5 Reasons Your Physical Product Development Is Stuck And How To Get It Unstuck
Over the past 18 years since the founding of Inertia, we’ve had a lot of...
Over the past few years, I’ve had a number of conversations with late-stage venture capitalists (VC), private equity (PE) investors, and operators of companies they’ve invested in about the role New Product Development (NPD) plays in their due diligence and post investment strategy. Almost unanimously the answer has been “not much”, but I couldn’t really get many satisfying insights as to why.
You might be asking yourself, why is an engineer-turned-business-owner with no institutional investment experience writing about investment strategies? Well, because for the past two decades, my company has been the innovation machine behind hundreds of NPD projects funded mostly by PE and VC investment dollars (they fuel our customers). We’ve talked with hundreds of companies about their NPD strategies as well as sat through thousands of investor pitch presentations. So, while we’re not the professional investors, we’re right in there alongside them and their operators to help create successful innovations to drive growth.
I recently came across an article on Product Development in Mid-Market Private Equity by Doug Keeports of K&A Advisors from late last year that helped to inform as well as validate some of my thinking around NPD as it relates to investors.
Here are some key takeaways from Doug’s article as well as a few of my own thoughts on investment and operations strategies from the perspective of an NPD and innovation leader.
While knowing the impact of new products to the proforma revenue is obvious and important, “what’s more helpful is knowing the health of the company’s NPD team and process itself”. The better the team and process, the better potential exit for the PE firm. This is the first time, I’ve heard this from an investor and I couldn’t agree more with this statement. After hiring, managing and leading NPD teams for the past 25 years, I know that it is not as simple as just hiring skilled experts and throwing them into the room to innovate. Which brings me to another one of Doug’s conclusions:
Doug maintains that the key to success for NPD relies a lot on soft skills – “creativity, perseverance, risk-taking, and strong leadership are hallmarks of successful NPD teams”. Many mid-market companies I’ve approached to help innovate are often not interested in getting a boost from external innovation services because they already have all the technical capability in house. What they fail to grasp (or what I’ve perhaps not yet mastered selling) is they often lack the systems, processes, and most importantly, the culture to innovate successfully and at speed. Of course, I realize that only the most humble and confident people will openly admit their own or their team’s challenges in this regard. I mean, that is why they were hired in the first place…I get it.
Along the same lines, one of my observations around the culture of innovation within the operating company has been to watch how the C-Suite makes their innovation investment decisions. You see, people often look at R&D and NPD as a cost, which is only one side of the ROI equation. They don’t usually factor in the opportunity potential to weight against that cost. Okay, full disclosure, I’m going to get salesy now, being the leader of a product development agency…the single most important element of value a (good) external innovation firm can bring is to maximize ROI. Sure, an external NPD consultancy costs 2-3x what it would cost to have salaried employees, but for early-stage and even mid-market companies, NPD is a cyclical event – it’s not constant and it’s at odds with other activities in the company. If you can bring a product to market in 18 months instead of 36+ months then it makes perfect financial sense to pay 3x more to go that fast, get to market in half the time, and be much further ahead in terms of sales, profit, and growth – I’ve done the math. We only have so many years on this planet so why drag things out by “saving” your way to market.
A new product project may take 5 to 10 years to reach its ROI goals between product development and commercialization (assuming it’s successful) which is at odds with most PE fund cycles of 5-7 years. This is probably the most common reason I’ve heard why NPD is not interesting to late-stage investors – and I get it. While increasing sales of existing products and increased operational efficiencies are largely the focus of investors, I think these tactics alone are limited to producing linear increases in growth whereas I would argue that NPD can create a step-function jump in both growth and value. Even if new products were not yet introduced within the investment horizon certainly there is value in having a well through-out product innovation pipeline, increased intellectual property portfolio, along with a robust NPD process, and a formidable team and culture.
Many smaller companies struggle with their innovation after their start-up phase and can’t transition into a more mature NPD process. My observation on this is they often get stuck managing the day-to-day “fire-fighting” that often comes with what’s called “sustaining engineering”. If there is no NPD leadership, no process in place, no defined and adhered to roles and responsibilities, then all activities default to firefighting, NPD grinds to a halt, innovation doesn’t happen, IP is not created, and growth will eventually stall – becoming vulnerable to competition.
The reason they often get stuck is because they lack the scale to have separate R&D, NPD, and Engineering Sustaining teams. In most cases it is the same people doing all these things – and let’s face it, those are different skill sets. Anyone that’s managed these different “flavors” of engineers knows that they’re not built to work across all these stages. And when they focus on everything, they focus on nothing.
Remember the Eisenhower Matrix? The urgent & important is usually a sustaining task (aka. firefighting). R&D and NPD activities fall into the important but not urgent quadrant because of their relatively long time horizons. The result? R&D and NPD continue to get pushed down the road because a new fire must be put out every day. Again, this is why some high-growth companies choose to outsource R&D and NPD as they start to scale.
One final reason why it might be important to consider how NPD might factor into your investment due diligence and post deal strategy. I recently listened to Doug Tatum, author of No Man’s Land, speak at an event and, if I understood him correctly, he explained that PE firms are now having to look further and further down-market to smaller companies because there are just not enough prospects due to past – a victim of their own success, maybe? This leads me to believe that as investors move down-market to smaller companies, they might have to rely on more than just increased sales and lower operating costs to find and build value and velocity (per my step-function comment above). They will likely find is that many smaller companies will not be as well-developed in terms of their NPD processes, systems, and culture as they have typically seen in larger companies.
With the investment landscape changing as of late, investors might need to look at things differently (and perhaps more closely) than ever before – beyond pumping up sales and lower operating expenses. Is NPD a part of that, it’s obvious what I think about that. I would certainly love to hear from more investors or business leaders, on their views on this.
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