The $250 Billion R&D Problem

Truly disruptive innovation has never been an easy job. Along the journey of bringing a breakthrough to market, there are many pitfalls that can quickly strand the new venture, investment, and innovation spirit of those leading the project inside the corporate walls. Within corporate global innovation, there is no lack of investment. The world’s largest corporations spent $680 billion on R&D in 2016 and that spend has been growing nearly 5% annually over the past 11 years, according to the 2016 Global Innovation 1000 Study by PwC. This innovation outlay results in the creation and investment in thousands of ideas.

Alas, there is no relationship between R&D budget and corporate performance and many great ideas get stranded, never to be experienced by the target consumer.

Ten reasons for this waste are as follows: 1) change of corporate strategy, 2) poor communication of the technology benefits and consumer relevance, 3) too disruptive to fit within a corporate’s product portfolio, 4) lack or loss of internal champion, 5) change in leadership, 6) inability to exploit the intellectual property (IP) within existing business and no incentive to license, 7) shorter term, lower risk projects given higher priority, 8) corporate bureaucracy and/or turf wars, 9) complex innovation processes stalling the opportunity, and 10) innovation before its time.

As a result, transformational technologies and early-stage ventures are deserted in what is known as the “Valley of Death,” a place where great ideas, millions of dollars, hard work, and innovation passion languish. My venture management company, Pilot Lite Ventures, estimates that 20% to 33% or $140 billion to $250 billion worth of these investments become stranded. From a personal standpoint, the two-plus decades I have spent leading innovation inside and across large corporations such as Kraft Foods is highly supportive of this data.

Not all stranded ideas are worthy of being launched—some are halted for good reason. But many are funded longer than they should be and contribute to wasted spending. Abandoning unfeasible ideas earlier in the innovation process can unlock R&D spending and redeploy it toward accelerating viable new ventures to market. In contrast, if the stranded innovation is truly viable, valuable, and financeable, then billions of dollars in revenue are being left in the corporate file cabinet. This is the real opportunity cost of stranded innovation. At an internal rate of return of 20% or a multiple of 3X, a staggering $750 billion per year or $2 trillion over a five-year period is locked in the Valley of Death.

A new R&D discipline, venture management, is required to extract the value from these stranded opportunities. Venture management increases ROI on R&D investment by transforming stranded assets into revenue-generating vehicles and eliminating ideas that are not viable, valuable, and financeable before overinvestment.

Venture management does not replace the traditional R&D essential to defending and growing core business. Rather, it is a new multidisciplinary approach that consists of specific activities for monetizing, de-risking, and accelerating innovation.

The five core competencies of venture management organizations include the following: 1) originate and validate—identify and validate the viability of early-stage technology, 2) generate—monetize stranded assets, 3) commercialize—develop and execute “go to market” plans for pilot testing innovation prior to full-scale launch, 4) accelerate—source collaborative partners and co-investment required for undercapitalized products and portfolios to achieve their full potential, and 5) create—build a systematic “disciplined entrepreneurialism” culture of innovation that accelerates value capture from IP, early-stage technology, incubators, and start-ups.

Pilot Lite Ventures has developed a toolkit consisting of seven proprietary capabilities spanning from originate to create that help organizations implement venture management. Key performance indicators (KPIs) are targeted at revenue, deals, and speed to incentivize value capture from R&D investment.

Implementing venture management is not easy. Many aspects of the methodology are a significant departure from traditional R&D and it takes time for the organization to embrace this capability. With patience and persistence, practicing venture management reduces wasted R&D investment, captures latent value in stranded ventures, and accelerates the path to market for innovation. Successful venture management boasts success rates 2.5 times that of leading investment firms and 10 times better than corporate venture capital.

This leads to the obvious question of what to do next. My suggestion is to identify the stranded innovation within your corporate walls. Have you ever attempted to monetize those opportunities? I am certain you will find projects that are worth another look and perfect for a venture management pilot. If you choose to do a pilot, recruit an experienced venture management professional or external partner. They will quickly get your pilot implemented and help you determine if venture management is right for your organization.

David A. Behringer, a member of IFT, is CEO of Pilot Lite Ventures USA ([email protected]).