Let’s say that you’ve come up with an innovation and now need to convince your company’s executives that it makes business sense. The first rule: beware of the Finance department. Financial analysts are great with an alphabet soup of classic financial tools: ROI, IRR, NPV, hurdle rates, and so on. Unfortunately, classic tools are good only for classic markets. That is, mature markets that are well understood and more or less predictable. With an innovation, these tools are less than useless — the market doesn’t exist. It’s like trying to measure the path of an electron using Newtonian physics. Newtonian tools are good for classic physics but will do nothing but mislead you in the subatomic space.
So how do you measure the potential impact? Well, you need new analytic tools — and so do your financial analysts. One option (no pun intended) is real options analysis. Traditionally, “options” meant the option to buy or sell something in the future. “Real options” are similar but they give you the option to do something in the future. In other words, we’re trying to put a value on the concept of keeping your options open. A good financial analyst working in an innovative company should know about real options — you can use the video to introduce it to them.