Investing in Innovation: Mastering ROI in Tech Product Development

Introduction

In the world of tech startups, the bright allure of cutting-edge technology and groundbreaking ideas can sometimes eclipse the more mundane yet critical aspects of business management—specifically, the return on investment (ROI). For anyone leading a company or developing new products, thinking like an investor is not just beneficial; it’s essential. The investments here are substantial: time, effort, and opportunity costs. The potential returns? These should be measured in concrete metrics, ideally tied directly to revenue. Let’s explore why an ROI-centric approach is crucial and how it can steer tech leaders away from costly distractions and toward profitable innovation.

An important note is that this theory applies to everything in product development; including building entire products, creating new features, or even addressing bugs. And it is a critical tool to understand the ROI tradeoffs between the different opportunities in front of a team to know which should be pursued.

Understanding ROI in Tech Development

ROI is a performance measure used to evaluate the efficiency and profitability of an investment. In tech development, this translates to scrutinizing every decision on what that decision costs—not just in terms of capital but also in time, human resources, and opportunity cost—against what that decision returns. The most straightforward ROI calculations tie back to revenue increases, cost savings, or both. However, other metrics like user growth, customer satisfaction, and brand reputation, while harder to quantify, can also signify healthy returns.

The Pitfalls of Ignoring ROI

The tech industry is rife with tales of companies dazzled by innovative ideas that burn bright and fast but fail to deliver financially. Such initiatives often stem from a desire to be on the cutting edge, driven by the fear of missing out on the next big trend (cough cough most AI projects) . However, without a clear understanding of an idea's potential return, these investments can lead to significant financial losses and strategic misalignments.

Take, for example, a tech startup that pours millions into developing a product centered around a new agentic AI workflow without a clear target market or value proposition. While the technology itself may be impressive, the lack of a viable business application can result in a poor ROI. This scenario underscores the importance of vetting every flashy idea through a rigorous ROI lens to determine if it aligns with broader business goals and has a feasible market fit.

Tying Investment to the Tight Return metric

Mapping the success of a product can be a difficult thing. Usually it is fairly easy to map to some engagement metric directly with the use of a new product or feature, but unless that engagement directly maps to revenue then you have some built-in assumptions that could result in an inaccurate understanding of the successfulness.

As an example, if I were building a new screen that showed an agentic workflow that was used by 20% of users then it would be tempting to declare a win. But an important distinction comes from asking: does this 20% engagement increase correspond to a 20% revenue increase? There are many revenue models where this logic wouldn't hold - if I have a recurring subscription model and these users still churn at the same rate then it wouldn't be a success.

Liquidity is a Powerful Thing

A common investing concept is the idea of liquidity - the ability to move your money easily from one investment to another. A home is quite illiquid; you can't sell off a room to pay for a new car and it usually takes a few months to go from selling your home to having money in your bank account. On the other hand, stocks are very liquid, since you can almost always find a buyer within seconds. This is an important concept in finance and product development since it minimizes the possibility of unknown opportunity cost. In product development we can think of our team's liquidity: how easily can they finish what they are working on and move to something else? If the project is a multi-quarter (or longer!) affair then every time something new comes up you have the difficult decision of deferring the new thing or delaying the big project. By keeping projects smaller you can mitigate the impact of unexpected requests for your team.

As an example, if you are in the middle of a 2 year investment into an end-to-end app refactoring project then not only are you paying for that work to be done but you are also currently losing the ability to build a new agentic workflow at this moment. (While I am highly skeptical that everyone who currently is building an agentic workflow should actually be doing that, it certainly is the right move for some.) That might be an unplanned and unpleasant surprise that you did not account for when you started the app-refactoring-project!

Adopting an Investor’s Rigor

To avoid such pitfalls, tech leaders should adopt the analytical rigor typical of seasoned investors. This approach involves:

• Thorough market research to validate demand and identify potential competition.
• Financial projections and modeling to forecast returns and assess risk.
• Incremental investment, such as developing a minimum viable product (MVP) before full-scale development, to test theories and refine assumptions based on real user feedback.
• Break projects into pieces that have inherent value in themselves, to increase investment liquidity.

Referencing past decisions where insufficient confidence in market demand led to unwise investments can also serve as a valuable learning point. Such reflections can help refine the decision-making process, ensuring that future projects are both innovative and financially sound.

Conclusion

In the race to build, tech leaders must maintain a clear-eyed perspective on ROI. This means not only being dazzled by the potential of new technologies but also critically evaluating their potential to generate revenue and contribute to long-term strategic goals. By adopting an investor’s mindset, leaders can better navigate the complexities of tech development, ensuring that every resource invested yields tangible returns.