Imagine you were choosing between two investment proposals. The first comes from a team of young entrepreneurs hoping to bring word-of-mouth marketing to China. The team’s concept is unproven, and the entrepreneurs admit they have no idea precisely how big their business will be. The second comes from a seasoned team inside a large company that’s looking to tap into a growing segment adjacent to its current business. The strategy is logically sound, takes advantage of the company’s capabilities, and the team is offering up precise financial projections promising hundreds of millions of dollars in revenues.
Seems like an easy decision, right? Yet, we decided to invest our own money into the first proposal, and advised a senior executive team to not invest their money in the second.
While that may seem counterintuitive, our experience in the trenches of innovation teaches us to look beyond a plan’s superficial elements to assess the team and how they created the plan. The first team forged its idea in the white-hot heat of the market, which meant that the many assumptions that remained were grounded in real-world experience. The corporate team, on the other hand, forged its idea in the languid lights of the conference room, which meant the plan was based on assumptions the team didn’t even realize it was making.
The word-of-mouth idea was pitched to Innosight’s investment arm by entrepreneur Christoph Zrenner in 2010. Zrenner had partnered with Benjamin Duvall, a business school classmate of his who had previously worked at Bzzagent, which had built a successful word-of-mouth business in the U.S. Team members had augmented the standard facts and figures suggesting that the market had potential with acknowledgment of remaining risks and uncertainties. Far more telling to us, they had spent significant time in the market pitching their idea to potential corporate customers, and had even successfully recruited a few, most notably Kraft Foods. We invested in the business, which – after a few twists and turns – is now growing rapidly across Southeast Asia under the name Wildfire.
The second team was well-intentioned but simply hadn’t done the fieldwork. Despite the soundness of the logic and the strength of the projections, the strategy was replete with risks that we could see but that the team had not acknowledged. The proposal dramatically underestimated how unique the value proposition was compared with offerings from start-ups. And it projected a pace of scaling that wasn’t credible given the company’s inconsistent innovation track record. Our assessment was that revenues would take longer to come in, and would be significantly smaller, than the team projected.
Scott Anthony is the managing partner of Innosight.