Metrics
First, nonprofits and government agencies practicing lean must define metrics appropriate to the innovation they are undertaking so that they can measure their experiments with rigor. In Joe’s case, each new bike lane project had to show multiple, measurable benefits, including:
• Increased safety
• Reduced traffic congestion
• Increased bicycle usage
• Increased retail and commercial revenue in bike lane corridors
Multisided Markets
Technically, most social sector activity looks like what is called in business a multisided market—a market where the payers are not the recipients of the product or service. In such markets, startups have to test hypotheses about all the relevant market participants.
Second, social sector innovators must also focus on metrics that matter to their funders, metrics that may not be the same as the impact metrics. As a manager of a city agency, Joe had to weigh the risks of entrepreneurship for his budget. How many failed bike lanes could he afford to build before he lost the mayor’s support, or before irked legislators cut his budget? More generally, which performance measures matter most to those funding the innovation? A shared understanding of the model of change between the funders and the innovators is always essential. In a lean startup, it’s also vital that learning be shared as it evolves, so that all stakeholders understand why the strategy has changed as a result of previously defined metrics.
Third, social sector organizations often find it challenging to develop rigorous metrics. It can, for example, be difficult to measure activities aimed at educating the public or changing public opinion (absent elections). In the private sector, the bottom-line metric is a spending decision—you know your innovation is successful if your customer spent money on it sooner or later. Activities that don’t directly sell to customers, like marketing, face the same challenge as many social sector activities, but at the end of the day they are benchmarked against sales. Similar bottom-line benchmarks exist for change-making (like the success or rejection of a ballot initiative as a metric of voter education), but those benchmarks are far more diverse. Agreement among funders, staff, and leadership to a strong culture of metrics is essential to the lean startup. That strong culture is, paradoxically, what can free you to innovate based on the results you see.
Before you feel too bad, remember that most business startups don’t make money immediately (as a matter of fact, most fail). They, like nonprofits and government agencies, start by figuring out how to deliver real value. Then, and only then, do they turn to monetization.