Innovation Accounting (IA) is a way of evaluating progress when all the metrics typically used in an established company (revenue, customers, ROI, market share) are effectively zero.
- It provides a framework of chained leading indicators, each of which predicts success. Each link in the chain is essential and, when broken, demands immediate attention.
- It’s a focusing device for teams, keeping their attention on the most important leap-of-faith assumptions.
- It’s a common, mathematical vocabulary for negotiating the use of resources among competing functions, divisions, or regions.
- It provides a way to tie long-term growth and R&D into a system that follows a clear process for funding innovation that can be audited for its ability to drive value creation.
Innovation accounting enables apples-to-apples comparisons between two or more startups, in order to evaluate which is most worthy of continuing investment. This is a way of seeing a startup or innovation project as a formal financial instrument, an “innovation option” 3 if you will, one that has a precise value and reflects a range of future costs and financial outcomes.
Innovation accounting is a system for translating from the vague language of “learning” to the hard language of dollars. It puts a price not just on success but also on information.
— The Startup Way: How Modern Companies Use Entrepreneurial Management to Transform Culture and Drive Long-Term Growth by Eric Ries