Innovation and Return on Invested Capital a love and hate relationship.

Why it matters a lot to learn more about a very important financial statistic: ROIC.

When I started with Corporate Innovation, I focused on the financials of the projects I worked on too late.

Like good Customer Development and Lean Startup taught us, focus on discovering problems and innovation accounting. Financials will come later.

But with rising interest rates, it makes sense to use a few financial principles in your innovation processes.

The problem is that money isn't free anymore. If you want to lend money, you typically pay between 4 to 7% interest rate.

It forces your board members to make more challenging decisions:

Invest in more sales capacity, marketing campaigns, solving IT-Legacy issues or allocating resources to this new innovation project.

They need to show shareholders that they are making the right investment decisions.

Return on Invested Capital, Return on Assets or Return on Equity typically measures that.

If you buy a bond, you can get an average, a near risk-free return of 4.5% for 10 years.

Another option is to invest in an ETF representing the S&P 500. It will give you an average return of 7-9% on your invested capital. It's not risk-free but carries less risk than investing in an innovation project.

To help you out here are a few tips to help you get the best out of this new situation:

🤑 #1. Proof your market wants to pay for your innovation as soon as possible.

Here, say why it's so important.

The earlier you can prove people want to pay for your new value proposition, the easier it becomes to get a return on your invested money.

More sales = more revenue, and when done correctly, you should be able to grow your profits.

🤏 #2. Stay lean in the early stages

Discovering new value propositions is the most risky part of your innovation funnel. Stay extremely lean in this phase. We advise you not to spend more than €30k in this phase.

The more money you invest, the higher your revenues and profits must be to create a proper return on invested capital.

Only when you gain traction and understand how to scale your sales pipeline, ask your board for a more substantial investment (See my previous point).

👆 #3. Prioritize projects with higher return on invested capital

After about 3 to 6 months, you should be able to draft a business case version 1.0.

Based on your initial traction and micro-conversions, you should be able to model out three potential scenarios:

• Worst Case

• Mid Case

• Best Case

(we like to use Unit Cases and Growth Models for this).

Now, you can start to calculate potential ROIC:

• The return on invested capital to realize your plans

• The return on your marketing & sales investments

Now focus on the projects that can bring you at least:

An ROIC of 15% and 250%+ for your marketing & sales investments

🤔 Why?

Even though you put as much effort into validating as you can, there is still much risk involved in scaling your project.

If your returns do not at least have the chance to create these returns, it makes sense for your board members to allocate the capital to different projects that bear less risk.

The better you understand the potential returns compared to the risk, the better you can explain that using this principle. The easier it becomes to keep your board members on board.

Don't know where to start calculating these metrics?

Feel free to contact me for a free first conversation!