(270e) Gambling on Innovation

The purpose of this talk is to provide a method for choosing an innovation portfolio, which is based on a simple and fundamental result from information theory. Given a set of innovation projects, estimated payoffs and probabilities of success for each, and an established capital fund, the question is “How much should one invest in each project, in order to maximize growth and minimize the risk of going bust?” That is, how should innovation leaders gamble on their innovation projects? The question relates to a type of process design for innovation processes. The concept in this article is especially important for early-stage innovation projects, where the probability of success is often <50%. As one heuristic, for p = 50%, one needs a payoff b = 4 to achieve a 25% median compound annual growth rate. This article provides an algorithm to guide investment decisions in innovation, plus some heuristics that can be used for guidance. It also emphasizes the critical importance of estimating probabilities of success for innovation processes.