go right? You only get the impact once you’re finished, at least in theory. And so, anything up to the point of final project completion, you’re entitled to that money. So, I think that’s where we’re starting from the right. Like that’s the basis.

Elijah 

Interesting! So, I thought, when he refers to entitlement funding, I thought it is very much based on the idea of a stage-gate, but it’s not really there. These gates don’t really exist. That’s how I interpreted it. When you spoke about it. Am I starting too late in history?

Tristan 

So, well, maybe I mean, stage-gates have been around forever, but the stage-gates are based on things happening, right. You said in your four year plan that after your one, you would do a complete analysis of the requirements and you would create a requirement and are an RFP that you’re going to send out to vendors. Congratulations, you’ve succeeded. But the four years funding the $20 million you asked for that has already been allocated to you. Okay. You have now ticked the box and you have passed to the stage-gate or whatever it is you want to, like, it’s still the idea that you are entitled to that money because you are doing the work. And that’s in direct contrast to whether agrees called calls metered funding, but it’s really based on principle are you having the impact that you said you’d have? I think the primary difference in these things is, one is again like, well, there’s nothing in my checking the box at the Stage-Gate, which says that my plan is good or that my RFP is good. There’s no quality control there. It’s just, have you done the thing? And even on different stage gates, you might have a stage-gate that’s just like, are you manufacturing? Ready? Right, has your supply chain process produced Six Sigma quality control specifications? That’s fine. But that’s still that’s we can say that’s a measure of quality, it is literally quality control. But it has nothing to do with impact. You might have Six Sigma quality control on your manufacturing process, but be producing something that no one actually wants to purchase, right? Being impact. What we mean by quality in this case, or impact is really that there’s customer value generated that there is, or at least stakeholder value generated, let’s say.

Elijah

Fantastic. No, that’s good. Okay. And so, when we design the skates now, I suppose are points of decision making whether or not we want to continue or not continue. That’s really what we’re looking for. So, we the terms there. How do we call these gates ideally? Like, just to make sure. So, it’s lingo flying around? I thought it’s really nice too, you know?

Tristan 

I don’t care what people call them. I mean, I think the decision point is fine for this conversation. But people call them states, people call them check-ins, you can call them stakeholder meetings. The Canadian overseas things could be an innovation committee or a steering committee, or an innovation board or an investor board. Like there’s almost an infinite variety of names for this thing. The one Eric Ries promoted is the growth board. But I actually don’t hear that too many in companies. Normally, it’s some form of the steering committee or Innovation Board, I think is a common term.

Elijah

Fantastic. Maybe let’s go with Innovation Board, like it and then there the gates, these are the main decision points, we have some sort of not necessarily always the same questions, but some standard questions we want to ask for a project to proceed, right. That’s really what we want to look at today, we want to look at when we look at median funding, or that kind of funding approach like hey, how do we make these decisions? And I think many people are struggling with it, I see many people designing it and I’m not sure like to ask too many questions. Are we asking too little question? How standard? How standardised? Can we make these questions? Are these decision points? And how flexible do they have to be? I think that’s really and then how much money do we allocate? I guess those are the those are really the big issues, right? Or what? And then who’s making decisions? But I think let’s leave that separate for maybe the beginning and talk about those two things.

Tristan 

Yeah, I agree. I think in some ways, I might just immediately contradict myself and say the language is kind of important, just in terms of framing what these things are. I do think like, when people think of stage gates, that usually is like, it brings to mind this massive bureaucratic process where you’re checking off boxes and making sure you’ve done certain activities. And so, I know that most of these things are called Stage-Gate processes that that is the common language like it’s my favourite. I can’t remember who put it in in this way that says there are less of kind of checkpoints and gates and more gas stations, it’s like the innovators are cruising along. And eventually, they run out of gas, right, they should automatically run out of resources, you are not entitled to gas for your car, you need to justify that you are going somewhere and that you’re going somewhere useful. And then we should find you with additional gasoline or some sort of accelerant resources. Right? It shouldn’t be that we are stopping everything. And now you must, you know, show us your papers, please proceed. It’s really that you need gas. And we’re willing to supply gas if you’re willing to pay us in the form of evidence that your project is good. So that’s the decision that we’re trying to make here is really are the benefits that your project is showing? Sorry, I just put myself automatically on this investor board. You and I are now we’re on the investor board. And this project should be showing us hey if you give us gas if you give us money time people, then we’re going to give you this benefit and here’s the evidence that we have to justify that. That’s the decision we’re trying to make.

