Innovation Accounting: how to measure innovation success

Manage the development of new products and business models and align innovation with your business strategy, by applying innovation accounting to your innovation ecosystem.

What is Innovation Accounting?

Innovation Accounting is an organized system of principles and KPIs established to gather, analyze and present data about a company’s breakthrough and disruptive innovation efforts – working to complement the existing financial accounting system.

Dan Toma and Esther Gons

To build successful innovation ecosystems, corporates should not exclusively look at traditional accounting methods to manage innovation and measure the impact, but at the same time, they should neither base their decision-making on intuition or faith.

To make informed investment decisions on corporate startups and ventures, managers need accounting metrics that are fact-based, and that reflect the entire process of innovation rather than just the financial outcome. Managers need an accounting system that is designed to complement the shortcomings of a financial accounting system when it comes to measuring innovation. 

To start doing so, we can use a combination of the innovation thesis, strategic goals, and the need to create a balanced portfolio. Innovation Accounting can then be used to measure and manage the progress of these corporate ventures from great idea to validated business model.

The term Innovation Accounting was first coined by Eric Ries in his groundbreaking book The Lean Startup. In his book, Eric Ries explores the topic of Innovation Accounting to measure the progress of a single startup.

In The Corporate Startup, we expanded the principle of Innovation Accounting to measure and manage the whole Innovation Ecosystem. In Esther and Dan's newest book, called Innovation Accounting, they do a deep dive into how to set up such an Innovation Accounting system.

Innovation Accounting is the process of defining and measuring innovation within an organization. When we are still creating and testing ideas, financial indicators are simply not enough. They offer insufficient data as they don't reflect the progress of the learning process when testing and validating ideas. That is why every modern organization needs innovation accounting next to traditional financial accounting. This new system must be in sync with the financial accounting system while mitigating its shortcomings. 

Innovation Accounting focusses on managing the following three innovation activities:

  1. Making investment decisions on different ventures at different points in their innovation journey.
  2. Tracking and measuring the success of specific innovation projects.
  3. Assessing the impact that innovation is having on the business as a whole.

That means that Innovation Accounting needs to be implemented at different levels of the innovation ecosystem.

Want to learn more about Innovation Accounting? Check out our webinars on this topic

Levels of Innovation Accounting

The Innovation accounting framework

Within the innovation accounting framework, there are three layers of indicators that feed one into the other. It gathers data on an individual venture level to make sure that investment decisions are being made through data rather than gut feeling. That data is aggregated to make sure there is insight in the entire funnel of ventures and abstracted again to translate into strategic indicators relevant for the board and the overall strategy of the company.

  • Tactical innovation accounting is connected to Measuring teams. These focus on product teams, the experiments they are running, the learnings they are having, and the progress they are making from ideation to scale.
    Read more: 3 Reporting KPIs to get started with innovation accounting
  • Managerial innovation accounting is connected to Measuring funnel. The focus here is on helping the company make informed investment decisions based on evidence and the current innovation stages teams are in. 
  • Strategic innovation accounting is connected to Measuring ecosystem. The focus here is on helping a company's board examine the overall performance of their investments in innovation in the context of the larger business, connecting to overall strategy as well as decisions on capability and culture. 

In order to measure your whole innovation ecosystem, and get the most accurate, reliant, and timely data, we encourage you to also measure:

  • The startup collaborations to better manage your collaboration projects and maximize the value of the partnership between corporations and startups. 
  • Innovation HR capabilities to make sure you have the right mix of people with the right skillsets. 
  • Innovation culture to make sure that your organization has a setting in which innovation can drive. 

 

Types of Innovation Accounting Metrics

Besides the different levels of Innovation Accounting, there are also two different types of innovation metrics:

The types of innovation accounting metrics

Performance indicators focus on how well the teams are doing in regard to the innovation process.

In contrast, Result indicators measure the tangible results that are emerging from this innovation activity. 

Innovation Labs have the tendency to focus on performance metrics rather than result metrics. That is fine to show early signs of success, but in the end, innovation has to have a real impact on the organization. Taking result metrics into account is not benchmarking the results with industry standards, it is looking at what the numbers are telling us, are they indicating a possible sustainable, repeatable, and scalable business model? It is wise to look at both performance and result indicators at every stage of the innovation framework.

 

 

Innovation Accounting in practice

Because this is all still very abstract, we’d like to give you some examples of KPIs you can use to measure innovation accounting in practice.

