“What’s My Trade, A$$hole?” - Innovate Like Wall Street is Watching
Don Rickles playing the pit boss in Casino
The community of Punks & Pinstripes asked that I re-issue this article about how to defend the ROI of innovation, which I wrote in 2020. I love this article.
In June, 2007, when I worked as a bank analyst I went on my first roadshow in Europe to present to some of the biggest fund managers on the other side of the Atlantic. My first meeting was with one of the most acclaimed, and most feared, investors in Europe, Eric Schott of APG.
Eric looked like Don Rickles playing the pit boss in ‘Casino.’
He walked into the boardroom, sat down, checked his Blackberry, and said, “Start.”
I started my presentation by talking about the economic headwinds affecting banks. He cut me off and said, “The market closes in 42 minutes. What’s my trade, asshole?”
I momentarily envisioned leaping out of my chair and drop-kicking him in the chest. But I kept my composure, fast forwarded to my last slide and said, “I think Lehman Brothers will fail and Citi will survive.”
“That’s what I think too,” he said. He then got up, shook my hand, and left the room.
Meeting adjourned.
During my time in finance I presented to some of the meanest alpha males and females with the shortest attention spans. It was a brutal pressure cooker. I still sometimes wake up in the middle of the night with nightmares of obnoxious, old, rich, white guys wearing Ferragamo ties.
But, despite my ongoing PTSD, I’m glad I went through it. Since my time on Wall Street I have helped Fortune 500 companies build 33 new ventures. Because of people like Eric Schott I’m always ready for someone to ask, “What’s my trade, asshole?” And while the wording is crass, the intention is totally legitimate: why would an innovation-agnostic investor care about what you’re building?
Why innovation matters to investors.
Every Investor in a large company needs to know that your company can do two things:
Reverse the decline of legacy businesses.
Launch and grow new businesses.
At its simplest level that’s pretty much it: Sustain old businesses, build new ones, and do it by taking smart risks in a reasonable time frame.
Innovation is critical for a company to demonstrate that it can transform and grow. More importantly, innovators are an essential part of that story. Here’s what you need to do to demonstrate return on innovation investment.
Never value an idea. Value an outcome.
The first, second and third rule of intrapreneurship is never pitch an idea, only pitch an outcome. This premise also extends to the economic valuation of innovation. You have to build and test a prototype before you start trying to predict how it will affect your company’s financial performance. Only then will you have credible starting assumptions about how it would affect sales, profitability, and stock performance once it’s fully grown. First, generate some small scale results, then make assumptions about how it will affect your company’s performance if it gets big.
Your CFO Needs You. You Need Your CFO
CFOs aren’t the best storytellers. Every CFO has suffered through the indignity of sharing an astoundingly good quarter with investors, but describing it in such bland jargon that investors don’t notice. The PR and communications people who help them are primarily there to ensure that they don’t get sued for saying something illegal.
In my experience, CFOs appreciate it when they can go into the product studio and help explain how user validation translates into financial value. They help extrapolate how it would impact the firm if it gets huge. The Punk-Pinstripe alliance between the CFO and the intrapreneur is worth nurturing.
If you can multiply and divide you can build a valuation model.
Valuation is not inherently hard - it’s just explained badly. If you made it through 7th grade math you’ve got what you need to run a valuation model. But the tools you use for valuing the transformation of a mature business are different from the tools you use to value a new venture.
Resources for valuing a mature businesses being transformed.
The OG, Jedi Master of valuation is Aswath Damodoran. His book, The Dark Side of Valuation, is a masterpiece. His blog, Musings on Markets is also stupendous. His smaller, simpler book is The Little Book Of Valuation. I recommend that you read them all. For a super easy model to get you started with valuation this article in Forbes by Bobby Grajewski is extremely helpful. But, please take your CFO out for a slice of pizza, and ask them to help you populate the model with credible numbers. Another great resource is the blog ‘Mergers & Inquisitions.’
Resources for valuing a new venture
If you are building a new venture from scratch DO NOT USE THE RESOURCES MENTIONED ABOVE!! New ventures do not have a track record of data that can reliably predict future performance. Instead, use the innovation options model. David Binetti is the architect of innovation options.
Innovation is a critical tool for spurring new growth and reversing the decline of a company. But very few innovators know how to share the value of their work to an innovation-agnostic investor. Every innovator should be prepared to defend their value to Wall Street.
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