Elijah

And I guess everybody’s waiting for “Hey, how do I make this decision right now and once that’s to talk about it?” but like once that again, maybe one more time about the language I heard you saying I think the first time saying, scale gates, I get so different. I really love it because of anybody else’s. So, I’m going off.

Tristan 

I haven’t convinced anybody else to use that term, I think except for you. So, I’ll give up.

Elijah 

I’m easily convinced. But what was good about that? Well, let’s talk about that for a second, because we will get into that. What that implies, to me at least, is that would escape the process. It was a go, no go decision. And then that was it, you finished off the project, which hardly ever happens, which doesn’t happen often enough. But if it happens, then it’s kind of it and we’re at least traditionally, right? And so, you really have to make sure you get through otherwise it has Korea implications and so on. But with this, what the scale GAE term implied, as far as I understood it, is that really, there is a loop within the gate. So, it doesn’t mean that the project is over, it might just mean that you’re not getting through the next gate. But you might have very good evidence and reason to say let me repeat this game. And let’s say, find another three, find the problem, refine the solution. Right?

Tristan 

So, that’s a pivot, right? These decisions are often referred to as pivot, persevere or kill decisions, right? Right. Persevere, meaning things are going well keep on going, maybe you can advance to a higher level of testing or higher level of scale, or pivot, meaning you’ve got to redo something here as you’ve searched for a customer, you tried out an MVP with them, and it wasn’t quite right. But you realise the MPV, the NDP has something of value in it. But maybe it’s a slightly different customer segment. Right? Like those are possibilities possible reasons to repeat the same phase. So I agree with you a Stage-Gate very much has this implication that there are only two options, either you go on, or you’re dead, right. And I think the principle of these decisions shouldn’t be that you can repeat and you can pivot. But the reason I like the term scale gate was that I, I advocate constructing your process, around varying degrees of risk, right like that, that to me is the principle of the decisions here is that we are trying to balance the amount of funding we’re giving to a project with the amount of risks that it has. So, a highly risky project, for example, one that you have virtually no data from, it’s very disruptive, but it’s very new, you don’t know what the solution is, you maybe have an idea of some technology, you don’t really know what the customer is. And it’s just very, very risky. And so, the answer to that sort of project, when it comes up for funding is not, here’s your $20 million, take your four year plan and go to work, it’s I will give you a small amount of money. And I want you to generate some degree of evidence, like just enough to bring down the risk threshold. And then you can proceed through the gas station, right, here’s some more funding. And I’m now willing to let you kind of play around with a little bit larger scale, right, because if it’s a very risky project, and I’m in a very large organisation, with very large customers, or a very large customer base, I don’t want to launching a very risky project to my entire customer base like that could kill us, right, a bad product launched to an existing brand that has a lot of brand equity. If it’s done badly, it could kill us. So, I don’t want you operating at full scale, I want you operating to 100 customers. Once you can prove that works, or at least it’s not too risky there, I will let you proceed to the next scale gate and operate at the next level of production capabilities. That’s sort of kind of thinking of your risk in terms of scales of operations makes a lot of sense, especially when you’re operating in physical products. Right? This type of thinking doesn’t really make so much sense to where I come from, which is technology products, because the scale is 02. You put something in production at work, so you can kind of scale it up immediately. But even with those tech companies, you’ll see Facebook launching products to what for them is a small, small degree of scale to a million people before they launch it to a trillion people sorry, over a billion people. Right. So, the same principle applies. It’s like how much risk do we want to allow this project to take on in terms of what scale are they allowed to operate on? And how much funding are we going to give them which again, is a type of risk? I’m willing to lose this amount of money and get no impact? Just to see if there’s anything interesting in this innovation project. Spend $10,000 and try and put out broccoli flavoured ice screen, go for it, it’s not really going to impact my bottom line very much. I don’t think it’ll work. It’s highly risky. But if it does work, I want a piece of that broccoli ice cream market. So that’s what I’m talking about here. It’s moderating your risk by constructing kind of different scales of operation that startups can play in.

