4 steps to optimal innovation (or capital) budgeting

“4 steps to optimal innovation (or capital) budgeting.”

Darrell Velegol, PhD

2024jan17

Having a “global optimum” over ALL projects will dramatically increase the Internal Rate of Return for your innovation (or capital investment) portfolio. As usually practiced, the Stage Gate methodology assesses projects ONE at a time. And “expected value” estimates like the usual NPV or IRR analysis can lead to unnecessarily high risk. Below are the steps for a better way to allocate resources in your innovation portfolio:

1. PARAMETERS. Measure or estimate the right parameters for each project: a) Projected Present Value cost, b) projected PV gross profit, c) estimated probability of success, d) estimated time to launch. If you don’t have these numbers, there are methods for attaining them, for instance using a modified “Delphi Method”. I can help.

2. ANALYSIS. Analyze all projects at once. I can help! If you want to try 5-10 projects as a trial, let me know, and we can compare your result with what I calculate. If that’s all you need, then you have what you need! If you have dozens or 100s or 1000s of projects, that’ll be more work.

3. INTERPRETATION. Interpret the results. There are usually a number of surprises after the analysis, and you might decide to re-assess some of your numbers, or make decisions that -- for your own purposes -- don’t quite come up as optimal. That’s OK -- I believe in “data-guided” decisions, more than “data-driven” decisions. You’re still in charge.

4. NEVER-EMPTY PIPELINE. If you’re going to maintain a steady pipeline of mature projects and launches, you’ll need to continue creating seed (i.e., early stage, low probability) projects. I can show you how to manage this balance, to keep a steady flow from low probability to mature.

A proper analysis can handle BOTH innovation and capital budgeting -- often seen as different domains -- in a unified way, and good estimation techniques can lead to improved communications between the commercial and technical functions, improving rational outcomes, mitigating bias, and increasing speed. This will boost your IRR, reduce risk, and give better retention of your best people.

Let’s give it a try! I’d love to learn more about your process for budgeting your innovation portfolio.

To learn more, contact me or check out the book “Design of Innovation Processes” at

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