12 Metrics for Managing Innovation: Lessons From Growth Leaders ^Top depends on the type of innovation and this in turn influences the metrics dashboard. When a business considers investing in a "small i" innovation, close to their core they have a wealth of data to plug into the familiar net-present-value (NPV) and other discounted cash flow financial models. Out comes a (seem- ingly) rigorous answer to the question “Will the anticipated NPV return on investment in this project exceed our cost of capital?” Of course, all the cost, revenue, and other estimates are just that—assumptions that can be manipulated. The financial analysis of adja- cencies and "BIG(ger) I" growth opportunities is far more prob- lematic because there is so much uncertainty to be resolved. NPV approaches can actually impede strategic thinking. Instead what is needed is a wholly different approach to resource-allocation decisions, captured in the mantra “Think big … Start small … Fail cheap … Scale fast.” More formally, what is needed is a real-options approach.10 A real option is a relatively small investment that creates the right, but not the obligation, to make further investments as the future unfolds. For this approach to work there has to be asymmetry in the distribution of returns, with greater upside potential than downside exposure to failure and loss. This happens when you can terminate the investment or otherwise limit any negative outcomes, while retaining the right to make further investments if the initial foray seems promising. Your next step depends entirely on what you learn. 10 Avinash K. Dixit and R. S. Pindyck, “The Options Approach to Capital Investment,” Harvard Business Review (May/June 1995): 105-115; and Ian C. MacMillan and Rita Gunther McGrath, “Crafting R&D Proj- ect Portfolios,” Research Technology Management (September/October 2002): 48-59. A real option is a relatively small investment that creates the right, but not the obligation, to make further investments as the future unfolds.