Elijah 

So, let’s get into how we make those decisions. So, implied by what you just said very much. It is, there’s a difference between the type of company the kind of product you’re coming up with. But how can we help the listeners and say, you know, this is generally these are kind of the questions we want to have answered in the beginning. Like to move on? I think, and correct me there you have I think your idea of, of these gates, like, you don’t really want too many, I think, is that right? I think many people go with, let me put it out there. So, we have like, some sometimes we have like ideation. And then we have validation. And you know, all these terms. And that, well, we have problems solutions, like problem discovery problem, solution fit, you know, MVP, and so on, so on. So, can you run us either through what you typically see or what you think is really good? And we start at that level, and then we look at them, at some of the questions, at least some of the ways we should make decisions from a quality. Let me frame that again. So, we have the decision points, and how we named them, then we have a qualitative, I guess, way of making decisions, and then we have a potentially quantitative way of making decisions. So, then we have models. And let’s get into that. So, let’s talk first about the main kind of gates, and what’s out there and what you think is the best or what do you think is currently? What would you suggest? Right?

Tristan 

Okay, so what I see a lot is typically like four stages. I think that’s very common. I think it’s, Dan Toma, Esther Gomez and Tendai, Vicki, and her book, the corporate startup, kind of map out here, here for generic stages. And it’s something like ideate, validate. What is it? No, it’s ideated, then it’s problem and then the solution, and then scale at scale. Hopefully, I didn’t just butcher their book. But I think it’s something along those lines.

Elijah 

Oh, even the lifecycle approach, right, where you go to sustain and then retire or renew. So, it becomes a bit of a loop.

Tristan 

I think that’s fantastic. Yeah, that comes at the end, that’s usually past launch, right? That’s whether or not you want to renew it and start all over again, or anything like that. I think those four phases are in general fine, I do see people gravitate to four phases, I have seen three, but the most common is four, I don’t know why that is, you could certainly get more fine grained. Or you can get a much more high level. I don’t know how to say that in a succinct manner. So maybe I’ll just try and synthesise it like this. If you were talking about innovation projects, and you’re trying to create an innovation process for just your core business, okay, which is kind of known and you’re producing a lot of variations on the theme, as you said, you’re retiring something. Yeah, to feature, you’ve got your iPhone, you’ve got your iPhone 13, you’ve got your iPhone 14. What’s next is we’re going to add iPhone 15 is just going to have a lot of different colours in it. That’s the standard Apple fans, no, you can only have it first in this one colour. And now we have matte grey, or whatever it is, or Chrome or whatever flavour you want. Now comes the gold version. Now you have a bunch of different colours. Of course, they could absolutely launch all those colours on day one, but they staggered out in this way. And that’s a kind of core innovation, like very incremental, marginal improvements. If the innovation process you’re constructing is primarily to change those core businesses, you can have a very elaborate process which has 12 different steps in it, because it’s kind of a neon process. And it’s always the same. The moment you start adding really disruptive projects into that same funnel is where it doesn’t work so well. And you have to have this much more simplified funnel. And I’ll just give you the very basic example. Like, let’s take what I’m hoping is the thing listed in the corporate startup, but doesn’t matter. It’s just an example. Right? You’ve got an idea. Now you want to discover and validate that there is a problem. And then we’re going to go and discover if we have the right solution. And then We’re gonna go if those two things work, we’re gonna test for viability and we’re gonna scale it up. Right. So that’s your, your funnel, it’s basically like, create an idea. Check, validate the desirability, then the technical feasibility and then the viability of the business model. Okay, so very straightforward. Now, that process in and of itself sounds good to all of us design thinking people who are very customer centric and say focus first on the problem, okay? doesn’t work at all. If you think about, like pharma or biotech, it doesn’t necessarily make sense, right? Because the first thing they’re worried about is, can we build this thing, like, we don’t really worry about the price point of a new Alzheimer’s drug. Now, you know, people will get want to get rid of Alzheimer’s, somebody is going to be willing to pay for it based on costs, and based on demand, and there’s gonna be a lot of marks around that. But in principle, we’re not so worried about that. So that order of operations doesn’t make sense, because you would come up with an idea. And I’ve got this brilliant idea. Let’s cure Alzheimer’s. Great. Okay. The second stage, validate the desirability check. People want Alzheimer’s, I don’t need to spend any time or money at that stage. It makes no sense. Right? So, that process doesn’t make sense. In some contexts, you know, that you might want to flip around the feasibility and desirability, you might want to test first for technical feasibility, can we build the thing? And then let’s figure out pricing desirability, in this case, is like, we know it’s desirable. It’s just a question of how desirable and how much money people have to whom no matter how many people so it’s more or less real? How do we convince the insurance companies to pay for it and things like that? So, you know, what, what seems like a standard all fit solution doesn’t work when you start tossing in these different innovation types or different industries. So honestly, if you wanted, the simplest possible thing would be ideate, validate and then scale, it’s a three-step process. And somewhere within validate, you have to validate both desirability and feasibility. I feel like I’m making this very, very simple and very complex at the same time, what I’m trying to say is that any process you put in place is a somewhat artificial constraint. Yeah, it’s semi arbitrary. In most of the places where I talk to, you know, there are basically kind of quick on ramps or off ramps into different phases here. Like, if you have that same ideate, validate the problem, validate the solution, validate, validate scale, a renovation project, or something that’s kind of a core incremental improvement, might skip a few gates and go right to scale. Or it might go straight to feasibility. Because you’ve already demonstrated the desirability, it’s just a small improvement on that. I know people want the iPhone, I’m just giving them the iPhone with the gold trim. Like you don’t need to go back to want to step one and validate desirability to a large degree because the level of risk is so minimal, it doesn’t make any impact. Right there. There are ways to modify this process to kind of make it map to that, but it doesn’t really matter. What matters is not necessarily the order of operations here. What matters is that you do those three things like that you validate desirability that you validate the feasibility and that you validate test viability, business viability, and you validate them in the order of greatest risk. Like that’s it validates is risk testing.

