Agility in product development function is widely discussed and almost a given these days across most organizations. However, agility in product investment decisions still has some catching up to do. Most internal investment decisions (Products or R&D or other requirements) are still decided by good old RoI analysis. The problem is while denominator (Investment) is known, Numerator (Return) is elusive. I am not talking here of the execution challenge in achieving returns but about the difficulty in accurately predicting the potential returns 2-3 years down the line from a big investment now. No matter the level of experience or expertise in any industry vertical, 2020 has shown how unpredictable the world has become. So, if we cannot predict the long term future returns, what is the alternative?

Answer lies in Incremental or Venture Capital style investing that looks like buying Options for future opportunities. Rather than making big investments in few products hoping to achieve the spreadsheet calculated returns 5 years down the line, what if companies invest incrementally in a larger number of products/ services? The initial investments would be to develop MVP's (Minimum Viable Products), test the market and define minimum success criteria at each round of funding. If the product performs as expected (or better), then a bigger round of funding can be provided for product development and sales/ marketing efforts. And if the product performs less than expected, the funding can be curtailed or stopped. There can be multiple such rounds of funding as the product/ service progresses in the market.

Many might argue that this is how most companies invest anyways, so what's the difference? 2 key points come to mind:

1. Clearly defining minimum success criteria for each round of funding that is controllable and somewhat predictable. While it is tough to visualize how the product might perform 2-3 years down the line, it is very much possible for product teams to provide that view 3 months down the line with a relatively high degree of confidence. Replacing theoretical spreadsheet returns with more controllable and near term targets strengthens business case for new technologies and helps large companies avoid missing out on emerging opportunities.

2. A large organization needs to have a pipeline of multiple such products in different stages of funding to have a good balance between growth and risk. Consider the initial investments as option premiums that give companies the option of expanding (or shrinking) investments as market needs change.

Most organizations follow some kind of incremental venture capital style investing for their R&D investments. However, some are good at funding initial MVP's, others are good at scaling, but very few are good at both. And, the real benefit of incremental/ option based investments comes when there is a clear pipeline of early stage products that can be scaled up (or down) as the markets change.

Disclaimer - Views expressed here are those of the author and should not be considered as views of the employer.