In past articles, we’ve explored the nuances of managing an enterprise portfolio. Such as the difference between reactive and proactive management styles. Reviewing incoming requests and deciding whether to invest vs. defining a vision and allocating resources to make it a reality.
Yet in either approach, we can end up overlooking important problems or opportunities. Despite our best intentions, we have blind spots.
What we miss
In his book, “The Innovation Blind Spot: Why we back the wrong ideas and what to do about it” venture capitalist Ross Baird outlines some of the factors that prevent funders from investing in young companies tackling important problems.
While we like to think of entrepreneurship as a universal opportunity, not everyone has access to resources they need to build a business. In fact, Baird cites that almost 80% of venture capital goes to founders in three states: New York, California, and Massachusetts.
The problem, as Baird outlines, has to do with three blind spots related to how we invest, who we invest in, and why we invest. These issues are caused by the mentalities of “one-size fits all,” “it’s not what you know it’s who you know,” and “two-pocket thinking.”
These blind spots cause us to spend most of our resources on ideas that solve a narrow set of problems for a small number of people. At the expense of the problems faced by the majority of people all over the world.
A portfolio manager is not that different from a venture capitalist. The work involves reviewing proposals for new projects and making decisions about whether to move forward and how.
Are your portfolio resources accessible to everyone? Could illuminating and addressing blind spots help your organization create a bigger impact?
The book mainly explores the entrepreneurship space but Baird also spends an entire chapter on what enterprises can do to deal with blind spots. He shares what’s not working in the funding space, but also plenty of examples of alternative models that do.
In this article, I’ll share a few of his insights and add some prompts for you to reflect on how these ideas might impact your portfolio approach going forward.
1. How do you invest?
One blind spot that Baird referenced is caused by the popular venture capital approach of investing large amounts of money with an expectation of a quick return. Funders looking for a particular type, speed, or magnitude of return tend to turn down or overlook opportunities that fit a different pattern.
“Because venture funds are under extreme pressure to deliver quick profits to investors, they prioritize short-term value capture over long-term value creation.”
– Ross Baird
He also mentions that different funding sources are better for businesses at different stages. Frustration occurs on both sides if there isn’t mutual understanding of which stage the business is in and what they need to do or where they can go to get funding until they’re ready for bigger investors.
Consider your organization
- How do you define the success of your portfolio? Is it short-term payoff? Long-term payoff? Hockey stick returns? Where are you focusing and could you be missing out on good ideas somewhere else?
- What criteria are you using to make decisions on what moves forward and what doesn’t?
- How developed does an idea or concept need to be before it can receive your attention, backing, and resources? Can ideas come into your pipeline with a problem statement? Do they need a proven prototype or pilot? A detailed business case?
- If you require some market proof, how will people in your organization fund experimentation until that point?
- What are your minimum requirements for an idea to be considered and funded?
- Are the criteria clear to everyone in your organization?
2. Who do you invest in?
Baird talks about how it’s easier for entrepreneurs in a few select cities with key connections to gain access to resources. Basically, the closer you are to money the easier it is to get more.
That can result in large funding gaps. Entrepreneurs working in places with fewer funders, who can’t move to a new location, or aren’t already part of the same networks as investors struggle to find funding even when they have great ideas and traction. This blind spot means that not only entrepreneurs but markets can go overlooked.
“The people who make decisions over which problems we’re going to solve are often disconnected from the problems that matter the most.”
– Ross Baird
The type of people evaluating ideas can impact whose ideas end up being chosen and the success of the portfolio. Baird cites a research study where a Ph.D. student investigated how circuses decide which acts will be more successful. Performers (“Makers”) ended up being better at spotting the best ideas than ringmasters (“Managers”) were.
That’s because Makers apply a creative mindset and envision possible futures. This helps them evaluate how likely a new idea is to work in the future. Managers use an analytical mindset and evaluate ideas based on what has or hasn’t worked in the past. So Managers are good at making decisions based on predictable patterns, but Makers are better at spotting the potential of brand new ideas.
Consider your organization
- Who currently submits ideas to be considered in the enterprise portfolio?
- Are they located in the same location, department, or social network as influential leaders? Or do you have diverse representation?
- Whose ideas are ultimately selected? We talked in an earlier post about the ways to avoid creating an elitist portfolio team.
- Do the people involved in making the decisions know about the problem or empathize with the end customer?
- Could you fold in more insights from people closer to the problem, whether that’s customer voting, peer review within your organization, or inviting delegates to your portfolio meetings?
- Are the people making portfolio decisions Makers or Managers?
- Do you make decisions by assessing ideas against a checklist of criteria based on past successes?
- Or do you forecast the probability of success? Such as the likelihood of this idea succeeding if they have the resources to reach the next milestone.
3. Why do you invest?
Another blind spot is what Baird calls the “two-pocket mentality.” A “two-pocket” approach means focusing on maximizing financial return, and then using the leftover money to invest in a broader purpose.
The problem is that it results in a situation where we’re spending large amounts of resources on creating new problems and a fraction of that on fixing the problems.
“We can’t create problems with 95 percent of our resources and expect 5 percent of our resources to solve them.”
– Ross Baird
In contrast, an organization is “one-pocket” if they follow a “more-than-profit” model (as Baird puts it). That means they create a societal benefit while creating financial wealth.
Sometimes the shift can be as simple as aligning your business model or your decision rubric with your personal values. For example, the CEO of New Belgium Brewing Company decided to go with a 100% employee ownership model. She recognized that one-pocket thinking also led to happiness because her values and work were in alignment.
Your employees want to work at a one-pocket organization, and in a past article, we talked about a way to shift your own business toward a one-pocket brand.
Consider your organization
- Is your business two-pocket or one-pocket? Are you creating a financial return in a way that also provides a broader benefit? Or do you split up those investments in your portfolio?
- What is your value framework based on? What is the intention behind it?
- Does it reflect your customer’s values?
- Your organization’s values?
- Your personal values?
- Stock market pressures?
- Are you able to make decisions that check multiple boxes or do you always need to slice up your portfolio into multiple sections to serve each group?
If you’re interested in the entrepreneurship and venture capital space, I definitely encourage you to check out Baird’s book and the accompanying web page with links to more resources.
While portfolio management in a company might involve blending a venture capitalist and entrepreneurial perspective, it’s helpful to be conscious of our blind spots. So we can adjust our portfolio approach and better leverage our resources to create a greater impact.
How will you address these blind spots in your organization?