The romanticized version of innovation reads like Athena’s birth — created from an idea in Zeus’s mind, she sprang forth from his head fully armored and ready for battle. Sadly for the entrepreneur, reality never matches mythology. The product lifecycle for discontinuous innovation is neither instant nor straight; instead it looks a bit like this:

A personal embarrassment precipitated my appreciation for the three innovation types. I was presenting to a large industrial firm, explaining the latest Innovation Management trends and extolling their use throughout the firm. Concluding my (rather presumptive) presentation, a veteran product manager rebuked me, saying, “Look, it’s obvious you don’t know anything about our industry. Maybe your approach is necessary in tech, but if I save $50 off my BOM through some new process I’m going to sell 10,000 more units. It is as predicable as the sun rising tomorrow. This is how I’ve innovated for 30 years and it’s kept us on top of our industry just fine.” (Left unstated was, “so take this crap and stuff it.”) …

The critical question any pre-growth innovator faces is: when do I step on the gas?

Move too soon, and you blow your funding chasing traction that never comes, speeding headlong into the deadpool. Move too late, and a competitor sprints to the finish, winning all the fame and glory — while you fume on the starting line, tormented by what-ifs.

You have a small window to get it right (think months, not years) but if you find the tipping point of growth — AKA Product/Market Fit — then everything else will fall into place. Growth conquers all. VCs will fight to invest in your startup, talent will seek you out, the press will write glowing stories highlighting your brillance, and more. …

The Innovation Options calculator is a simple tool to run an ROI analyses on your pre-growth initiatives. This post will explain how to use and read the tool; to learn more about the concepts and mathematics behind Innovation Options can do so here.

Input

We start with the four inputs we’ll need: the term, iterations, fundraising goal and best-case scenario.

Term

The term is the duration of the option. It is the period during which you’ll be conducting the market testing to determine the idea’s growth potential.

Iterations

This corresponds to how frequently you expect to test your idea’s assumptions against reality. You should test as often as possible; this generally corresponds to your intended release cycle, but can be any form of validated learning. …

Innovation Options measure the return on investment (ROI) of pre-growth initiatives based on the option value they provide to the firm. They are an effective alternative to traditional, cash-flow based approaches such as Net Present Value which fail under conditions of high market uncertainty.

In this article, I’ll detail how one calculates the ROI of an Innovation Option using the trinomial option pricing model. First, I’ll describe the trinomial model’s general approach and equations. Second, I’ll demonstrate how the trinomial is adapted specifically for innovation. Third, I’ll show how you use the model to generate an ROI for the Innovation Option and measure progress during its term. …

Understanding how pre-growth investors should view their portfolios.

Angels that invest in pre-growth startups essentially are considering this pitch from founders: “We have this idea that we think will grow. If we prove that, we’ll need a lot of money to grow it, but we’re not sure how to do that yet so please give us a smaller amount to figure that out.” If the angel investor thinks there’s any potential at all they make a small bet. If growth materializes, they double-down by investing in future rounds; if not, they walk away. …

A step-by-step guide to understanding financial options.

Options are the right, but not the obligation, to purchase something at a predetermined price. In essence, an option delays an investment decision until we have more information about the market. While some use them to speculate, options are more typically used to manage risk under conditions of high uncertainty.

While we may view options as only for Wall Street traders, they are actually quite commonplace in everyday life. For instance, homebuyers usually ‘lock-in’ their mortgage rate before shopping; if rates go up, they pay the locked in rate. If rates go down, they can take the cheaper rate. …

How to Calculate ROI without Forecasting Revenue

It starts innocently enough. An enterprising Product Manager comes up with an idea that represents a high-growth opportunity for the firm. He runs the proposal by Finance who naturally wants to see the ROI. The PM knows how much investment he needs, so the I is covered — but the Return? That’s when entrepreneurial enthusiasm meets corporate reality.

He knows the revenues must be high enough to justify the riskiness of the new product. But he also knows if he doesn’t meet those targets he’ll get killed at quarterly reviews, even though it’s nearly impossible to accurately forecast revenues for products that don’t exist. …