What You’ll Find This Week

One of the most clear-cut reasons that innovation fails (particularly within larger organizations) is a misalignment to core business metrics and budgets. We’ve discussed this at length in our series on the metrics that crush innovation. This week, we’re refocusing on how to align budgeting efforts to innovation when the two don’t fit together neatly.

In Part 1, below, we discuss Rethinking the Budget by outlining key difficulties and their solutions to ensure innovation doesn’t get killed in the funding stages. Stay tuned next week for Part 2!

Here’s what you’ll find:

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This Week’s Article

Most companies claim to prioritize innovation. But the moment it comes to funding those efforts, few companies are successful at navigating the complexity that makes innovation a financially viable pursuit.

Budgeting for innovation is a paradox.

Innovation demands speed, uncertainty, and iteration. Traditional corporate budgeting is designed around predictability, control, and optimization. When companies use these outdated methods to fund innovation, they’re guaranteeing their own failure.

Most organizations try to fit innovation inside a system designed to eliminate variance. As a result, they end up with safe bets, watered-down ideas and zombie projects designed to hit legacy ROI targets that don't apply in today’s market.

This is how you get "innovation theater" — expensive projects dressed up as cutting-edge pursuits, but optimized for optics instead of outcomes. If you want innovation that actually ships and scales, rethink how you allocate, approve, and protect your innovation investment.

You’re not just aiming for better forecasting. The goal is to build an internal operating system that enables uncertainty and celebrates the value of learning instead of burying people in process.

Innovation, by its very nature, introduces risk and ambiguity, both of which finance teams are trained to avoid at all costs. When you treat innovation like core operations: assigning it to annual planning cycles, standard ROI models, and waterfall forecasts, you remove the conditions that enable early-stage exploration.

Clayton Christensen outlined this clearly in The Capitalist’s Dilemma: even well-capitalized companies struggle to invest in new-growth businesses because financial metrics skew decision-making toward predictability and capital efficiency. Organizations are inherently biased toward sustaining innovations that reduce cost or optimize existing revenue streams at the expense of disruptive bets that might take years to pay off.

This is why today’s truly disruptive ideas often emerge from startups or spinouts. Allowing these ideas to flourish requires an environment that isn’t suffocated by quarterly earnings pressure or committee-based approvals.

If you want to compete with that agility, your budgeting process needs to reflect it.

Traditional budgeting models collapse when they treat every initiative as though it fits within the core business. Innovation requires a different structure, starting with governance.

If every funding decision goes through the core approval process, with the same approval board and the same KPIs, creating efficiency within the core business will always win. It's easy to justify. It’s tightly aligned to financial targets. And it’s usually linked to someone’s bonus.

To fix this, orgs can separate both the budget and the approval process. One proven structure is the 70-20-10 model:

That 10% Explore budget isn’t meant to deliver predictable returns. It’s meant to surface future options. But if you force it through the same metrics as the Core, your exploration will get killed before it starts.

ABB, a global industrial technology company, runs ABB Technology Ventures (ATV) as its corporate venture arm. Rather than channel all innovation through central R&D or business units, ATV operates with a dedicated, protected budget set aside exclusively to fund early-stage ventures aligned with ABB's strategic priorities.

Investments are made in tranches based on milestone progress, and teams are evaluated on strategic fit and learning outcomes, not just financial metrics. This approach has enabled ABB to back more than 40 startups across areas like robotics, energy storage, and industrial AI, several of which have scaled into core offerings or ecosystem partnerships.

Most budgeting processes require detailed business cases. These work well for known problems with a clear ROI potential.

But innovation doesn't start there. Innovation starts with uncertainty.

You don’t know the customer, the solution, or the market timing. What you have is a hypothesis, and your funding process should reflect that key distinction.

Instead of demanding a full business case, fund based on:

This is the foundation of innovation accounting and lean startup methods. Steve Blank and Eric Ries both argued for funding based on validated learning, not forecasts. You're investing in a series of experiments, not a guaranteed outcome.

Early-stage venture teams (whether acting as innovators within a large org or startup founders) need access to just enough capital to test assumptions quickly, gather feedback, and adjust course. They are not ready to scale, and funding them as if they are creates waste — the money will get spent.

Governance should reward responsiveness to learning. If the budgeting process punishes pivots or demands rigid adherence to early plans, it locks teams into flawed trajectories and stalls progress. One effective safeguard is milestone-based funding, which releases capital incrementally based on evidence of progress. This approach limits sunk costs while reinforcing a culture of learning and accountability.

Innovation governance shouldn’t be assigned to the same folks responsible for operational optimization and efficiency. Innovation requires its own mandate, its own metrics, and its own mechanisms for decision-making. The same team that optimizes EBITDA shouldn’t be in charge of early-stage funding; they will never find short-term economic value in the investment.

In high-functioning, innovation-forward orgs, budgets are carved out, pre-approved, and governed by a team who understands the goals are different. The purpose of innovation efforts is not to maximize immediate return. The purpose is maximizing future optionality and opportunity.

One proven tactic: set up an internal venture fund with metered capital deployment. Small checks early, with increasing investment based on evidence, not projections. Think in tranches:

The team writing these checks needs innovation experience, not just financial oversight. Otherwise you end up funding the wrong bets (or worse, no bets at all).

Simply put, innovation will never look good on a traditional P&L. Early-stage ventures generally have:

But if we force innovation through the same reporting frameworks used for established lines of business, we create perverse incentives: teams either inflate projections or sandbag scope to achieve KPIs that were never reasonable in the first place — all so they can maintain their budget to continue their explorations.

The solution is to run innovation according to a parallel set of metrics:

Notice we’re not focusing on vanity metrics, but rather leading indicators of commercial potential. You wouldn’t evaluate a drug trial by profit per pill sold. You’d look at efficacy, safety, and dosage windows. Same with early-stage ventures: you evaluate what matters at that stage of maturity.

Some companies build shadow P&Ls or internal dashboards tailored to innovation-stage metrics. Others run new ventures through separate legal entities. Either way, you need to protect the signal from being lost in traditional financial noise.

Innovation budgets exist to enable a fundamentally different operating model, one optimized for learning, iteration, and long-term value creation. The real shift is in mindset: from proving to discovering, from controlling to enabling, and from forecasting outcomes to managing uncertainty.

Only by building a dedicated, resilient system around innovation can companies turn ambition into execution.

Want to build a real innovation budget that drives outcomes, not theater? Start by changing how you think about money.

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