September 24, 2010

The 3 Keys to Success with Freemium

Freemium is a difficult business model to execute but can create a valuable, sustainable company when things go well.  I helped to conceive of and execute the freemium business model at LogMeIn, which is now valued at over $800m.  Since then I’ve helped optimize the model at another 14 startups including Dropbox, Xobni, Eventbrite, Lookout, Webs, WordPress.com, etc.

Through these roles I’ve discovered the following three elements always seem to be present with successful freemium businesses:

1) A free version that provides users with a lot of value and at least one premium version that also offers users a lot of value but is clearly differentiated from your free version

2) Precise metrics-driven execution with a very optimized conversion funnel

3) Deep understanding of customer perceived value and use cases

There are times when freemium doesn’t make sense.  For example, it rarely works with products exclusively targeting enterprises (open source has done well with enterprises, but that’s probably more a function of product flexibility than price). Also, freemium requires that the marginal user cost for the free product is zero or low.  Finally, freemium shrinks the potential revenue of the total addressable market for the category, so the overall market needs to be big enough to still be interesting after a successful freemium company shrinks it.  Of course incumbent players serving the category are unlikely to want to shrink the market, so freemium generally comes from disruptive startups with nothing to lose.

If these startups are able to gain traction and meet the three requirements above, they generally gain strong organic growth and are very defensible businesses.

As startups get better at executing the freemium business model I think we will see a lot more of it in both existing and emerging categories.  Why?  Users have always loved free and the freemium business model makes it viable to offer something of value for free.  Already the model extends well beyond software to dating, identity protection, music, video, phone service…

September 1, 2010

I’m Founding a Startup

In case you missed my Tweet on Aug 13th “Burn the boats – I’ve reached the point of no return and finally admitting I’m founding a new startup. Details soon.”

I didn’t really intend to become a founder, but was hit with an epiphany of a huge opportunity that I was perfectly suited to execute. I actually tried to push it out of my find for several days (my consulting practice has been fun/lucrative) but I kept having a nagging feeling that it had to be done. I shared the vision with a few venture capitalist friends and they quickly offered to fund it. I then received strong need validation from potential customers, which wasn’t surprising since the original epiphany had been based on engaging many potential customers.  Momentum has been strong ever since (though surely there will be course corrections along the way).

I’ll be on a blogging vacation for the foreseeable future…

July 31, 2010

The Startup Team

I completely agree with everything Paul Graham says in this short interview…   I’d want to invest in this type of team if they were using a lean startup approach.

 

July 26, 2010

Find a Growth Hacker for Your Startup

Once startups are ready to scale, their biggest challenge is often hiring someone capable of leading the growth charge.   A marketer with the right talents and approach can kick some serious ass once product-market fit and an efficient conversion/monetization process have been proven.

But the problem is that most startups try to hire for skills and experience that are irrelevant, while failing to focus on the essential few skills.  Typical job descriptions are often laden with generic but seemingly necessary requirements like an ability to establish a strategic marketing plan to achieve corporate objectives, build and manage the marketing team, manage outside vendors, etc.

Generally speaking, the job requirements/skills mentioned above are not paramount for startups in or before the early growth phase.

After product-market fit and an efficient conversion process, the next critical step is finding scalable, repeatable and sustainable ways to grow the business.  If you can’t do this, nothing else really matters. So rather than hiring a VP Marketing with all of the previously mentioned prerequisites, I recommend hiring or appointing a growth hacker.

What is a Growth Hacker?

A growth hacker is a person whose true north is growth.  Everything they do is scrutinized by its potential impact on scalable growth.  Is positioning important?  Only if a case can be made that it is important for driving sustainable growth (FWIW, a case can generally be made).

The good news is that when you strip away everything that doesn’t have a direct impact on growth, a growth hacker should be easier to hire than a VP Marketing (or maybe an insider already has the needed skills).  I’ve met great growth hackers with engineering backgrounds and others with sales backgrounds.

The common characteristic seems to be an ability to take responsibility for growth and an entrepreneurial drive (it’s risky taking that responsibility).  The right growth hacker will have a burning desire to connect your target market with your must have solution.  They must have the creativity to figure out unique ways of driving growth in addition to testing/evolving the techniques proven by other companies.

