Are market cap and present cash flows the best way to measure innovation?

All opinions are my own and do not necessarily reflect those of Novo Nordisk

Forbes, with the help of the folks from The Innovator’s DNA recently published their coverage and rankings of the 100 most innovative companies.  I’m particularly interested in their ranking method, as it contains elements that are near and dear to my heart–namely, metrics and crowdsourcing.  In a nutshell, they describe how they use a company’s current market capitalization, along with it’s current net present value based on cashflows, to extrapolate how much the market feels the company has in potential.  The method nicely incorporates crowdsourcing in that the market cap measures how much investors as a whole think a company is really worth, now and in the future, and if that’s higher than expected based on cashflow, that suggests investors are factoring in a bonus to value based on future expectations.  Higher future expectations are interpreted as investors seeing a particular company as innovative and having the potential for great leaps forward in offerings and/or income.

I really like using the crowd in this way, and would love to see an analysis that retrospectively looks at these kinds of values over, say, 1970-1990, and combines that with a mature assessment of which companies have been adjudged by business historians to truly have been innovative standouts, which is not the same as business successes.  We say now that Bell Labs was one of the most innovative places on the planet in the 1900s.  Would the same have been said at the time?

At the same time, I can’t help musing if this process couldn’t be made even better.  Recognizing innovation when it’s happening has obvious advantages for anyone looking to get into the next amazing thing, whether as a participant, an investor, or a policy maker.  So let’s start by examining where there might be shortfalls to the Innovator’s DNA method. Continue reading

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