The vast majority of startups and innovation projects have historically not delivered what was initially promised. Many organisations have and will continue to lose money, or have not had the desired impact with their innovation projects. Accounting and the way we do financial modelling plays a huge role in this.
Traditional financial modelling aims to calculate things like Return on Investment (ROI), Net Present Value (NPV), and so on, many years into the future. For innovation projects, these calculations are very inaccurate as they are built on layers of data-poor assumptions.
To be fair, facts are hard to come by as innovation projects and startups are by definition doing something that is new. Therefore, conventional accounting has very little historical data as it is familiar with handling well. Everybody who has allocated or asked for resources for high-risk ventures knows this. The risk is often clear enough but managed in a way that can introduce even more risk.
High-discount rates for future cash flow is one of these examples. While intended to mitigate risk, it sets a higher bar for startups or corporate innovation projects. Any experienced person driving an uncertain venture is familiar with this process. In an attempt to make sure resources can still be secured, these in/entrepreneurs know that they have to present higher predictions than initially calculated. This makes it less likely to achieve a certain target and all too often uses even more resources. It is one example of how applying well-trusted tools in an environment of high uncertainty is not helpful — and even counterproductive — for everyone involved.
Innovation Accounting is designed to fill the gap where standard accounting falls short.