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The ROI of Innovation

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As product managers, we are often asked a single question when we propose a new product: What’s the Return on Investment (ROI)? What’s the ROI of innovation?

Money bag - Tests cost money to run and impact the ROI of InnovationThere has to be a Return on Investment (ROI) or we can’t get funding for the project. The details of this conversation may vary depending on if we are an entrepreneur talking to and investor, an intrapreneur pitching to our business unit manager, or head of a skunkworks pitching to the CFO. But the general theme is the same.

  1. Finance requires a 4 year projection of revenue showing an ROI
  2. The visionary grudgingly creates a realistic spreadsheet projection of the next 4 years revenues that shows a 100 million dollar market.
  3. Finance denies funding because the returns are too small. Finance declares, “If it’s not a billion dollar market, we don’t invest.”
  4. The visionary, adjusts the market size and margins until the spreadsheet shows 1 billion dollars.
  5. Finance divides the projected revenues by 10 to account for “visionary enthusiasm” and then approves it because 100 million is pretty decent.

WTF just happened?

There must be a better way to decide on innovation investments than this.

Shared Fiction

It reminds me of when I see someone waving at me at a party, so I wave back to be polite, not knowing who the hell this person is.

Of course, they were waving at someone else behind me, but assume, since I was waving at them, they must know me and walk over to have a chat. Even after 10 minutes of conversations where we’re both fairly certain the other person has no idea who we are, we continue the charade out of courtesy.

Everyone in this scenario knows it’s a complete charade and suspects that everyone else also knows it’s a charade, but everyone plays along because it would be impolite not to.

Until someone dares to question the shared fiction out loud, it will continue.

Harmless Fiction

Cocktail party civility is a harmless fiction. The fiction around pitching new innovation projects can be deadly.

It’s deadly because if we know one thing for certain, companies are dying faster than ever.

Average company lifespan on S&P 500 Index (in years)

The average lifespan of an S&P 500 company has declined from 80 years to 15. If you work at a large company, that fact should terrify you.

The Absurdity: The ROI of Innovation

What’s the ROI of innovation? What about a potentially disruptive innovation?

Let’s start with something easier. What’s the ROI of buying health insurance?

(Let’s assume we’re in the US where there isn’t state sponsored health care.)

Hint: It’s negative.

Stethoscope - What's the ROI of health insurance?Without doing any math, we know it’s negative because health insurance companies would quickly go bankrupt if they lost money on every person that bought health insurance. It’s the same reason we can be assured that the odds are against us if we gamble in a casino. The casino would be bankrupt if the odds weren’t in their favor.

On average, we’re bound to lose.

Does that mean we should never buy health insurance?

No. We want to buy health insurance because the downside of a health problem is potentially catastrophic.

Death - A problem everyone has and corporate startups are no exceptionWith medical costs what they are (at least in the US), the cost of a major surgery is sufficient to bankrupt us. Or even worse, we simply might not be able to afford cancer treatment. Unless, like Walter White, we have a spectacular backup plan, we’re dead.

Spoiler alert: Walter White died anyway.

The Joy of an Unused Option

Health insurance doesn’t make any sense in terms of ROI (or Net Present Value if you’re into that sort of thing.) The only time it makes sense is when we know we’re about to get sick.

Does that mean we should be unhappy unless we’re able to cash in on our health insurance by having a triple valve bypass?

If we don’t have to use our health insurance, we ought to be absolutely thrilled! It’s not a waste of money just because we didn’t get sick.

Buying health insurance is like buying the option of going to the doctor. We don’t have to go. But we can if we need to.

The option has value, even if we don’t use it.

Happiness in Disruption

Congratulations on Your FailureIn innovation, we should also be thrilled when innovation projects fail. Particularly if they are disruptive to our core business.

If they fail, it means that the potential disruption is probably not as much of a threat as we thought.1

If they succeed, sure…we’re disrupted. But at least we disrupted ourselves! We have a chance to profit and sustain ourselves through that disruption.

The alternative is to let others disrupts us.

Which would you rather do?

Investing in innovation is investing in the option to launch a new business. Even if it might fail or we decide against it in the long run, the option still has value!

Innovation Options

Innovation accounting & innovation options

This is a deep topic (as is all innovation accounting) where I have been heavily influenced by my conversations with David Binetti. For those that are interested in calculating the value of innovation options, I’d recommend a conversation with him and to check out his new project called Innovation Options.

