Radical Budgeting: Introduce a Crowdsourced VC Model for Inside Your Organization
By Adam Siegel on November 17, 2016
In our work with large organizations, we regularly hear about efforts to take a page from start-up orthodoxy and apply lean principles to product development. I whole-heartedly agree with these efforts and am a big believer in early prototyping, iteration, and dramatically increasing experimentation to encourage risk-taking and learning from failures. These efforts also tend to go hand in hand with innovation initiatives where it has been decided that some part of the business is going to try Working Differently.
We sell an application that lets companies crowdfund ideas that have been internally generated by employees, like an internal Kickstarter. I often tell organizations to think of it as a seed round in a venture capital process, only the investors are all your employees vs. just a few executives, and the money is coming from your budget, not institutions or individual wealthy people. In fact we’ve now introduced aspects of this model to several large organizations like AstraZeneca, who we profile briefly on our homepage.
But I think we’re only at the beginning stages of where this could go and the value an organization could derive. What if you expanded this thinking and tried to supplant the entire budgeting model inside organizations to: 1) mimic VC rounds (seed, Series A, Series B, etc.) and 2) use crowdfunding to decide what ideas/projects/initiatives should get resources during these rounds?
Not Such a Big Leap
Most companies already have a stage gate process for product development stages, with requirements at each stage, e.g. business case, prototype, marketing plan, etc. so the deliverables would not change, but crowdsourcing those decisions would fundamentally change the decision making process and culture inside the organization.
The value could be quite significant:
- Continuously get credible, minimally biased signals from people who are arguably the most qualified to be making these decisions: the collective wisdom of people who know your business best.
- Create transparency in the investment and allocation resource process which is typically a huge black hole of office politics, anxiety, and disillusionment.
- Dramatically increase the engagement and motivation of your employees who now suddenly feel like they have skin in the game and control their own destinies
- Become much quicker at reacting to market dynamics by being able to fund cheap experiments and scale them if they prove successful.
- Remove nepotism and bias in the funding process. The likelihood of investment decisions being made based on what is best for the business vs. personal gain is increased considerably.
- Provide a path to kill “sacred cows” and avoid sunk cost mentality.
Mimicking the Venture Capital Model
Seed, seed, then seed some more
The first stage of investment is typically a seed stage. You have to look no farther than the most successful seed incubator in the world, Y Combinator, to identify what an internal strategy could look like. Funding ~200+ companies per year, they currently invest $120k per company - a minimal investment in the grand scheme of things. Seems like a lot of companies to be investing in per year, but what are they really doing? Making lots and lots of bets and hoping just a few take off.
Now let’s look at how that could play out internally. For kicks let’s say you wanted to invest $1M in seed stage experiments. You could first issue a “call for ideas” related to your strategic initiatives, specific problem areas, or even ideas for new features of an existing product. People could then submit and collaborate on those ideas, and in doing so, request budget - ideally limited to a low amount, say $20k, or 1 month of time to write a business case or build a limited prototype. But instead of your executives deciding what should get funded, the crowd could do so as part of an ongoing crowdfunding exercise with “house money” they’ve been allocated from that $1M.
So now you have your early seeding process churning out lots of experiments. Most will fail, but a few will be promising, so let’s talk about what could come next.
Series A - Get to something tangible
After an idea is funded and completes its goals in the seed stage, it may need “Series A” funding. While the funding requests are larger and those who control the pursestrings may get squirmy at continuing to have minimal control over how the money gets spent, there’s no reason not to stick with a similar process as in the seed stage. Based on whatever deliverables and actions the company has outlined for this stage of product development, the “crowd” makes the decision whether to fund or not.
If you feel nervous about each employee now having thousands of dollars to make investments, this is when you could pare down the investment community based on merit/engagement. Maybe the only people allowed to make investments at this stage are ones who have contributed or collaborated on ideas, made lots of investments, or even better, made lots of “good” investments - ideas that showed quantifiable value later.
Series B and onward - Get to launch and scale
In certain industries we may now be talking about investing millions of dollars in to an idea, or we may also be talking about simply funding ongoing development of a feature and not spending much money at all. Either way, even at this later stage of funding, it’s the wisdom of your employees who you are counting on for prioritizing investment decisions, not just a small group of executives.
While the approach outlined here is already a significant departure from how funding is decided today in organizations, it could be taken even further. Imagine if instead of house money, everyone was given a budget of time, and ideas were replaced by tasks that needed to get done. Every task would have a budget of time associated with it and employees (or even customers!) would make investments in the tasks they felt should be prioritized. Each week or month, the time budgets would be replenished to repeat the process.
In an agile or scrum software development methodology which a majority of
software development shops follow these days, prioritization of tasks is
decided during daily or weekly stand ups. With this model, developers
alongside customers could make investments in the tasks they felt were
highest priority and those that reach their tipping point would get worked on.
In future posts I’ll discuss how the organizations we’re working with are taking small steps to move towards a venture/crowdsourcing model and also explore how using crowdsourcing to prioritize spending or tasking fits perfectly in some of the emerging operational models like holacracy.