Modern Portfolio Theory Applied to Innovation

There are 2 kinds of innovation:

sustaining and disruptive.

Sustaining aims for 2X,

Disruptive aims for 10X.

Sustaining is short-term focused.

Disruptive is long-term focused.

Companies need to invest in both.

They need to play both the short and long game.

Many companies get this and already apply a portfolio model to innovation.

But you typically find them mostly invested in sustaining when times are good,

And only increasing allocation towards disruptive during a crisis.

This is a reactive strategy which

often leads to sub-optimal results

because it’s a market-timing strategy.

The best time to invest in risk

isn’t during a crisis,

but when times are good.

Much like:

The best time to be tilted towards stocks versus bonds

isn’t in our sixties,

but in our twenties.

A better strategy is to apply

a modern portfolio theory model to innovation.

One that is goal based and diversified,

irrespective of short-term market conditions,

but rather the “desired lifespan” and time horizon of the company.