What is Innovation Accounting?

Hey everyone! In the previous blog, we discussed the Build-Measure-Learn Feedback Loop. However, we didn't dive deep into Innovative Accounting. In today's blog, we are going to explore the fascinating world of Innovation Accounting.

We've already grasped the concept of a successful company's feedback loop. In that it's necessary to check whether our efforts to tune the engine of growth are bearing fruits, in other words, whether we are making progress or not.

In the traditional methodology, companies use outdated accounting to check progress. However, the startup world is too uncertain for Traditional Accounting to work effectively. To solve this problem, Innovation Accounting comes into play. To understand the concept of Innovation Accounting, we must know the difference between Traditional Accounting and Innovation Accounting:

Disclaimer: If you want to understand this fully, I strongly recommend to check my previous blog*

Traditional Accounting:

In the context of the Lean Startup Book, traditional accounting refers to the conventional methods of measuring progress in a business. It typically relies on vanity metrics such as profitability, revenue growth, and market share to assess performance. Traditional accounting focuses on financial indicators and historical data rather than forward-looking, customer-centric metrics favored by the Lean Startup Approach, such as validated learning, actionable metrics, and customer feedback loops.

Innovation Accounting:

Innovation Accounting is a quantitative approach to measure progress in conditions of extreme uncertainty. It also helps us create learning milestones (are the points where we learn valuable insights). It is entirely different from Traditional Accounting because it focuses on tracking metrics that indicate whether a company is moving closer to its ideal, such as customer acquisition, retention, and satisfaction. Innovation accounting emphasizes the use of actionable metrics and iterative experimentation to drive decision-making and innovation.

How does Innovation Accounting work?

Innovation Accounting works in three learning milestones/steps:

1. Establish The Baseline:

In this step, we create an MVP (as discussed in the previous blog) to gather empirical data to check where the company is right now. Without a clear-eyed picture of where we are right now, we can't move forward. I would like to make it even smarter by conducting a smoke test before creating the MVP. Basically, a smoke test refers to a minimal, low-cost experiment to check the value hypothesis (discussed in the previous blog) without building any physical product. For example, if I'm building a clothing brand, instead of immediately building an MVP, I could conduct a smoke test by digitally designing the product with minimal effort to gauge interest. If people like it, then I would jump to create my first MVP. By doing this, I prevent the wastage of work, which is the motive of the Lean Startup Methodology. By creating the MVP and gathering feedback from it, we establish our baseline, and this baseline determines the company's future.

2. Tuning The Engine:

This is the second learning milestone in which we try to move forward from the baseline by making incremental upgrades to the product, innovating new features, and trying to tune the engine of growth. 

*If you want a detailed blog about the engine of growth and its types, please let me know in the comment section.*

3. Decision Making (Pivot or Persevere):

This is the last step in which an entrepreneur faces the most difficult situation whether to Pivot or Persevere (already discussed in the previous blog, if you want to know, please check the previous blog).

4. Iteration:

After making the decision of Pivot or Persevere, we have to repeat the steps again for new products.

So, this was all about Innovation Accounting. If you have any doubts, you can email me at ahtishamasiftantray@gmail.com for further assistance.

*Written By Ahtisham Asif Tantray*