In this lesson, we're going to dig deeper into one of

the lean start-up principle called

innovation accounting which is basically some accounting concepts for start-ups.

So the first question you may ask is,

wouldn't accounting be applicable once the start-up is successful and established?

Do we really need accounting?

So according to Eric, yes,

we do need accounting but a different kind of accounting,

not the traditional accounting.

We want to use the accounting that helps you make the right decisions at the right time.

Eric defines three learning milestones for innovation accounting.

The first one is, develop a baseline where you establish

a real data to understand the current state of the company.

And then, the next milestone is tuning the engine,

where you are trying different experiments to

move from your current state to the ideal state.

And then the third milestone is pivot and persevere,

which means that if you are going in the right direction,

then you persevere, but if you're not, then you pivot.

So there is this regular checks that you do as part of your

lean start-up to make sure that

you're going in the right direction or if you need to pivot,

you are making a decision to pivot.

In terms of developing a baseline,

the one thing is that you create a prototype and

you test multiple assumptions at the same time,

or you can test one assumption at a time.

And if you're doing one assumption at a time,

you should try the riskiest assumption first because if you don't try

the riskiest assumption first and that becames invalid,

then all the effort that you put before is going to go waste.

So these riskiest assumptions are also called leap-of-faith assumptions.

So if you have any of those assumptions,

you want to try that out first.

The other concept is called the smoke test,

where there is no real product.

Customers are given an ability to pre-order the product that is not yet

built because this validates if customers even interested in trying your product.

So the smoke test is a very quick way to validate one of the key assumption which is,

are they even interested in your product?

Now in terms of tuning the project,

it basically involves all the activities,

whether it is a product development activities,

marketing or other initiatives targeted towards improving the drivers of growth model,

whatever it is the growth model that will help you reach toward the ideal state.

You try different experiments to see if you can improve those drivers.

Then he defined the three A's of the metrics.

The first one is actionable.

So you want your metrics which demonstrate the cause and the effect both.

And this should not be the vanity metric.

For example, let's say you have a website or a portal,

and if you only thing that you measure is the number of hit,

it might be misleading because maybe there is a robot that is just hitting your site.

And if you're only doing that you're measuring is the number of hits,

then suddenly you will see a big hit,

big improvement in the hits and you will say,

well I'm going the right direction but it is actually

masking that no real user is actually using your website.

So vanity metrics can lead to false conclusion and can mask the failure.

The second A is the accessible.

You want your metrics to be easily understood or easy to

understand by the team as well as by your stakeholders,

and easy access to the report and the data.

So, one of the way to make it easily

accessible is to make bad metrics as part of your application.

The third A is the auditable.

So you want your data to be credible.

And in case needed,

you should be able to manually test the data that you have collected,

that increase the trust in your data, in your metrics.

And then sometimes, it also helps you understand the why behind the user behavior.

Another concept is called pirate metrics.

It's not part of the lean start-up but it's

a concept which defines the five level of metrics called acquisition,

activation, retention, revenue and referral.

So to give you an example,

let's say you built a software.

So acquisition would be somebody actually downloaded your software.

So that will be counted as acquisition.

And if they installed it and tried to use it,

that would be calling the activation.

Now if they repeatedly use it,

then you will include them in your retention score.

And then, if they pay to use your software then it will be the revenue.

And then if they recommend your software to others,

then they will be counted in the referral.

So, you can choose whichever metric is

applicable at a given time but these are

the different way you can measure the success of your product.

Another concept in lean start-up is called pivot or persevere.

So one of the concept in lean start-up is

this runway which is the amount of time remaining to either lift-off,

which is the success of your start-up, or your fail.

And is basically calculated as amount of money remaining

for running your start-up divide by the monthly burn rate.

So let's say you have one million dollar of remaining and your burn rate is $100000.

So you have 10 more months in your runway and if you're running out of money,

you could extend this runway by either getting

more money or you can cut your costs so that your burn rate is low.

Now Eric has given another definition of runway which is number of pivots remaining.

How many times can you go to that pivot and persevere cycle?

And so, that gives you one more way to increase your runway which

is by reducing the time it takes to do one pivot which is,

how can you iterate quicker?

The faster you can iterate through your bell learn measure cycle,

the more runway you have.

During his research, Eric also found out that people are not

pivoting as fast as they should be and sometimes,

it was due to the vanity metrics.

So they have chosen the metric that were masking

the real progress or sometimes they had incorrect hypothesis.

So the hypothesis itself was incorrect that were making them not pivot quickly.

And the third one was,

they were afraid that if they iterate faster,

they may not be able to prove their real idea.

And so they wanted to get it done right and then try it in the market.

So Eric suggests that you schedule your pivot or persevere meeting ahead of time.

That way, everybody knows that the meeting is scheduled and we will be

discussing whether we're going to pivot or persevere at that time.

There are lots of ways you can pivot.

So first one is zoom in where

one of the feature of your product actually becomes your product.

So you are eliminating all the other features and you're

just focused on that particular feature or features.

The another one is zoom out where

your product becomes just one of the feature of your product.

So you have expanded your product to include more features.

Another idea is the platform, pivot by platform.

So your application becomes a platform or your platform becomes a product.

So you started with an application but then later you realize that it'll be

better if we deploy that as a platform where others can contribute as well.

Another example could be pivoting back customer segment.

So you designed your product for

a specific customer segment but you realize that they no longer need it.

But during your experiment,

you found that another customer segment found your product useful.

So now you're going to focus on that customer segment.

Or sometimes, the customer need has changed.

So you designed your product for a specific customer need but you realized, well,

they don't need it for that purpose but they have a different need that we can fulfill.

So then you shift your product to a different need.

Or sometimes, it's the channel of delivery is not appropriate based on your experiment.

So you can change the channel of delivery to

something else and your users may find that useful.

Or sometimes, the technology is different or you found out that

the technology that you were using was not going to

work or is not what users looking for,

so you use a different technology that users are looking for.

Innovation Accounting

Lean Software Development

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