How to Define, Measure, and Communicate Progress
We have standard measures of progress for well-established companies. No matter the type of business, a company’s financial statements can be used to measure the health of a business.
But financial statements aren’t as useful in an early stage startup or product which typically go without revenue for some time with nothing to report but loses. More importantly though, the goal of a startup should be finding a business model that works repeatedly with a priority of learning before scaling. Solely using revenue as a measure of progress at this stage can often get in the way of learning.
Seeking profit too early is a pre-optimization trap.
So what is an early stage product to do?
We need a new kind of accounting for early stage products which is where Innovation Accounting comes in.
Rather than relying on revenue alone, Innovation Accounting defines a set of macro metrics that can be used to model the customer lifecycle. Revenue happens to be one of those macro events, but not the only one. The power of these macro metrics is that they provide leading indicators to revenue before revenue is actually realized. In other words, you can actually define and measure customer value before you capture back some of this value i.e get paid.
Holding Innovation Accountable
But there is more to Innovation Accounting than just the ability to define and measure progress.
And that is to hold entrepreneurs accountable.
Reasonable smart people can rationalize anything but entrepreneurs are especially gifted at this.
Much like financial statements can be used to hold companies accountable, innovation metrics can be used to hold entrepreneurs accountable which is a actually a very good thing both for external stakeholders and entrepreneurs.
External stakeholders can use innovation accounting to continuously and systematically de-risk their investment in smaller batches versus employing the traditional all-in approach.
Entrepreneurs can use innovation accounting to provide a fast feedback loop that both informs their most critical business model assumptions and give them an opportunity to course correct before it’s too late.
When implemented correctly innovation accounting provides a framework for defining, measuring, and communicating progress which fosters healthy conversations across the extended team of peers, advisors, and investors.
Check out the resources below to learn more on innovation accounting:
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