Andrew Koh is a notable thought leader, keynote speaker, industry trendsetter, finance and tech champion.
To address the challenges to the investment community after the pandemic, I plan to write a series of articles covering the future of investment. My goal is to inspire the next generation of thought leaders to continue shaping the investment world. Here I will discuss how investors can create an innovation index to help identify the next unicorns. For clarity, a unicorn is a privately held startup company valued at over $1 billion.
The Case For Using An Innovation Index
This approach calls for a major mind shift for investors who are used to relying on traditional financial tools to support their investment activities. In light of the recent downfalls of unicorns such as WeWork and Wirecard AG, it is imperative for investors to ask themselves what they may have done wrong in their investment strategies. Investors can identify the next unicorns by using an innovation index approach that considers three key areas: innovation opportunities, technology strategies and business transformations.
The key objective for investors here is to identify innovation opportunities in unicorns that will form the future drivers of the company’s business growth. I often use a simple form of design thinking I refer to by the acronym BEC, which stands for “Benchmarking, Emerging trends, Connecting customers.”
First, it is useful to benchmark against the future trends of the best innovation companies. Investors should critically examine a unicorn founder’s thought process based on the founder’s interactions with internal and external parties, how their decisions were made, and subsequent actions taken to implement their strategies to generate corporate results. This systematic approach aims to remove investors’ biases based on founders’ backgrounds, past corporate histories or financial performances.
Second, an investor should identify and take actions early on emerging trends among the unicorns operating within the same industry and the wider economy.
Third, an investor should understand how unicorns go about connecting and retaining their customers for future profits. Investors should investigate how long a unicorn takes to form relationships with its customers. This should be considered with the average seven-year business cycle in mind.
An investor should always look for startups that clearly know and understand exactly how their company’s technology strategies can work for them. For example, unicorns using future manufacturing technologies should incorporate design thinking, artificial intelligence and the use of data extensively, instead of relying on traditional manufacturing outputs as performance metrics.
Another common mistake made by investors lies in the assumption that hiring good chief technology officers and/or chief information officers can magically solve all of a unicorn’s information technology issues and challenges. In fact, technologists and information officers often need a lot of help when working within tight deadlines and budgets to deliver projects. It also does not help if CEOs are technologists themselves who may choose to override critical decisions made on project developments using their own judgements based on limited information and personal biases.
How a company manages its own business transformation projects speaks volumes to its ability to leverage its improved processes to provide products and services to clients. This is a key way unicorns separate themselves from their competitors. One of the best indicators I have found for unicorns that have successfully transformed themselves is to constantly measure the amount of new revenues and profits generated out of their business transformation investments. For example, legendary hedge fund activist Bill Ackman, based on his firm’s business transformation done back in 2015, made a hedge position to protect his investment portfolio in February in the event of a stock market sell-off driven by the Covid-19 pandemic. As a result, his firm reaped $2.6 billion of profits for its portfolio, a 100-fold return generated from his firm’s business transformation.
Creating A Living Innovation Index
The final step once an investor has successfully identified and allocated their investments into a portfolio of companies is to create an innovation index that encompasses the key criteria set up by the investor concerned. There are several ways investors can go about doing this, such as using a portfolio risk-weighted average approach and comparing their own index to a set of global innovation indices. Investors can differentiate themselves from competitors by using emerging technological tools, such as machine learning techniques, to help them decide which approaches work best for their innovation indexes and to make their innovation indexes living as these tools are continuously updated on a real-time basis.
I hope this helps you understand how to identify the next unicorns by using a living innovation index approach, with a little help from technology, to stay ahead of the competition.
The content of this article is for educational and informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial or other advice.
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