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PELLEGRINO: Where do entrepreneurs go wrong when innovation is a core value?

May 30, 2015

innovation-sig-pelligrino-mike.jpgThere is an immutable truth among entrepreneurs and inventors: They are eternal optimists. One needs to be to suffer the trials and tribulations of bringing an idea from conception to market launch. Without optimism bias, entrepreneurs and inventors would give up early, surrendering innovations to the inferior status quo. Societies do not advance under such conditions.

I have seen many interesting concepts over the course of interacting with thousands of inventors over the years. Like many things in life, the truth is stranger than fiction. While I have many examples, some fun ones include:

• One prospective client had a domain name they wanted to sell to Apple for greater than $12.5 billion. Apple apparently has a hard time selling iPhones without this domain name.

• One prospective client called me (several times over seven years) to value a new economic model for the world. My continued attempts to inform him that his adaptation of communism will not likely generate much value fell on deaf ears.

• One prospective client generated a patent on a software technology they said was worth at least $10 billion. The relevant industry had total revenue of less than $5 billion.

The optimism bias creates a common expectation and perception of innovation value versus real value. If I ask many of my early-stage companies what their ideas are worth, the common response is oftentimes something greater than $10 million. Like a doctor telling a patient they have cancer, I tell many of my clients that their baby—their prized innovation, their life’s work of blood, sweat and tears—is ugly.

So what attributes make an innovation valuable? Create real economic value as opposed to perceived economic value. There really are only a few ways to create real economic value, and they generally fall into four buckets:

1. Increase top-line revenue, increasing profits.

2. Increase market share, lowering effective amortized costs to service clients, increasing profits.

3. Reduce operational costs, increasing profits.

4. And last, reduce execution risk, increasing the value of future operational cash flows.

Valuable innovations create economic value in at least one of these dimensions. Really valuable innovations create economic value in two or more.

These innovators and their innovations exist in our very city, yet they are well below the radar.

One of my client’s innovations has driven more than $1.6 billion in revenue in less than 10 years in medical devices.

Another client figured out how to sort garbage more effectively. While seemingly unsexy and low-tech, he solved a real problem and is well on his way to being a billionaire.

Another client figured out how to better reinforce cell phone towers, saving cost and reducing risk, generating exceptional profits from the innovation.

These innovators fly well below the typical radar of the Indianapolis tech scene; however, their value creation tends to easily exceed that of the city’s highest-profile innovators. In every case, they created value in one of the four buckets I described.•

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Pellegrino is founder and president of locally based intellectual property firm Pellegrino & Associates, which has more than 200 clients including IBM, GE and American Express.

Check out the rest of IBJ's 2015 Innovation Issue.

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