Elijah 

Let me try to sum up, we have, on one hand, so the more uncertainty actually, the less rigid process, you want around the less standardised questions you want to ask, the more, the more clear, you are on the type of innovation, if you do a core, that’s called a core innovation, like with little risk with little uncertainty around it, like an incremental improvement on your existing product with existing customers, you can actually have more pre-existing questions in place, you can also benchmark already and is that because you said like you talked about, like 12 gates or whatever.

Tristan 

I think that’s correct. But it’s basically a question of homogeneity, right? It’s like if all of your ideas are the same, and it’s just different flavours of the iPhone and different flavours of ice cream, then you can have a super specialised process, right? If you are trying to build an innovation process, which is not just capturing, you know, flavours, but it’s also capturing supply chain improvements, manufacturing improvements, financial improvements and process improvements. Yeah, that’s not going to fit into the same innovation process that you would for this highly specialised 12 step process. So, I think the question you have to ask yourself if you are an innovation manager and you’re building this process is what am I building this process for? Is this for core innovation? Is it just for a kind of demand besides innovation? Or am I also trying to put the entire R&D process here like materials innovation under the same umbrella, in which case, you’re going to have to have a more abstract and more general more generic funnel something more like Steve Blanks investment readiness level?

Elijah

So, do we need actually three different types to make it a bit easier? We don’t want to go into like how what innovation means and what different types of innovations they are, and how we can classify there’s not really some really rabbit hole I want to go into right now. Those questions and deliver like, hey, how do we make those decisions now? But let’s say there’s like core adjacent and transformational innovation, what would that be fair? So, we could say that for each type of innovation, and we do ideally want to allocate different budgets for each type of innovation and potentially have little different strategies for each of them. We have different ways of making decisions. Is that something we could say? Or lining? I think we have a problem between harmony here like making sure you know, folks can follow a specific system and know where they are in the process and so on, and having enough flexibility, like what you see it seems to be?

