How do you balance spending on innovation vs. core business needs?

This is an interesting question, and points to the digital transformation occurring across the industry.  As we modernize legacy systems, we have to also maintain core infrastructure services. We are therefore realigning teams to assign staff to either cloud services (aka transformation) or base infrastructure (aka "keep the lights on"). We recently told staff that both teams are vital since the have to keep systems running, while we modernize.  So, the long answer to this question is that both are vital, but we seek to limit investments on legacy systems and instead redirect funds to the new technologies

Innovation drives core business. 30% of the spend should be innovation fund at the minimum. 

I've always prioritized innovation dollars over core if the core business need is more than 3 years old. Markets change fast; what was a "core need" likely can be streamlined or optimized to fit today's accelerated economy. Review and revision should be done annually, as a means to lower cost improve efficiency and customer satisfaction. In short to create differentiation and value. The side benefits include regularly reducing technical debt and inculcated transformation as a part of business growth.

As a small company we keep a running list of things we want to innovate or tools we want to try on. We try to match that list with new features/enhancements coming on and when there is a possible match we time box one or more RD cycles to evaluate if we will use one of those tools. If the findings are promising we go ahead and embrace it, while building a good business case to do so.

It has been especially hard for us as a small company.