We created some example metrics for:

Set up your own Innovation Accounting
with GroundControl as your single source of truth

Designed for Innovation Managers and Corporate Ventures

Innovation Managers

  • Have real-time insights into the performance of their innovation program with innovation accounting.
  • Have a visual overview of the progress of all ventures.
  • Can report with confidence to the board with clear and visual data. 
Learn more

Corporate Ventures

  • Easily identify their riskiest assumptions, thanks to clear key questions and a smart risk model.
  • No more PowerPoint! Generate One-Pagers based on factual data and learnings.
  • Use shared learnings from other ventures.
Learn more

Innovation Accounting Infographic

We created a printable infographic poster of everything there is to know about innovation accounting. You can download and print it for free.
Download Innovation Accounting infographic

Example metrics for Tactical innovation accounting

Performance Metrics

Result Metrics

  • number of stage relevant assumptions identified
  • learning velocity
  • learning ratio
  • cost per learning
  • cost of venture
  • time spent
  • confidence
  • venture specific growth analysis

Example metrics for Managerial innovation accounting

Performance Metrics

Result Metrics

  • number of ideas in a stage
  • number of ideas stopped per stage
  • number of ideas progressed per stage
  • average cost per stage
  • average time spent per stage
  • confidence
  • potential future revenue

Example metrics for Strategic innovation accounting

Current portfolio

Innovation Results

  • portfolio distribution
  • portfolio fade
  • investment distribution
  • NPVI
  • cost of innovation
  • average time to 'sustain'
  • average funnel conversion rate
  • efficiency of innovation investment

Innovation Accounting Book

The Innovation Accounting book provides a practical guide for measuring your company’s innovation ecosystem. The book is a deep-dive on all the aspects of Innovation Accounting that are mentioned on this page and more. 

Why this book?
When a company is committed to growth through innovation – not just exploiting the existing business models – standard accounting methods offer insufficient and, often times. irrelevant data.

Who is this book for?

  • Executives looking for a new way of measuring corporate performance in a world where accounting-recognized assets are becoming commodities
  • Investors seeking better ways of looking at a company’s growth potential
  • Managers who need to valuate innovation product teams using not only financial indicators
Read more

Innovation Accounting articles

September 29, 2020
Innovation Accounting framework, what is it? and who is it for?

Table of Contents Where did this Innovation Accounting framework come from? Who should use the Innovation Accounting framework? How should Innovation Accounting be used in a corporate environment? What types of innovation are applicable to this framework? What types of innovation are not applicable to this framework? Putting it together Today we will be talking […]

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August 27, 2020
Innovation tracking: How to get started?

Table of Contents Tracking innovation is like steering a boat3 Rules when you start to track innovation GroundControl can help We see a lot of organizations that want to start tracking innovation performance by using innovation accounting. But where should you start? And what are the hurdles? Questions like these are very common and logical […]

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August 4, 2020
How to measure that innovations are moving forward

We struggle to iterate quickly – I’d like to identify metrics to demonstrate that innovations are moving forward? This challenge from the first Group Call at Innov8ers really caught my eye. It is a struggle that we’ve seen a lot with both our own startups and the corporate startup teams that we’ve coached over the years. Especially […]

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February 24, 2020
The 3 Innovation KPIs to get started with innovation accounting

How to start with innovation accounting? We start with measuring the following three innovation KPIs from corporate startups.

Read More
April 26, 2016
A deep dive at getting Mixpanel right

Table of Contents Forest for the treesWhat to trackIdentify and aliasNaming events and propertiesHow Cocoon tracks the Pirate Metrics in MixpanelRetentionNEXT steps Last weekend Diego Menchaca, founder of Teamscope and apparently also a big fan of our blog posts, proposed that I should write a blog post about Mixpanel. “Most blog posts tell what to track on Mixpanel, but […]

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April 1, 2016
The Early Adopter from an Analytics perspective

Yesterday we had the first introductory session with a potential portfolio company and tried once again to explain why it is so important to focus first on a clear early adopter. We often compare the early adopter with a person who fell of his bike (we’re from Amsterdam after all) and broke his arm. His […]

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February 2, 2016
Dig deeper to find the pain

In the first 5 blog posts about Analytics we covered Vanity Metrics, the Pirate Metrics framework, the criteria of a good metric, the key activity, the key metric and cohorts. The final problem we need to overcome is one we wrote about in almost all the previous blogposts: The danger of having metrics that make […]

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January 20, 2016
Cohorts: because averages hide the pattern

When I first started using good metrics (I was no longer focussing on vanity metrics like total registered users) I had a hard time wrapping my head around Retention. What does it mean when you have 25% active users. Do they come back every day? Or every week? How do you measure that 25%? It […]

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January 5, 2016
One metric to rule them all

If there is one thing important for startups, it is focus. The same applies to analytics. Startup life is chaotic enough and you can not have an overview of everything at the same time. To effectively apply analytics to your startup, it is important to focus on one metric at a time. We are basically […]

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December 23, 2015
AARRR — An analytics framework for startups

In the previous two posts we gave you an introduction to analytics, discussed vanity metrics and the criteria for good metrics. In this post we’d like to introduce the Pirate Metrics, an analytics framework created by Dave McClure of 500 startups. It’s called Pirate Metrics not just because Dave McClure seems to be a big […]

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December 9, 2015
What makes a good metric?

Last time we did a short introduction on analytics. We explained that numbers that can only go up and to the right are called vanity metrics. Metrics that only exist make you feel good. For example, the total amount of signups since the beginning of your startup is a vanity metric. In this blogpost we […]

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December 2, 2015
An introduction to startup analytics

One of the most requested topics when mentoring startups are analytics. Startup founders know that they have to measure things and that analytics are the solution, but not a lot of people know how to actually apply it. The problem is that even after reading the books (like Lean Analytics, which I can highly recommend), it is still hard to apply to your own startup.

Read More