Tristan

I think that’s true. But I think it’s kind of in some ways, we’ve kind of skipped the question we should have asked before this, because we’re talking about metered funding, we’re talking about stage gates. But when people, when organisations try to implement something like this, is because they want to control or make more predictable innovation. When innovation managers want to do something like this, it’s not just controlling the process. They’re actually trying to change the culture, they actually probably have some other things that they’re that are on their agenda. Like the strong reason, I think the reason if anybody just who’s listening to this, who’s just like, please tell me what the gates I should have, yeah. Pick up the corporate startup bot book and just send in all those four days, right? Because the first one problem, and yes, that will not work. In all circumstances. If you’re a biotech pharma company, I would probably not implement that process. But for 99% of the companies out there, customer demand is almost always the biggest risk. So just do that, right? Just implement that process, it’s probably pretty good. If you want the real solution, I think the real answer, and you’re not trying to deal with, you know, trying to fix the culture at the same time as all this, I think the answer goes back to stuff we discussed in previous podcasts, which is, you should have a business case. And the business case should represent uncertainty in the business case in form of ranges. And then based on what the business case tells you is the most sensitive variable, that’s the one you go after that is your biggest risk, that’s the first gate you should go through right? the gauge should be based on I want your business case to, you know, have at least this level of ROI, or at least a 10% chance of getting to this level of ROI. And I want to know more than this amount of once. Nice, right? Nice downside. And for anybody who hasn’t read those, or hasn’t read or listened to those podcasts, I probably just said a huge mouthful. But all I’m saying is that, like the look, every project that I want to fund, I’m only willing to give, you know $10,000, this is my first scale gate, right? I’m only one guy willing to give $10,000. And you’re allowed to have this amount of uncertainty like this width in your business projections, it could either make a billion dollars, or it could make zero. If that’s the range, you’re talking about possible outcomes, you get Max 10 $10,000. Now, if you can tell me for the next scale gate if you want to start playing around with and you want to send an email out to 10,000 of our customers tell you what, I will give you more money for that if and only if you can demonstrate that the minimum possible outcome of this project is $1 million. Okay. And your max doesn’t have to be at a billion anymore, but I want to see at least that you have a 25% chance of hitting $1 million, right? So, your range of uncertainty of your range of possible outcomes has narrowed. And I don’t really care if that risk is because of technical feasibility or desirability or business viability because you don’t know what pricing it is or you don’t know what the cost structure is. That’s okay. It doesn’t really matter what order of operations is what matters is that you’re addressing the thing that that is driving the uncertainty of your model. And again, 99% of those times, the uncertainty is being driven by a lack of consumer understanding, a desire that way. 99% of the time, it’s probably going to do that, even in some farmer cases. But if you already know it, and it’s a core business project, and you already know the desirability, then forget about that focus on can you create a technically feasible product, which is beneath this price of manufacturing, so that you have enough margin to actually sell it in the market.

Elijah 

I think we need to like, um, so you and I, this is kind of what we nerd out on all the time. But maybe people who are just expecting the questions, I want to ask at those four dates, kind of that is probably a bit of a leap right now. So just to distribute, just to spend a minute on catching up there. So, I don’t know, it’s tricky, right? Because on one hand, I mean, you would hope people folks listen to every single podcast.

Tristan 

The basics, we can’t play the game, right? I’d rather nail the base and then nail the really complicated math stuff. And the basics are exactly what we’ve just talked about. Like there are three things that have to work for a business model to succeed, like in the simplest possible form, right? Even simpler than the business model canvas, people want to it has to be desirable, it has to be possible to build it at the right price point, it has to be technically feasible, in other words, and the balance of the desirability, which is the amount people are willing to pay for it, versus the technical feasibility, which is the amount that’s going to cost you to build it, that is the viability right is the balance between those two things. And in this case, desirability could also include, sustainable impact, social justice, whatever other intangibles that you want to put into that, but it’s just cost benefit. So those are your first three gates. And those are the questions you want to ask, is this desirable? Is it feasible? And is it business viable? Is this a sustainable long-term business?

Elijah 

I’m not necessarily in that order. And the way to achieve that, I suppose, and that’s what I was trying to get back to like that, as in the way to achieve that is to quantify earlier. And so, there is actually a way to do that. So, when we say business plans don’t work or business cases don’t work. Long term predictions usually don’t work. That’s as much true as it is not because like, if you can quantify your uncertainty earlier, then that’s how you can prioritise the questions you want to ask. So, and I guess that’s what want to get. And that is done with something we call innovation accounting.

