Ideas. Worth. Doing. (Part 2)

July 21, 2014

Ideas. Worth. Spreading. Doing.

In a series of posts, we are exploring where ideas come from, how we tend to select those worthy of capture, and which (and why), if any of those from the endless stream of our consciousness, efficiently grab us – first to take notice and then, on rare occasion, to act upon.  As we explored in our last blog post, each of these attributes – “ideas,” “worth,” and “spreading” – are the core elements of the TED slogan.  What is it about these three elements that has enabled TED to capture our imagination and our attention, and has fueled its global popularity and growth?  And how do these elements, individually and collectively, apply to the advancement of innovation?

Our first deep dive into the TED slogan focused on “ideas.” The main premise being: ideas are mental expressions derived by collisions between desire and impediment.  We want something, but we can’t have it.  So we ideate a way to get it, conflict and desire being the gears of the human idea engine.

Next up – Worth.

Worth is the oxygen of economic theory.  Generally, worth is equated with value, but the simplicity stops there.  How we determine worth and, thus, value is as individual as we are and particularly more obscure when it comes to making the conscious decision to capture an idea, or not.  The action itself has a cost.  Aside from the associated physical costs (napkin included), capturing ideas is a mentally expensive endeavor.  It means we actively seek to reframe setbacks, to put progress in front of status quo.  It requires moving past the “why” to the “why not.”

The process of ideation is also “time expensive.”  It requires that we not be doing anything else, or at the very least not anything requiring keen concentration.  Seldom is today’s world do we have the luxury of unoccupied time.  It requires a decision and a discipline to allocate it.

Even the best ideas, in their earliest moments, are iterative.  Our minds assemble the “stuff” of ideas bit by bit and line by line as they emerge, often editing and reassembling on the fly, as we integrate new thoughts with previous experiences in order to envision a potential new solution.

If this process sounds exhausting, it generally is.

For most of us, the vast majority of our time is spent outside the ideation realm.  But when we do elect to capture an idea? What is it about a particular idea that matters?  Why do we stop and expend the time?  What makes us consider certain ideas sufficiently valuable?  The answer: when it extends our own story.

The ideas we capture are the ideas that extend how we define and expand ourselves.  They are the ideas that we believe will help us pave past boundaries in the world we seek to explore – and to improve.  They are the ideas that create new paths to experiences that we hope to have, new solutions to obstacles that block our desires.

Weighing idea investments and returns.

But to be impactful, ideas require more than just this internally focused motivation.  Ideas that change the world require adoption and mass appeal.  They are externally focused; they must provide value to others as well.  They require significant investment; thus, they demand a return.

People say ideas are “a dime a dozen,” principally because their supply far outstrips their demand.  Truly valuable, worthy ideas are those few that, once understood and reduced to something tangible (perhaps just the napkin), are generally recognizable as broadly applicable.  They capture the imagination of many.

The hardest part of translating ideas from concept to reality is thinking of the idea in quantitative terms, yet we must.  At the same time, we must also strive to acknowledge the vast uncertainties associated with bringing an idea to life, and we must believe that investment is warranted.  We must believe in an idea’s ability to impact lives, move markets, and provide true benefit and value.

In the context of start-ups, these value calculations are essentially binary.  We (the potential investors) either believe, or we don’t.  The resulting valuation becomes generalized to market comps rather than anything related to conventional forecasts based on market potential or discounted cash flows.  Those days will come later (hopefully!).  But, to begin, it is a simple “yes” or “no” calculation. If yes, then next question is:  What are the current pre-money prices being paid for similar ideas? Surprising to many founders, it is not how much is this idea worth.

Image by Ewing Marion Kauffman Foundation and Angel Capital Education Foundation

Image by Ewing Marion Kauffman Foundation and Angel Capital Education Foundation.

Seed-stage valuation has very little to do with the inherent value of the idea or the related company.  A great way to “get real” is to scan postings like AngelList or to look at recent data from the National Venture Capital Association.  Perusing these resources reveals that demand by investors to participate in an early-stage venture is the single driver of valuation.  If more folks want in, then the price goes up.  If the demand is driven only by the innovator (and his/her individual passion and desire to get things rolling), then the price will peg to the basic market comps.

It is surprising how little these pre-money valuations change over time.  In markets that are highly constrained, fewer deals get done, but generally the valuations are only slightly compressed.  For example, in my first biotech start-up in the early 1990s, we raised $3.3M in a series A round at a pre-money valuation of $5M.  The company was focused on a drug discovery platform with some small animal efficacy data.  Now, 20 years later, we routinely see transactions for similar types of companies pricing in similar pre-money ranges.  The early stage investors need to control the cap table and make sure they hit value-creating milestones.  The dollars required for both are not highly inflationary.

So, back to our slogan “ideas worth spreading” and the centrality of value creation in innovation.  The monkey in the middle of all of this is worth, and rightly so.  Without implied personal worth a great idea is seldom captured – and the notion is simply lost to the ephemeral.

Unless an idea can truly attract a crowd, is it too personalized to drive the process of spreading and actualization?  We’ll explore this topic the next time.