When budget season arrives, innovation leaders feel like Sisyphus—dragging the rock up the hill, only to watch it roll back down.
The struggle exists because the approach is backward. Typically, teams identify a portfolio of ideas first, then ask, "Where are we going to get the money?"
Elliott Parker, CEO of Alloy Partners, argues that the type of funding you receive determines the type of innovation you can pursue.
To unlock transformative growth, you must fundamentally change where the money comes from. What follows deconstructs the mechanics of funding innovation through the lens of the CFO and the balance sheet.
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The CFO's Language: Risk, Returns, and Strategy
Understand the gatekeeper's three priorities
To unlock capital, you first have to understand the person holding the keys: the CFO. The CFO has three primary jobs, and understanding them is critical to your success.
First, and most importantly, the CFO manages risk. Their job is to ensure the corporation does not run out of money. Second, the CFO must maximize the return on investment. They look to increase efficiency, squeeze out earnings, and ensure capital flows to the most important areas. Third, the CFO influences strategy. They weigh in on the direction of the business.
When you pitch innovation, you are often pitching something that feels like a bottomless pit of uncertainty. To build support, you must speak "CFO-ese." The key is changing the nature of the discussion. Usually, the discussion ends up being around the quality of the ideas you are going after. You need to change the game.
The job of an innovation leader is to convert assumptions about the future into knowledge. When you frame your work as validating or invalidating assumptions, you are managing risk in a way the CFO understands.
The Three Drivers of Enterprise Value
Link innovation to what the CFO actually measures
A hard truth exists that every innovator must accept: Innovation has to enhance enterprise value. There are only three metrics the CFO cares about. If you can link innovation to any of these three, you are more likely to succeed:
Revenue: Can you show that your innovation effort increases revenue?
Expenses: Can you show that your plans reduce operating expenses and increase efficiency?
The Multiple: The market assigns a multiple to your earnings (Price-to-Earnings ratio).
The formula is simple: Earnings (Revenue - Expenses) x Multiple = Enterprise Value.
Here is the trap for corporate innovators. If you are inside a $50 billion company, anything you build from scratch is just "a drop in the bucket". And when it comes to earnings, innovation teams funded as an operating activity are actually a drain on earnings.
A CFO might cynically say, "The best way that the innovation team can enhance earnings is to not exist anymore."
This leaves the third lever: The Multiple.
You drive the multiple by changing the narrative the market believes about the company. You do this by shining a spotlight on the things you are building or by pursuing innovation that leads investors to think about your business in a higher-multiple industry.
If you can tell the CFO that while you won't impact revenue or earnings in the next few years, you can impact the multiple applied to those earnings, you are speaking directly to enterprise value.
The ROIC Trap and the Power Law
Recognize why corporate optimization conflicts with innovation
CFOs are obsessed with Return on Invested Capital (ROIC). The formula for ROIC is Profit divided by Invested Capital.
To improve ROIC, a CFO can play with either side of that equation. Often, the easiest path is to reduce the amount of invested capital. This looks like shutting down a factory or closing an unprofitable business unit.
This focus on ROIC creates a fundamental tension because innovation is a "power law asset class." Like venture capital, you invest in a bucket of companies knowing many will fail, yet the ones that work will pay for everything.
In innovation, "it's the magnitude of correctness that matters.” You need to set up a system and a framework where you can be wrong a lot, because when you are right, it's really going to pay off.
However, the corporation is optimized for the opposite—for frequency of correctness. People get promoted because they are always right and never wrong. You need to be operating in a system that can be optimized for magnitude of correctness. You can do that through the funding mechanism.
Access Patient Capital Through The Balance Sheet
Fund innovation as CapEx, not from OpEx
This is the crux: Transformative innovation is not an operating activity. When innovation is funded as OpEx (Operating Expense), it is a tax on the operating business. It is a drain on earnings that must produce a return in the near term because that is how the operating business is measured.
"As long as you're funding your innovation as an operating activity, it's very, very unlikely you will ever do anything transformative successfully. All of your innovation is going to look like the core business, because that's how you're going to be measured."
The solution is to find ways to fund innovation as CapEx (Capital Expenditure). OpEx is how you run the business day-to-day. CapEx is for long-term investments, like building a new factory or making an acquisition.
Companies are often sitting on mountains of cash on the balance sheet while managing operating expenses down to the penny. As an innovation leader, you must ask: How do I unlock that balance sheet capital?
External Venture Building and "Other People's Money"
Create independent entities to unlock validation and capital
A specific mechanism unlocks balance sheet capital: Venture Building. By designing and launching external ventures—independent entities outside the corporation—you allow the corporation to fund activity with CapEx rather than OpEx.
This methodology offers several advantages: It does not impact the P&L (no drain on expenses), allows access to world-class entrepreneurs, and enables faster learning.
However, the "best form of capital" is OPM: Other People's Money. When you set up ventures externally, you create the option to invite other investors to participate.
"If you have a new billion-dollar business idea that may require half a billion dollars in investment capital... Where are you going to find half a billion dollars to fund this innovation? You need other partners to come in and invest alongside you."
When outside investors put money into your venture, they validate its value. The market tells you what the thing is worth, which is the best form of validation you can hand to a CFO.
The Elanco Case Study
Elanco, a large animal pharma company, was launching a feed additive to reduce carbon output from cows. The product was expensive and unlikely to be paid for by farmers without regulatory pressure.
They formed an external startup called Athian that created a marketplace in the dairy industry for buying and selling carbon credits—essentially "insets" in the value chain. This was something Elanco could not have done internally. However, by launching it externally, they created a massive new revenue channel.
"Within six months of launching this company in the US, we went out and raised capital from other players in the industry, and within six months, 85% of the US dairy industry had invested in Athian as a startup."
For Elanco, this was a strategic win that strengthened the ecosystem, solved a near-term business challenge, and changed the market narrative about Elanco—potentially impacting that all-important "multiple."
Validating Value Through Market Signals
Let external investors assign worth, not internal teams
A persistent question surfaces around speaking C-level language regarding startup results and data. The traditional struggle involves trying to convince executives of value through internal metrics.
External venture building solves this. You are not the one assigning value to it. The market is. If other investors say, "We believe this is worth $100 million," that is the best form of validation you could have.
There are two forms of return to communicate; direct (when a startup exits or distributes back to the corporation) and indirect (strategic benefits like opening new sales channels).
The principle remains: use the market to tell you what this is worth. Have other people tell you so it's more believable.
The Imperative for Central Innovation Teams
The current reality is challenging. Innovation budgets are getting distributed to functional leaders demanding immediate results. These leaders are tasked with making improvements in six months—ideally improvements led by AI. They do not care about how that happens. They just need results.
To survive and thrive, the central innovation function must evolve. It must move from being an expense line item to being an investment vehicle—one that uses the balance sheet to drive the enterprise multiple and secure the organization's future.
The role is shifting from budget fighter to capital allocator. The future belongs to those who act as custodians of the balance sheet's potential.