Tristan 

I’m just trying to get something started in my company, then I think it really is as simple as desirability than feasibility. So, what we’re talking about, or what you’re getting into now is really well, I’ve worked on the desirability to some degree, and there’s still some risk in there. But now the feasibility is riskier. And so now I want to work a little bit on how do I build this thing? And then oh, okay, well, now I’ve reduced the technical risk. Now, I want to go back to the market risk and focus on that, right. So, in a real project, there’s always a little bit of kind of bouncing back and forth between different priorities. Sometimes I’m working on marketing because that’s the riskiest thing. Sometimes I’m working on manufacturing because that’s the riskiest thing. And when you have a small startup, like out in the wild, not in a large organisation, you have generally very, very limited resources. So, you can’t even afford to work on multiple of these streams at a time. But as you scale up, of course, you will have teams solely focused on feasibility, solely focused on the desirability, and then all the little subbranches of that. But initially, you have to have this bouncing back and forth, and that also happens in larger organisations. And that’s kind of the reason why it doesn’t always make sense to say please do things in disorder and only disorder. It’s an aggressive oversimplification, for the purpose of just giving people something they can understand and work towards.

Elijah

Well, which is important, right? So, that’s depending a bit on the maturity level and who makes decisions, I guess, and how do people get rewarded and promoted?

Tristan 

So, that’s when I say you have this process where we’re maybe it is this oversimplification of desirability feasibility, viability, but as the decision maker on that board, you have to realise that you have to provide people with the kind of human override to say, hey, team, you’re working on the gold plated iPhone, we already know people want that. So, you can skip that stage, just go right to feasibility and make sure we’ve got the gold. Like, they’re always I think the decision makers have to have a keen understanding of what they’re really trying to judge and encourage is aggressive risk mitigation, you know, figure out what the biggest risk is and reduce that. And we want the teams to tell us what the risk is part is, ideally, it shouldn’t just be about following the process, the process is a guide. It shouldn’t be a checklist that if you don’t follow, you’re fired from the company like it’s just supposed to be a guide. And that’s the thing, which I think bothers me about stage gets the most is because it’s implemented in a way where often people are going through the checklist without understanding why the checklist is there. And so, they’re not actually doing what they’re supposed to be doing, which is mitigating risk.

Elijah 

I take a step back, again, like in a sense, if we could, if we can sort of question really always actually is, where’s the most uncertainty here? That’s how we should be guided. Now we know often, desirability, and the average is one of the big ones we said before as in pharma, potentially, that’s not the big one. But very often, that’s just one of the big ones. So, might as well go after that first. And why that is usually built something when you can solve a problem. So, is there a problem? But if we wanted to get rid of as many rigid gates as possible, right, where that doesn’t even apply, then really the answer to that as to the most effective system is if we could build a model that tells us where that uncertainty actually is. That’s what I was trying to get to, like, if we could build a model earlier. I think it is very surprising, very early. And that’s maybe one thing I would say about it. The demarcation line for that, so to say is, when we can define the customer journey, would you agree with that?

Tristan 

Well, so if we take those three phases as our default process here, right, so yes, you have ideation first, but desirability phases, feasibility, viability, right in that first phase, you don’t necessarily know what the solution is, you don’t necessarily even you’re trying to discover the customer need. So, it’s very hard to even put something down on paper that says, I believe the price point for this unknown solution is somewhere between $0 and $100,000. Like even saying, that seems ridiculous, right? Because you have no idea how much actually this solution, let alone price it. Like at that point, it’s silly to kind of like construct at any sort of business case for innovation accounting for the whole thing, you should really just sizing the market. That’s all you’re trying to do is it’s a big opportunity. Is there enough demand there to make this make sense?

Elijah

In that case, let’s maybe do this way going forward. So, there’s a moment in time, where we think we’re you think it makes sense to build a model? Let’s talk about the moment before. And so, since we don’t have a quantum quantitative way of making decisions. Let’s talk about that moment before. So, what will be the questions we want to ask, like, do something very, like something more specific, you know, let’s say there is either a manager or an early investment board, or, you know, like some people coming together and making this.