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About the Author

This article was produced by grasshopperherder.com, a website that is dedicated to insights in entrepreneurship. see more.

Callum Connects

Jasmine Tan, Director of Stone Amperor

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Jasmine saves her clients time and effort when doing kitchen fit outs with her biz Stone Amperor.

What’s your story?
I started working in the industry in 2003. I was in a marble and granite supplier company for 5 years. Even though I left the company, I still had customers calling me for my services. I referred them back to my previous company but they refused to because they loved the fast response service that I offered. I realised that customers do look at prices, however most of them prefer quality over quantity. Thus I have decided to establish a sole proprietor company also known as 78 Degrees which later rebranded as Stone Amperor in 2014.

What excites you most about your industry?
The kitchen countertop industry is a very confusing market. There are many brands, materials and prices to choose from. What excites me the most is my ability to help clients choose the best materials and brands within their budgets, whilst saving them time and effort.

What’s your connection to Asia?
I have been in Asia all my life and I love Asia. No matter where you go there is no place like home.


Favourite city in Asia for business and why?
I love Singapore. This is because Singapore has always been a stable country and it is great for doing business. However as it is a small country, it can be really competitive. I believe that if just do your best and give your best to your customers, you can overcome this.

What’s the best piece of advice you ever received?
“Take actions. Learn and improve continuously. An idea without action is just a dream.” This was really good advice that I received from my partner.

Who inspires you?
A very down to earth billionaire from Malaysia, Robert Kuok

What have you just learnt recently that blew you away?
Property is the foundation of every business.

If you had your time again, what would you do differently?
Own instead of renting property for my business.

How do you unwind?
I enjoy going shopping, watching movies and hanging out with friends. I am quite a simple being.

Favourite Asian destination for relaxation? Why?
I love going to Taiwan as I love the culture there. Everyone is so polite and the weather is great.

Everyone in business should read this book:
Sun Tzu, Art of war

Shameless plug for your business:
Perfect top, Perfect price, Perfect life from Stone Amperor

How can people connect with you?
Email me at [email protected]

Twitter handle?
@StoneAmperor

This interview is part of the ‘Callum Connect’ series of more than 500 interviews

Callum Laing is an entrepreneur and investor based in Singapore. He has previously started, built and sold half a dozen businesses and is now a Partner at Unity-Group Private Equity and Co-Founder of The Marketing Group PLC. He is the author two best selling books ‘Progressive Partnerships’ and ‘Agglomerate’.

Connect with Callum here:
twitter.com/laingcallum
linkedin.com/in/callumlaing
Download free copies of his books here: www.callumlaing.com

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Entrepreneurship

Is There A Coworking Space Bubble?

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An annual growth rate of nearly 100%, almost five years in a row? More than 60 coworking spaces in a city like Berlin? Are these the characteristics of a bubble? Nope, these are characteristics of a lasting change in our world of work, which has been further catalyzed by the recent economic crises in many countries. But what makes this change different to a bubble? We’ve summarized some arguments of why the coworking movement is based on a sustainable change. However, that doesn’t mean it’s an easy job to open a good working coworking space.

Five reasons why the growth of coworking spaces is based on organic and sustainable growth: 

1. Coworking spaces invest their own money and create real wealth

Already, there is a convincing argument supporting why coworking spaces are not developing in a bubble: the fact that they create real wealth.

Whether referring to the dotcom bubble a decade ago or the real estate crisis in Spain or the United States, the crisis originated in a glut of cheap money, in an environment in which the sender and the recipient were unacquainted. From funds and banks, money flowed in steady streams to investments which offered little resistance and the most promising returns – which only a little while later turned into delusions and ruined investments.

Redistributed risks create illusions. Those people who distributed the money rarely wore the risk of investment decisions. The risk was mainly taken by small shareholders or people who bought parts of those investments. This was because either both parties’ (better) judgement was drowned out by the noise of the market, or because shareholders were unaware of the risk, and were at the mercy of banks and funds for reliable information.

Another fundamental condition for the creation of bubbles are the sheer amounts of money that flow from various locations globally and are concentrated, by comparison, in much fewer places.

Most coworking spaces, however, receive their funding from local or nearby sources and do not operate within this financial system. In fact, the founders mainly inject the bulk of the required investment, and turn to friends or relatives for additional support. They wear the full brunt of the risks that are involved in small-time investment.

