Platform ROI: How to determine the investment horizon on your digital platform investment

How do we drive alignment on the investment horizon for the platform?

This article is part of the Digital Platforms hub

Most platform businesses require significant upfront investment to mobilize the ecosystem. This investment often comes with a longer time horizon as the business validates initial use cases, executes to get to critical mass, scales through network effects, and captures value. While some platforms capture value right from the start, others may require significant ecosystem mobilization before revenue models can be scaled out.

Accordingly, platform execution requires senior leadership alignment on the investment horizon. One of the most common barriers to gaining executive support is a misalignment on the investment horizon.

Through the late 2010s and the early 2020s, easy access to capital drove platform valuations higher even as the timeline to positive cash flows kept extending. Venture capital investors working across a portfolio of bets can work with longer horizons. However, long-term investment horizons may not suit senior leadership investment appetite at incumbent firms, particularly for leaders who are looking to deliver short-term shareholder value.

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Scenario planning supported with testing and experimentation to validate key hypotheses can play an important role in gaining senior executive alignment with the investment horizon. To align senior leadership on the investment horizon, managers at the platform firm must clearly articulate the platform adoption, scaling, and monetization roadmap, calling out their key hypotheses at each stage, and branching out various investment and cash- flow scenarios based on how these hypotheses play out.

With a roadmap clearly articulated, hypotheses laid out, and scenarios established, the platform firm should set up an experimentation approach to launch pilots and better inform the scenarios. Laying out various future scenarios and outcomes can help senior leaders get a better sense of possible outcomes, and risks associated with each. With data captured from pilots, the probability of each outcome can be further informed and strengthened. Additionally, a base case outcome and associated ROI can be developed to allay senior leadership concerns. With these tools, senior leaders may make more informed decisions to align themselves with scenarios that meet their investment appetite and horizon, and which are appropriately de-risked at the point of decision-making.

Eventually, aligning on an investment horizon is less about aligning on a static timeline and more about informing a clearly articulated roadmap and future outcome scenarios through testing and experimentation.

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Frequently Asked Questions

How do platform businesses navigate the challenge of aligning investment horizons, especially considering variations in senior leadership’s appetite for short-term versus long-term returns?

Platform businesses often navigate the challenge of aligning investment horizons by employing comprehensive scenario planning supported by testing and experimentation. This involves clearly articulating the platform adoption, scaling, and monetization roadmap, along with key hypotheses at each stage. By branching out various investment and cash-flow scenarios based on these hypotheses, platform firms can help senior leadership understand the range of possible outcomes and associated risks, thus facilitating alignment on the investment horizon.

How can platform firms align senior leaders on investment horizons, balancing upfront investment needs with delivering short-term shareholder value?

Specific strategies and frameworks employed by platform firms to facilitate senior leadership alignment on investment horizons include scenario planning, experimentation, and hypothesis testing. These approaches enable managers to present a clear roadmap with defined hypotheses and potential outcomes at each stage of platform development. By quantifying risks and opportunities through scenario analysis and experimentation, platform firms can address senior leaders’ concerns and align investment decisions with the desired horizon.

What industry benchmarks or best practices exist for platform businesses to determine ideal investment timelines for digital initiatives?

Industry benchmarks and best practices play a crucial role in guiding platform businesses in determining the optimal investment horizon for their digital platform initiatives. By analyzing precedents and success stories within their industry or comparable sectors, platform firms can gain insights into the typical timelines for ecosystem mobilization, revenue scaling, and network effects realization. This data-driven approach helps platform businesses make informed decisions about their investment horizons, ensuring alignment with industry standards and best practices.