Tristan 

As long as you understand what decision you’re trying to make and what you’re trying to judge, you should be able to quantify something immediately. So, it’s just a question of, what are you trying to quantify? Right at that first gate, let’s just say the first stage of desirability. Just imagine you’ve discovered a problem, but you just have no idea what the solution could be. It could be an app, it could be a physical device. It could be a service, it could be if I’m trying to get somebody to remind me. Now I’ve got Alzheimer’s on my brain. So, if I’m trying to get somebody to remind me to take my Alzheimer medication, right, perfect use case, right because I have Alzheimer’s. I have trouble remembering to take my medication. Many different solutions to this, like could have an app that sets a timer and reminds me, I could have. So, that’s one thing, I could have a physical timer that dispenses the pill and I see it and I take it, I could have a person, a service that comes and knocks on my door and tells me to take, those are three perfectly viable solutions to remind me to take them. I’m sitting here staring at my vitamin K. So, I know well about these need for physical reminders sometimes, right, but there’s a range of different pricing that somebody is going to be willing to pay for that. And there’s also a range of possible costs to develop that product. Now I could on day zero include that entire range of possible costs, in my model of like, well, an app is going to have an incremental cost of one cent per user, and have a big fixed cost for developers. But aside from that, the incremental cost is zero. Or there’s this whole thing where it’s a physical person coming knocking on my door and telling me to take the pill, in which case, the variable costs are gonna be very high, and the fixed costs are probably gonna be pretty low. Does it make sense to build the whole model to include all that cost of manufacturing on day zero? This idea? No, don’t bother, like doesn’t make any sense. The only thing that matters is the market sizing. So once you’ve decided, like, how are you making the decision? What are you making a decision about? If I’m trying to decide to invest in this particular project versus another particular project, all that really matters in the first gecko is the market size. So, that’s what we want to quantify immediately. And again, even on day zero, before I even type in all timers into my Google search bar and see how many Alzheimer’s patients there are worldwide, I could take a guess and quantify that. I know there’s more than one. And I know there’s probably less than a billion, right? There are 6 billion people on this planet, it’s definitely less than a billion people. Right. So that’s a very high range of uncertainty. And on day one, I can go and do a Google search and narrow that tremendously, right. But the point is that even on day zero, as long as I’m allowing the entrepreneurs to put in a range, okay, which expresses their uncertainty, they don’t need to give me the exact market size, what they need to do is express the range, right, and the number of people times the amount they would possibly be willing to spend for this medication reminder system, that’s your range of possible market sizes. And you can do that on day zero, on day one, you get a little bit of information, you reduce the range on day 10, you get some more information on day 20, you should be ready to make a decision as to whether or not this particular idea or another idea is worth additional investment.

Elijah Eilert 

Funny, we ended up quantifying again.

Tristan 

You can always quantify, even on day zero, it’s just that you’re not quantifying to a precise number, you’re quantifying your level of uncertainty. So, I’ll tell you the only moment before quantification that I think would make sense is, again, don’t remember who coined this phrase, but something like a founder market fit, right? Like, do you care about this problem? Right, that is something where I think I suppose you could probably quantify it, but it’s not worth it. Right? When you have an idea, you have to think for yourself, is this an idea that I really care about and that we have the capabilities and team to actually execute on? So, it’s much more of a strategic question, more of where to play the how to win question, or just a way to play question like, does this domain make sense? Even before I size the market? Is this a domain we would ever go ride? And I remember there was a, I was at a lien camp in Germany somewhere, I think it was in Stuttgart. And somebody gave a presentation, which was a, it was a very good presentation, it was probably one of the best executed case studies of doing Lean startup that I’ve ever heard, right. It was a startup team. That basically said, we’re going to do the customer discovery, we interviewed customers, and then we put up a landing page, you demand testing, and then we size that with Google ads. And then we did a concierge version. And then we did it was a revised version. And then we did a full prototype and we rolled it out. And we demonstrated the market viability of this idea. And I, I might be making this up at this point, because it was so long ago, but I’m pretty sure it was Uber for hamburgers, right? This was a long time ago right before you could get everything delivered before Uber Eats. Or like we can do Uber for hamburgers. So, you want McDonald’s delivered to your door. You want a high end burger delivered to your door. And at that point, once they had demonstrated desirability, technical feasibility and viability at that point, the team got together with their whole team, and they said okay, who’s gonna take this project and run it and scale up? And the answer was: no one. Nobody in the team actually wanted to be the CEO of Uber for hamburgers. Okay, so and the reason I’m a little shaky on this whole thing is because as you know, my German is pretty terrible. And this entire case study was in German. So, I was having to ask a lot of questions as it went through. And so, the question I asked them was, hey, couldn’t you have asked that question? When you started the project, instead of demonstrating desirability, feasibility and viability? And then asking, do we want to do this project? Could you have not asked everybody like, hey, assume this works? Would anybody here be really passionate about being the king of hamburgers? Or the burger? The burger chance the case? 50? There was nobody from Hamburg there. I let the German in the head to on from memory had to say that. There you go. So yeah, there was no one from Hamburg in the room, and they wouldn’t do that. But that is the first question that you should ask before quantifying.

