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What CIOs can learning from Angel and Venture Capital Investors

When I look at today’s IT Economics arena, I’m rather surprised that it has not progress much further than the level of sophistication of the mid-80s when IBM Investment Strategies for Information Systems (ISIS) and BEAM came into being.  TCO came about a little later which included a hint of lifecycle costs, taken from the engineering economics activities that Logistics Engineers had been doing for years.  Later Rapid Economic Justification (REJ) was created to link IT Investments to Business Benefits.  When we created REJ we knew there was further to push the envelope than what we released.  However, just REJ seems a large jump for field to take on IT Economics.

A brief stint back at IBM working corporate strategy/marketing and research into Rita McGrath’s concepts of managing product investments as a portfolio segmented by market maturity.  The idea was to divide product development investment by time horizons (H1 – H3) where H1 represented existing product lines and H3 represented emerging business opportunities.  During that time I saw an opportunity to apply these concepts to IT Economics. However, the idea of IT as an investment, working out the mechanics of multiple investments and time horizons in a portfolio still needed to be worked out.

Typically, an enterprise will not consciously want to invest in several of the same investments as the payoff is not the same as multiple investments in the stock market, so how then does one create an IT portfolio?  The answer was less complicated that initially thought.  If fact is was right in front of me.  Enterprises already have portfolios of IT projects.  What they have is trouble determining which investments to make.  This becomes an issue of balancing long term and short term, enabling (infrastructure) and line of business(applications). In general how to line up projects so as to enable the future without killing the present.

The past few months I’ve spent investigating engineering economics, decision theory, stock and private capital markets.  The stock market –even with its meltdown– provided several good ideas that I’m translating to the IT economics arena [Real Options, Hedging].  The private capital market provide insights on risk mitigation and a different perspective on ROI.  The ah ha moment occurred to me prior to attending COFES 2012 Special Session: A Chat with Dick Morley.  Dick is a rather unusual fellow; physicist, inventor and investor.  Most of my discussion with him was just prior to his chat session.  In which we discussed the process of bringing new ventures into being.

One of the interesting disclosures was his investment strategy, which seem to match my experience with other venture capitalist organizations.  He invested in multiple projects; typically ten or more.  Here the law of averages theoretically should take place.  That is at least some percentage of ventures will be successful over time.  His statement seemed obvious, but the questions was which ones?  His reply was shocking at the gut level:  “I don’t care”  This is gambling and I’m not trying to beat the house, I am the house.  As long as I establish the rules of the game in my favor over time, I’ll win.  Below are a few attributes I’ve collected so far regarding private capital investor types

 Angel Investor

Investment Span 10:1 portfolio as a risk mitigation strategy

Scorecard: ROI, Cause, Bragging rights

 Venture Capitalist

Investment Span 10:1 portfolio as a risk mitigation strategy, T&Cs, Seat at Table, Due Diligence (Business Model, Market, Leadership Team)

Scorecard: ROI, Time to time, Bragging rights

Investment Banker

TBD

 This became my ah ha moment.  IT Investments are often looked at as either Bank CDs with guaranteed returns or trying to beat the house.  Both perspectives are equally flawed.  However, since these are probabilities of return and the math is complex Enterprises often turn away from such calculations to simple ROI or gut feel decisions –of which the statistics are just as poor or worse when it comes to benefits realization vs. successful technical or task achievement. With that insight I’ve been researching how to build a framework that will enable Enterprises to employ the appropriate level of Economic tools easily for a possible series of White Papers.



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