Iterative Deepening: What Opportunity Development can learn from Venture Capital

To be afraid to play around with a new idea actually betrays a lack of confidence in judgment rather than the exercise of realism.
Edward de Bono

What is the right thing to do after the spark of an idea but before that opportunity enters the New Product Development (NPD) pipeline? This is a period fraught with many risks. The risks are of over investment, of arbitrary milestones, and of rational but premature judgment: whether opportunities are “good” or “bad” when taken at face value.

This is also the most crucial time to cultivate early opportunities. It is a period where time and attention, rather than money, are the most precious resource. It’s also a time where we lack clear answers to our questions. Opportunities at this point are like start-up companies and we are the Venture Capitalists. Except in this case our “capital” is our time and attention. So what mistakes have Venture Capitalists learned to avoid?

Venture Capitalists don’t try to predict the winners – they don’t know enough yet. They don’t invest in everything they see – they don’t have enough money. They aren’t afraid if portfolio companies pivot (or fail) – that’s part of success at the portfolio level. What VC’s insist on doing, however, is to have their portfolio companies earn the next stage. And not every company can make it. Available resources (investable funds) also have a pre-determined limit, and the investment in any one firm is sized to allow follow-on support down the road. In this way, investors can participate in the downstream upside that is impossible to see in advance. The generalized term for this practice is “Iterative Deepening”, and we can apply this practice to the task of identifying opportunities in the idea stage as well.

Iterative Deepening is based on three principles:

  1. Judging opportunities as Waypoints not Endpoints: Opportunities are judged on where they could go, not on what they appear to be today. Furthermore, the stakes for investing time and attention are limited to just the next round of investment, not a final go/no-go decision. You shouldn’t say, “I don’t like this opportunity,”, but rather, “I don’t think it could lead anywhere, even with a pivot.” It’s acceptable to say, “I hate this opportunity as described, but I love where it could lead…and here’s what I suggest…”.
  2. Using time-based rather than outcome-based milestones. When the clock runs out, the opportunity must make its case for more time – just as start-ups must seek the next round of investment when they near the end of their funds. Furthermore, successive rounds are increasingly larger! The stakes keep getting higher, just like a venture capital Series B round is (generally) larger that Series A, which in turn is larger than the seed round.
  3. Winnowing the field downstream: Saying “no” to many so you can say “yes” to the few. Not everything earns its way to the next round and the commensurate larger investment of time. As each interval lapses, you say “no” (or “not now”) to a significant fraction, say 80%, of the portfolio. But to that top 20% you reward 5 times the time and attention received in the previous round. Even a simple process of three rounds of successive time-investments (for example, an hour, a day, a week), can bridge the gap between an idea and a product pilot without over-investing in “also-rans”. By analogy, even a blockbuster start-up has a Series A, Series B, and Series C round. And like venture investors, we seek hundreds of opportunities at first so we can be there with those few winners at the end.

Following these rules in practice, however, proves difficult. It fact, it’s often beyond the discipline of companies steeped in a culture of operational excellence. These organizations require polish, evidence, and a clear case for each opportunity to move forward. Senior management needs something they can say “yes” to, and commit to fully. Likewise, managers don’t have the bandwidth to play a portfolio game. They need projects that are supported by evidence, and when they are given the requested staff and funding they are expected to succeed.

Despite this challenge, the model of Iterative Deepening is the right path to follow. If your company is not explicitly doing this yourself, others are. These early steps, when ideas are numerous but also unpolished, are a critical time. Decisions in this phase will set the path for subsequent actions. The question is whether your organization explicitly acknowledges these early steps and takes the appropriate actions or not. If the organization doesn’t have the patience to acknowledge those early steps, they will happen either outside the organization (by competitors and start-ups), or even internally through secret “guerrilla operations” that are revealed to the organization only if successful.

Surprisingly, organizations with a culture of operational excellence are best positioned to muster the discipline for Iterative Deepening – even if the culture recoils at witnessing half-baked opportunities evolve. We know this because operationally excellent Venture Capital firms show that it’s possible to play this way to win. For companies to succeed they must simply master a new method, a method that admits to the uncertainty of the front-end, but rewards those who manage uncertainty rather than try to eliminate it – or worse, pretend it isn’t there. The method of Iterative Deepening rewards those who focus on the future at the portfolio level, rather than on each individual opportunity as it appears at the moment in front of them. Iterative Deepening is simply a disciplined way to allocate time and attention under conditions of high uncertainty. Without such a method, a company will spend its time pursuing low-risk, incremental opportunities, and will only see strategic opportunities when they are announced by the competition.

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