Over the years, we’ve seen a lot of potentially valuable innovations flop because the companies sponsoring them were using the fundamentally wrong logic in managing them. For instance, as Clayton Christensen recently described in the Harvard Business Review, they insist on valuing projects in terms of Net Present Value. A different approach, we’ve argued, is to think of ventures or innovations as real options. A real option is a toehold investment that buys you the right, but not the obligation, to make a subsequent investment when you know more. Consider how this way of thinking can help you avoid these common causes of innovation failure:

The one big bet syndrome. In highly uncertain environments, it’s nearly impossible to predict with any accuracy which innovations are likely to succeed and which are not. It makes sense, therefore, to test out a number of different approaches on a small scale, proceeding forward only when you’ve validated enough assumptions to move ahead with confidence. The logic of real options supports this approach: essentially encouraging companies to take out a couple of different projects aimed at a promising market or technology, without huge risks. “Big bet” ventures in our experience seldom work out. Remember such supposed first-moving winners as WebVan and Pets.com? Their particular bets were wrong, yet the viability of Internet-enabled business models has now been demonstrated. Keeping some resources for multiple tries might have allowed those projects to succeed later on.

Escalation of commitment. A second dilemma is that projects can come to take on a life of their own, creeping forward even after a great deal of evidence has accumulated that suggests that the original concept isn’t going to work out. The failed “Iridium” satellite phone venture is a case in point – over its 10+ years in development, changes in mobile telephony made many of its most salient features irrelevant. Motorola and partners nevertheless launched the venture, only to see it wind up in bankruptcy within months. Taking an options approach forces managers to constantly ask, “does it make sense to proceed to the next step?” and stop or redirect the venture if it doesn’t.

Unrealistic expectations. One of the saddest outcomes for an innovation project is when the program succeeds in an objective sense – creating new products, or happy customers, or whatever – but fails because expectations from the parent company were inflated. A recent example that looks a lot like this to me is Revlon’s “Vital Radiance” line of cosmetics aimed at older women. If you search the web, you’ll find scores of fanatically happy customers, yet the products didn’t provide the breakthrough growth Revlon management was after, and they ended up dropping the line. Viewing innovations as options instead of corporate saviors can dampen excessive expectations and allow venture to develop in their own time and way.