Replace Outdated Funding Models to Make Innovation Work

Welcome back to another episode where we explore the transformative power of Next Funding. Today, we dive into how innovative funding models can revolutionize investment in your organization. Let’s break down the insights shared by Greg, illustrating how to replace outdated funding models with a more flexible and effective approach to drive innovation.

The Problem with Traditional Budgets

Traditional budgeting processes are designed for stable, performance-driven environments. Think of it as running a well-oiled machine where everything is predictable. But innovation is a different beast altogether—it's unpredictable, experimental, and full of uncertainties. The conventional annual budget process simply doesn’t fit.

Let’s look at a real-world scenario. Imagine a company with 50 innovation opportunities in their portfolio. Each idea is in the early stages, needing validation before more significant investments are made. If they split the budget evenly across all 50, they risk over-investing in projects that might not pan out, wasting precious resources.

Next Funding: A Smarter Approach

Next Funding shifts the paradigm from rigid annual budgets to a more flexible, venture-capital-like model. Here’s how it works:

1. Create a Fund: Instead of setting a static budget, establish a dynamic fund dedicated to innovation. This fund can encompass financial capital, human capital, intellectual capital, and even political capital.

2. Stage-Gate Funding: Release funds in stages as each project meets specific milestones or thresholds. This way, you only invest heavily in projects that have demonstrated potential.

3. Celebrate Stops: Not every idea will succeed, and that’s okay. Projects that don’t meet criteria should be stopped early to conserve resources. Celebrate these stops as victories in protecting capital.

Business Case: The Air Force's Innovation Hub

To illustrate the power of Next Funding, let’s consider an example from the United States Air Force. They needed to develop a rescue package that could be dropped from a C-130 transport plane into active combat zones. The team proposed a concept with an initial prototype cost of $1.5 million.

Instead of validating the basic requirements first, they jumped straight into building the prototype. A year and $1.5 million later, the package didn’t fit in the plane. A classic case of over-investing too early. They could have spent a fraction of that amount to build a scale model with cardboard and foam, ensuring it met basic requirements before committing to a full prototype.

The Super 7 Criteria

Greg highlighted the importance of the Super 7 criteria in the Next Cycle, ensuring projects align with strategic goals at each stage:

1. Strategic Fit: Does the project align with the organization’s overall strategy?

2. Portfolio Fit: Is there room for this project within the current portfolio?

3. Market Need: Is there a significant demand for this innovation?

4. Feasibility: Do we have the technical know-how and resources?

5. Worth It: Will this project deliver the expected capital returns?

6. Affordable Loss: Is the next stage of investment manageable within our budget?

7. Option Value: Does the project offer potential flexibility or future benefits?

Google X and the Airship Example

A great example of applying the Super 7 criteria is Google X’s airship project. The next development stage required a $200 million investment to build a working prototype. Google X decided it wasn’t worth the investment, even though there was a market need and strategic fit. On the other hand, the Air Force saw value in continuing similar research and acquired a blimp factory for $150 million, which fit within their budget and strategic goals.

Implementing Next Funding in Your Organization

To adopt Next Funding:

1. Analyze Current Budgets: Identify funds allocated for new projects and reclassify them under the Next Fund.

2. Set Benchmarks: Define funding benchmarks for each stage of the innovation cycle, ensuring flexibility and clear guardrails.

3. Promote a Culture of Flexibility: Encourage teams to embrace the fund model, understanding that unused funds can roll over to the next year.

Conclusion

Next Funding is more than just a financial strategy; it’s a mindset shift that encourages flexibility, strategic alignment, and smarter investment in innovation. By celebrating early stops and only heavily investing in validated opportunities, your organization can drive sustainable growth and innovation.

Now, reflect on your current funding models. Are they flexible enough to support innovation? Are you investing wisely in the right opportunities? It’s time to embrace Next Funding and make innovation work for your organization.

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