Investing in Improvement Vs. Investing in a Potentially High-Yielding Bet

Problem

There are many ways of looking at product investment. One way is considering the difference in how much you are investing in the improvement of your current product or service and how much you are betting on new products that may fail. In the latter example, often called a “bet”, the likelihood of failure is much higher than the former, but the potential return that the investment may see could be much higher.

In a start-up, one hundred percent of your investment goes into bets. You don’t really have an operating business model yet, so everything that you do is basically a bet. If you have a running business model, as your company matures, you shift more and more of your resources into improvements. You have something that works, and improving what works is a much safer way to generate revenue and impact than trying something totally new.

So, the question at this stage becomes: how much should I invest in optimizing, versus trying out completely new things that may either pay off or fail?

Actions taken

In my role, I went from one hundred percent of our investment going into bets, to, over time, as we gained more of an understanding of our business model, investing around forty percent of our resources into improvement. At my next job, the business model was quite mature; the only thing that we did was improvements. We didn’t invest anything in bets anymore. That can be the right strategy, but, for a company in a dynamic environment, there is a certain danger to it. We reviewed very explicitly what we were working on and what we were investing in and tried to understand whether or not this allocation of resources was the right way to go or whether we were missing out on other, more lucrative opportunities.

In the end, basically, this triggered a discussion that led to a reallocation into new projects, about twenty percent of what we were investing overall.

If you’re not investing anything in bets, you’re probably very confident in the ability of your improvements to meet your objectives. That might be the case, but a lot of times, there’s something underlying that’s often an issue. You’re too confident in your market position and just working on what you have. You’re trusting that the market environment will not change and that your position will not be challenged.

It might also be that you’re not investing enough overall in your product through sheer scarceness of resources, so you start putting everything into improvement because there is just not enough room to actually work on bets. You may also be too risk-averse as a company, shying away from accepting that some of the more adventurous bets that you could make may not yield any return.

Lessons learned

• When encouraging movement in one direction or another, you need to investigate the stance that you’re seeing in regard to growth, profitability, and your competitive position or mode in the market. For each of these areas, you need to identify what your homework is. What do you have to do to achieve your targets? In a high-growth company, what do you need to maintain or to accelerate that growth? The outcome might well be that just by optimizing my existing business model, I can achieve my targets from now through to next year. In that case, it may not be the right decision to begin investing in new bets.
• You need to make sure that your company has the right appetite for risk. If not, then this type of discussion can help bring some understanding of what level of risk acceptance is necessary to the surface. Where do we have to take risks? Be explicit about the areas where you’re investing in something that might not yield any return. That’s also sometimes very helpful. Bring the entire organization in alignment over that message. In doing this, realistic expectations are established for whether or not the venture will be successful. It can also drive discussions around overall resource investment in Product. For achieving our objectives, are we actually investing enough in our product? It requires an understanding of your current position in the market, where you would like to be, and how you can get there.
• In a start-up, you have an idea and you invest in it with everything that you have. If you were to pursue two bets, you take down the overall chances that either of them will be successful. As the company matures, you can still take on new bets, but you’re not betting on the company anymore. A certain part of your investing, you’re just betting on these unicorn achievements within your product portfolio. A financially-stable company has this ability; it can stomach a certain number of failed investments.