They have access to much more information, because it is their own project, rather than a foreign one thousands of miles away. This also includes failures and mistakes that are encountered along the way, but the risk is less redistributed, thereby decreasing the probability of failures.

2. Labor market changes demand on certain office types lastingly

Most users of coworking spaces are self-employed. The proportion of employees is also on the rise, in many cases simply because they work for small companies that increasingly opt to conduct their business in coworking spaces rather than in traditional offices. The industry of almost all coworkers fall within the Internet-based creative industries.

With flexibilisation of work markets, new mobile technologies that are changing work patterns, and the increase of external services purchasing from large and medium-sized enterprises (outsourcing), the labor market has changed radically in many parts of the world.

The long-term financial and emotional security of becoming an employee no longer exists, especially for younger generations of workers. Bigger companies are quicker to fire than hire, and precarious short-term contracts are on the rise. Promising options on the labor market are more often recuded to freelancer careers and starting your own company.

And that’s possible with less money to invest. All you need is a laptop, a brain and a good network. For years, the number of independent workers and small businesses has been growing worldwide – particularly in internet-based creative industries. Anyone who has sufficient specialized skills and the willingness to take risks may adapt more quickly to market conditions if they own a small business or are self employed; more so than if they were to work in a dependent position in an equally volatile market.

Coworking spaces provide an environment in which to do this. Once they have joined a (suitable) coworking space, these factors become apparent to coworkers, who will remain in their space for years to come.

Furthermore, independent workers rarely fire themselves in crises, and even small companies are less likely to give their employees the boot – compared to their large counterparts. This combination enables more sustainable business models – and less business models à la Groupon.

3. Coworking spaces don’t live on crises

Global economic growth is waning while the number of coworking spaces is continually growing. Do coworking spaces thus benefit from this crisis?

The current crises accelerate the formation and growth of coworking spaces, because they offer solutions and space for the resulting problems. Coworking spaces are therefore not a result of a crisis, but the product of change that pre-dates their existence. A crisis is simply the most visible expression of change.

The first coworking spaces emerged in the late 1990s; the movement’s strong growth started six years ago – before the onset of economic downturns in many countries.

4. Coworking spaces depend on the needs of their members

Most coworking spaces are rarely full. Does this mean they are unsuccessful? On average, only half of all desks are occupied. But the average occupancy rate of 50% refers only to a specific date.

In fact, coworking spaces generally serve more members than they can seat at any given time, since members do not use the spaces simultaneously. Coworking spaces are places for independents who want to work on flexible terms. Smaller spaces rely more on permanent members. Larger spaces can respond more flexibilty to the working hours of its members, and, can rent desks several times over.

If a coworking space is always overcrowded or totally empty, the purpose of said space would be defeated. Firstly, it is rather impossible to work in an overcrowded room. Second, it’s impossible to cowork in an empty room. Given the nature of flexible memberships, a coworking space only can survive if they fit the needs of their members. Members would otherwise be quick to leave, and membership would be much more transient.

5. The coworking market is far from saturation

Less than 2% of all self-employed – and even fewer employees – currently work in coworking spaces. Reporting on coworking may increase, but inflated reporting on the coworking movement in the mainstream media is still far away.

Coverage of coworking space are most likely to be found in the career or local sections in larger publications – front cover coverage remains the dream of many space operators. This is because the whole coworking movement can’t be photographed in one picture. What appears to be a disadvantage, however, is actually a beneficial truth: niche coverage allows the industry to grow organically, and avoid over inflation.

Conclusion

Coworking spaces don’t operate in parallel universes – like the financial market. Demand and supply are almost exclusively organic and operate in the real world economy.

For the same reason, there is no guarantee that opening a coworking spaces will be automaticly successful. Anyone who fails to learn how to deal with potential customers in their market, or is unfamiliar with how coworking communities function, will have a difficult time of making one work. In the same way that business people in other industries will fail if they do not understand their market.

Those who simply tack on the word ‘coworking’ to their space’s facade will need to work harder. The structure of most coworking spaces is based on real work, calculated risk, and real-world supply and demand.

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About the Author

This article was produced by Deskmag. Deskmag is the magazine about the new type of work and their places, how they look, how they function, how they could be improved and how we work in them. They especially focus on coworking spaces which are home to the new breed of independent workers and small companies. see more.

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