The Lean StartUp - 7 Measure

In order to measure whether a startup is making progress or to identify if it is time for a pivot, Eric Ries has come up with a concept called 'innovation accounting'. 

Innovation accounting is the idea that turns the leap-of-faith assumptions outlined in Chapter 5 into concrete data and a 'quantitative financial model.' 

How it works:

According to Ries, innovation accounting works in three steps:

1. Use a minimum viable product to obtain actual data on the current state of the company. 

2. The startup must then turn the baseline into the ideal. Meaning to make the necessary changes in order to create the ideal product. 

3. After step number two, it is time to either pivot or persevere. If the data suggests that the ideal is making good progress for the company, then the company should persevere. 

Ries at his startup, IMVU, had an interesting idea on how to measure. He agreed with his partners that they would spend just five dollars a day on the then-new Google AdsWords, and this would buy them a hundred clicks every day. Therefore, they could measure whether they were making progress on their product with a new set of customers every single day. After that, they could make some changes to it, which is step no.2 above, which would then result in step no.3 and determine whether they should stay with that product or pivot. 

The author, subsequently, emphasises that learning is more important than the optimization of the product. He provides an example of a company that thought that their problem was with the engineers in that they did not deliver an adequate product, whereas the problem actually was the fact that they did not know who their customers were. Therefore, learning your customers is initially more important than having the perfect product. 

Lastly, why innovation accounting is so critical is evident from the following passage:

"Only 5 percent of entrepreneurship is the big idea, the business model, the whiteboard strategizing, and the splitting up of the spoils.The other 95 percent is the gritty work that is measured by innovation accounting: product prioritization decisions, deciding which customers to target or listen to, and having the courage to subject a grand vision to constant testing and feedback."