Elijah 

So, thank you. That is brilliant. How do we translate this brilliant, so we need to translate the corporate now? I think like I think that’s fantastic. And I think this is something we see in the startup world, right? I think it’s very real. Like when we say I don’t I invest in this team, that there’s something about it, right? Like, do I believe in these people? And like do I believe, and I think a sub question of what that VC would look for is, are they passionate about going through the depths and the horrors of actually running a startup? As we know, it’s not very, it’s usually not that amazing, you know, other than if you do an accident, or the very beginning, like everything in between is tough. So, and similarly for a corporate startup? So how do we translate that into the corporate world into large organisations where we might want to make sure we have the right people for the right project? I think that’s what you were saying. Right? That’s really one of the most fundamental early decisions.

Tristan 

That’s the pre quantification question is you can’t, you can, it’s just not going to work out very well. You can’t assign a team always to work on a project. Because now if you assign a team, to a project that they don’t believe in, and they don’t care about, and it’s not a problem space there, they think is worth solving. You know, if it’s a team of people who think like, Why can’t these people just pick up their own pills and set a timer on their clock and solve their own issues, then obviously, they’re going to fail at that project. They’re going to sabotage it consciously or unconsciously, and they’re just not going to put the effort in. So, for me, I think I’ve been blessed by working with teams that are passionate about these projects, generally, they’re not going to come to talk to me unless they’re passionate about those projects. So, I haven’t really had that issue. And I have heard most investor boards that I’ve worked with have always had a keen sense of, are these the right people for this project? are they passionate? Are they willing to put in the extra hour at midnight, if that’s what it takes to succeed? And I haven’t had that issue too much. But I think there’s a real question. So, I’m kind of glad you brought it up as a pre-qualification question.

Elijah 

A friend of mine who worked at Google, talks often about how you know how they have, they have a bit of slack in there, and they can do what they want and stuff. So, I guess that’s a really great way of like, you know, somebody who’s going to the end that sources projects and I guess that’s a great way of sourcing projects, right? Because like, you probably wouldn’t do what you’re not what you don’t care about, like why would you can do what you want, like, interesting?

Tristan 

Probably not quite, I really enjoy fixing bugs. So, you know, but maybe that’s not the right person to work on this innovation project is not really just wants to fix bugs and work on the backend database. I think that’s perfectly reasonable. Like, do you have a founder market fit? That’s kind of a that’s the question startups would ask. And I think the last is do we have the right to win in this space? Do we have to work at the abilities necessary?

Elijah

I smiled about the turn when you said you know, is there another fit? And I’m like, Yeah, that’s a really good, you know, five minutes later. That’s a really good one.

Tristan 

It’s a reasonable question to ask. Huh?

Elijah 

So, where are we at? We have kind of three main questions we won’t answer, I guess, how do we answer them? There’s literature out there. So, we pitched a corporate startup book here, I guess. Right?

Tristan 

If you want a basic introduction to setting up your own innovation, programming your company, I think it’s a good place to start.

Elijah 

It’s a good place to start. Thank you so much. It was a great episode. Thank you. Check out the show notes for everything for anything you need for anything about the episode. We’re going to put a lot of links in there. And if you want to talk to Tristan, that’s a good place to start. And thank you very much, Tristan.

Tristan

Awesome. Thank you very much. I’ll talk to you soon.

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