PORTFOLIO FUNDING BY HORIZON
HEALTHY PORTFOLIO FUNDING
"10/20/70" is a default recommendation (1), meaning a company needs to allocate 70% of funding to H3 profit (core business), 20% to H2 growth, and 10% to H1 new ideas (innovation). However, a healthy balance for a company depends on multiple factors:
The pace of change and uncertainty in the industry. Technology companies and industries undergoing disruption need to invest more in innovation and growth, H3 and H2, to keep their strategic options open and to keep up with the high pace of change.
Company capabilities, such as managerial talent and financial freedom. To afford long term growth, a company needs to excel in the operational execution of H1 core. Then it needs to invest in innovation management capabilities of H2 and H3.
Shareholder expectations. Investors in high growth companies have high expectations. Meeting them most of the time requires excellence in research, commercialization, and operational improvements.
Smaller companies may have only one portfolio; mature enterprises might have a hundred. Regardless of size, companies need to appropriately fund product portfolios in all three horizons to achieve sustainable long term growth.
Mature enterprises often starve H3 for the sake of near term profits in H1 and implement H2 mostly through acquisitions of growing startups. I will come back to these unhealthy funding patterns in an article about systems thinking.