My presentation at the 2018 IO Summit in Lincoln, NE. How can companies maximize their return on corporate innovation investments? (1) Stop using the wrong valuation calculations and (2) Don't copy the wrong things from traditional startups.

1. SEAN AMMIRATI
PARTNER | BIRCHMERE VENTURES
ADJUNCT PROFESSOR | CARNEGIE MELLON UNIVERSITY
Maximizing ROI for
Corporate Innovation
May 30, 2018 @SEANAMMIRATI WWW.SEANAMMIRATI.COM

2. 52% of S&P companies have disappeared
IN THE LAST 15 YEARS
61 YEARS
1955 lifespan
17 YEARS
2015 lifespan

3. Why?
What got you here,
won’t get you there!

4. Transportation

5. Local recommendations

6. Creative Destruction
Creative Restoration

7. Every company needs to be
entrepreneurial!
How?

8. Entrepreneurs create the
world the way it ought to be!

10. Now I spend time convincing
others to do the same
INVESTING AT BIRCHMERE
VENTURES
TEACHING AT CARNEGIE
MELLON UNIVERSITY
WRITING & SPEAKING ABOUT
INNOVATION

12. We believe startups can exist and thrive
anywhere, including in large corporations.

13. We believe startups can exist and thrive
anywhere, including in large corporations.
But the processes and tools to create these startups
are different from those needed by the proverbial one
in a garage.

14. Maximizing ROI on
Transformative
Innovation

15. Stop Using the Wrong Valuation Calculations
Don’t Copy the Wrong Things from Traditional Startups
How?

16. Precursor to Valuation: Market Sizing
Total Addressable Market: what is the
universe of customers who could use your
service
Served Available Market: who can you
currently reach with your sales and
marketing channels?
Target Market: your likely customers

17. “Market size: How big will
the company become if it
took the whole market?”
- Tim Draper
“
What is the first thing you look for
in an investment?

18. Thinking About Valuation
Applying traditional corporate financial models (e.g.,
IRR, NPV) to internal investment decisions for innovation
projects is an inherently flawed exercise.

19. Thinking About Valuation
Applying traditional corporate financial models (e.g.,
IRR, NPV) to internal investment decisions for innovation
projects is an inherently flawed exercise.
Likelihood
of Result
Financial Result

20. Thinking About Valuation
Transformative innovation projects tend to end up in the
extremes: the long right tail is full of great successes, but
the highest part of the distribution is at and near zero.
Likelihood
of Result
Financial Result

21. “The Babe Ruth Effect” of VC
- Chris Dixon
Percentage of
10x investments
http://cdixon.org/2015/06/07/the-babe-ruth-effect-in-venture-capital/

22. “The Babe Ruth Effect” of VC
- Chris Dixon
Percentage of
10x investments
http://cdixon.org/2015/06/07/the-babe-ruth-effect-in-venture-capital/
Percentage of $
losing investments

23. Thinking About Valuation
We don’t want to use models designed for predictable
expansions and cash flows. But there are finance tools
designed to value higher variance activities.
We apply options pricing theory to a gated innovation
management approach to more accurately value corporate
startups.
We call it Option-Gate.

24. Option-Gate
Model
Applying traditional corporate
financial models (ex: IRR or
NPV) to internal investment
decisions for innovation
projects is an inherently flawed
exercise.

25. Option-Gate Model
The model inputs are divided up into two parts:
1. Marketing Sizing
2. The path to validating the hypotheses which have to
be true for the business to be a success
The model output centers around a valuation number.
This number corresponds to what the idea would be worth if
it were priced as a call option today.

26. Don’t Copy the Wrong Things…

27. Don’t Copy the Wrong Things…

28. Other Tools We Are
Developing

29. Corporate
Startup Canvas
A compliment to the Business
Model Canvas.
When thinking about new
startups within established
businesses, we believe there
are additional ingredients
that need to be thought
through and validated.

30. Pitching Innovation
to the C-Suite
The C-Suite Canvas walks you
through a hypothetical set of
executives and what they care
about to help better prepare
corporate entrepreneurs.

31. Use of These Tools
Any feedback on these tools is welcome as they are
all in a state of “public beta.”
Try them out at CorporateStartupLab.com/Tools

32. Thank you.
@SEANAMMIRATI
WWW.SEANAMMIRATI.COM