Chapter 8

Innovation Accounting

According to traditional accounting, business success is measured by the bottom line: Specifically, revenue that outstrips expenses, the bigger, the better. But what if you're still discovering what business you're in? You don't yet know precisely what your product will be, who will use it, what they'll use it for, or where the money will come from. You have no revenue, margin, or profit and no financial history that suggests a timeline to profitability. Your spinning wheel company may be growing steadily in value, but years may pass before it starts turning straw into gold.

Under these conditions, traditional accounting shows no difference between a startup that's failing and one that's on the verge of breakout success. You may be hatching the next, or you may be witnessing the dawn of the next Facebook. Which is it?

Innovation accounting gives you a way to assess the difference, creating accountability and transparency in an area that was previously ambiguous. This lean startup technique allows entrepreneurs to track their progress and financial decision makers to measure the market potential of their investments.

Rather than financials, innovation accounting is based on measurements of user behavior. It reveals whether the business is growing in ways that matter for financial success in the long run: What percentage of visitors to the site return, what percentage take advantage of standout features, what percentage become paying customers? ...

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