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Resource Center > Article
Innovation Accounting: A Necessary Part of Any “Lean Startup”
1 Nov 11 Posted by: Kathleen C Lanza
in Start-Up
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In his recently released New York Times bestseller, “The Lean Start-up,” entrepreneur and master business start-up blogger Eric Ries lays out a host of business strategies that have caught the nationwide attention of prospective and current business owners alike.  The basic supposition of Ries’ book is that the success rate for innovative entrepreneurial endeavors can be improved by following his five Lean Start-up principles, one of which is “innovation accounting.”

According to Ries, among the most dangerous moves any business start-up can make is persevering for far too long, all in the name of that most stalwart of entrepreneurial traits―optimism.  Although there are exemplary tales of hugely successful business people who have risen above what were thought to be extremely grim odds, the tales of others in the same boat who led their companies into abject failure are far more common.

The Lean Startup

One of the reasons Ries cites for this sobering fact is that the more long-term projections of any traditional business plan, although helpful, are not realistic.  They oftentimes don’t accurately reflect or allow for the inherent turbulence that any start-up encounters, especially in its earliest days.

A start-up requires a degree of fluidity early on that is not conducive to a rigidly constructed and more standard approach, according to Ries.  This perspective is supported by his definition of a start-up’s job―“to (1) rigorously measure where it (thestartup) is right now, confronting the hard truths that assessment reveals, and then (2) devise experiments to learn how to move the real numbers closer to the ideal reflected in the business plan.”

While standard accounting policies and procedures are an integral part of any successful business, particularly larger corporations, they are not necessarily beneficial in evaluating entrepreneurial endeavors, especially early on.  That’s where Ries’ concept of innovation accounting comes in.

Many business owners deem the ongoing modification of their products and services coupled with rising numbers as a solid measure of progress, according to Ries. He says that’s just not good enough and encourages entrepreneurs to ask themselves two very important questions in this regard:  “How do we know that the changes we’ve made are related to the results we’re seeing?” and “More important, how do we know that we are drawing the right lessons from those changes?”

Innovation accounting, Ries says, allows for this more in-depth level of analysis.  It takes into account the “disruptive innovation” that is an inherent part of any start-up.  By implementing the three basic steps to innovation accounting set forth in Ries’ book, start-up entrepreneurs can prove objectively that they are growing what will become a sustainable operation.  Furthermore, they are able to turn what would once be considered faithful assumptions into a quantitative financial model, one that supports accountability even when the model changes.

According to Ries, innovation accounting works in three basic steps:

1)  It uses a minimal viable product (MVP) to establish real data on where the company stands at any
given juncture.  An MVP is the fastest way to establish a customer feedback loop with minimal output of effort, Ries
says.  Its primary goal is to test fundamental business hypotheses without having to perfect the product or service in question too prematurely.

2)  Using the MVP, start-ups, through many attempts, move from the baseline to the ideal, when the company then reaches a decision point.

3)  At this juncture, a company is either making solid progress toward the ideal enough that it makes sense to continue, or persevere.  If not, the strategy must be deemed flawed and in need of serious change―or as Ries labels it, a pivot, which starts the process all over again and in a more productive fashion than before.

If you are a home-based or other small business opportunity or franchise owner or start-up entrepreneur and want more in-depth information on innovation accounting and The Lean Start-up’s other key principles, visit http://theleanstartup.com/ today.


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