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Innovation: How to do it and what are the risks?

Let’s face it: all businesses make mistakes.  Some are tactical in nature, with little consequence to the long-term viability of a business.  Strategic mistakes, such as misallocation resources over a longer period of time, on the other hand, can have serious consequences for all stakeholders involved.

Given the pressures to constantly innovate and out-innovate the competition, it is no wonder that software vendors often invest time and development effort into products that do not sell.  We at Volaris come across software businesses that have invested hundreds of thousands of dollars into products that ultimately no customer wanted.  Not only do such wasted efforts negatively affect the company’s bottom line, but significant development time has also been wasted.

In order to reduce the failure rate of new products, top performing vendors have processes and practices in place to minimize the risk.  We at Volaris refer to it as a ‘Special Interest Group’ initiative.  Other businesses have different names for the process, but the key principles are common:

  1. Innovation is always driven and sponsored by a subset of the customer base.

    Best in class vendors require a number of key and interested customers to support the project and put “skin in the game”, which means funding the development initiative.  This ensures customer buy-in, support and validation - in return these early customers have access to the product in the form of a discount.

  2. Clear expectations around product performance and ROI

    Top vendors define and require a certain penetration level of their new innovations into their customer base before making the investment.  In cases where projections are not in line with reality, they have the discipline to pull-back and cancel projects before additional investments are made.

  3. Innovation is treated and measured separately from existing operations

    Top performers separate their innovation efforts from the day-to-day aspects of their business.  This allows for a more accurate quantification of the innovation effort.

  4. Product enhancements are a source of revenue

    Rather than continually enhancing the functionality of the core product with no impact on revenues, top performers focus on creating value for the customers by developing add-ons or new modules.  This way, they are able to upsell, or even cross-sell their existing customer base to generate incremental revenues. 

  5. Staying within their circle of competency

    Top performers do not stray too far from their existing domain and technology competency area.  This approach minimize product failure risk, while maximizes synergies with their existing ecosystem, as well as their capacity to execute.

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David Nyland

David Nyland is a Portfolio Manager and President of the Volaris Communications & Media Industry Group. He began his career as a software developer at a Tier 1 systems integrator, and quickly moved into entrepreneurial roles at 2 telecommunications software start-ups which scaled and were sold to strategic acquirers. Since then David has been CEO of 2 companies, a public company with global scale, and a VC-funded private business, during which he completed acquisitions of businesses in North America and Europe. David joined Volaris in 2013 to build a Communications and Media portfolio for Volaris, and has since completed numerous acquisitions worldwide including in Canada, Sweden, US, Switzerland, and Singapore. David has a passion for software and telecommunications technology and building synergistic businesses that scale profitably. His goal is to develop a strong synergistic portfolio of companies and hold them forever.