What would you think about a 12,900% ROI?

Organizations frequently use what is called the Return on Investment (ROI) as a performance metric to evaluate the profitability of a program or investment.  The ROI measures the amount of return (in monetary terms) on a particular program or investment relative to its initial cost.  It's calculated simply by dividing a program's net profit (revenue generated by the program minus the cost of the program itself) by the cost of the program.  For example, an investment that cost $100 and generated $100 in net profit (i.e. over the initial cost of $100) would have a ROI of 100%. Generally, any positive ROI is good.  However, while a good ROI can vary depending upon the type of investment, the target ROI in most cases is generally in the range of 5-10%.  

So what would you say about a program or investment that generated a 12,900% ROI?  That would be incredible, to put it mildly.  That is exactly the ROI that a group of Stanford students achieved on a project several years ago that has lessons for all of us today.  Back in 2009, Stanford professor Dr. Tina Seelig placed her students in the Stanford Technology Ventures Program into 14 teams and gave each team an envelope that contained $5 of "seed funding."  Each team had five days to develop any idea that would generate money.  Once they opened the envelope and officially received their "seed funding", they had 2 hours to execute that plan and generate as much money as possible.  

Each team was asked to send Dr. Seelig one slide describing their project, and she then gave each team 3 minutes to present their project to the rest of the class.  She heard several different ideas, including "Going to Las Vegas" or "Purchasing a lottery ticket" (both with the potential to generate a significant ROI, though with a small chance of actually generating any return).  She also heard about projects that set up a car wash or a lemonade stand, which all generated a positive ROI, even if fairly small.    

Dr. Seelig said, "Most of my students eventually found a way to move far beyond the standard responses.  They took seriously the challenge to question traditional assumptions, exposing a wealth of possibilities in order to create as much value as possible."  Dr. Seelig further explained (see her video here), "The teams that made the most money didn't use the $5 at all.  They realized that $5 was actually a limitation.  They realized that framed the problem way too tightly, and if they looked at the skills they had and the opportunities around them, that was worth a lot more."

Here are some of the more innovative projects:

• One team used the $5 to purchase several inexpensive items at a discount store and then tried to re-sell them for a profit.
• One team set up a stand in front of the student union and pumped up bicycle tires for $1. Actually, this project was so successful at first that they switched from a fixed pricing model and asked for donations instead.  Their income soared.  Dr. Seelig said, "The iterative process where small changes are made in response to customer feedback, allowed them to optimize their strategy on the fly."
• One team booked reservations at popular restaurants and then re-sold their places in line to people eager to skip the wait. This particular team also iterated quickly.  Male team members ran around town making reservations, while the female team members did the "selling" when the team noticed people were more comfortable being approached by women than men.  The team also discovered that focusing on restaurants that provided buzzing pagers was more profitable - physically switching one pager with a long wait time for one with a shorter wait time made people feel they were receiving something tangible (and also gave the team members another reservation that they could sell).

Each of the projects listed above generated a few hundred dollars.  However, the team that did the best generated $650 for a 12,900% ROI!  The students on this team determined that the most valuable asset that they could sell was their three-minute presentation time scheduled the following class day.  They decided to sell that 3 minutes to a company that wanted to recruit students in the class.  The team created a 3 minute "infomercial" for the company and showed it to all the other teams in the class.

Here is my take.  First, learning through experimentation and iteration based upon experience is absolutely essential to the success of any project or business venture.  Second, "thinking outside the box" drives innovation.  Third, challenging assumptions and avoiding framing a problem too tightly can often lead to low-risk / high-reward actions that generate incredible returns.