An effective growth hacker also needs to be disciplined to follow a growth hacking process of prioritizing ideas (their own and others in the company), testing the ideas, and being analytical enough to know which tested growth drivers to keep and which ones to cut.  The faster this process can be repeated, the more likely they’ll find scalable, repeatable ways to grow the business.

When VP Marketing?

Not all growth hackers can or should evolve into VPs of marketing.  A VP marketing needs to be able to help shape the overall company strategy, build and manage a marketing team and coordinate outside vendors among many other responsibilities.  Some growth hackers will be great at this, while others will be bored out of their minds.  The important thing to note is that without some proven scalable, sustainable ways of growing the business, these things will not matter.

Are You A Growth Hacker?

Some of my favorite conversations are those I have with fellow growth hackers.  Last week in San Francisco, I had breakfast with three fantastic growth hackers and we traded insights that benefited each of us (don’t bother asking me for names to try to recruit them, two are CEOs and the other is VP User Growth at a very hot company).

I’m a big proponent of establishing and building a broader community of growth hackers.  The problem is that not all people are cut out to be growth hackers.   If you think you are a growth hacker, please post a link to your LinkedIn profile below so other growth hackers in your area can connect.

Update Oct 2013 – If you want to get inspired to develop effective growth hacks and engage with other growth hackers, check out our new project at GrowthHackers.com.

July 13, 2010

Getting to Product-Market Fit

I’m very excited about this guest post and confident that it will be a huge help for anyone struggling to find Product-Market fit. Enjoy! Sean

Guest Post By Patrick Vlaskovits

Sean asked me to write a guest post to help startups achieve Product-Market Fit since he primarily advises startup after they’ve already reached it (during their transition to high growth businesses). Actually getting to Product-Market Fit is an important topic since the vast majority of startups never get there, making it virtually impossible to drive sustainable growth.

I’ve just completed what amounts to a comprehensive study on the topic of getting to Product-Market Fit with Brant Cooper, culminating in our book called The Entrepreneur’s Guide to Customer Development. The most important insights were gained from successful serial entrepreneur, Steve Blank, who encouraged us to write the book as a primer to the first step of Customer Development. Customer Development is the startup framework he codified in his landmark book, The Four Steps to the Epiphany. If you haven’t read the book (you really should), Steve’s many insights are deep, but the core takeaway is that most startups fail not because they don’t manage to develop and deliver a product to the market; they fail because they develop and deliver a product that no customers want or need.  The ramifications of this deceptively simple observation are manifold and underpin much of what you will read below.   Sean has provided a free survey that should be helpful in validating if you have created a product people want or need.

The Entrepreneur’s Guide to Customer Development also folds in the work of Eric Ries.  Eric has built upon Steve’s work and expanded it with his concept of “The Lean Startup.” A Lean Startup is one that combines fast-release, iterative development methodologies (e.g., Agile) with Customer Development concepts.

Wherever you are in the process of taking your product to market, the following Lean Startup and Customer Development concepts can help you achieve Product-Market Fit.  Nothing else really matters to a startup other than getting to Product-Market Fit as fast as possible.   Below is a brief outline, based on The Entrepreneur’s Guide to Customer Development, which will hopefully help you do just that.

Identify and document your assumptions

The sooner you understand and accept that you, as a entrepreneur at somewhere pre-Product Market Fit with your startup, are operating in near-chaos, where all your assumptions/hypotheses about how you gratify your users, who they are, how you will acquire and monetize them – are simply that, untested assumptions, the better off you are.

With your assumptions documented and in-hand you will:

“Get out of the Building” to validate (or invalidate) your assumptions

You must find, meet and speak with prospective customers about your product and ascertain the validity of your assumptions. This is the crux of Customer Development.  Only by speaking to these people will you have any sort of understanding about “their reality” as Dan Martell likes to put it.  What problems do they face?  How do they solve them?  What matters to them?  What is a must-have for them?

As you speak to potential customers, you should:

Identify the risk factors in the opportunity

Are you facing significant technology risks?  Or more of market risk?  How can you test and validate these (starting with the most risky)?  What market testable milestones can you build that would result in sufficient evidence to induce you to pivot or move forward? A proof of concept? A letter of intent?  A prototype?

As your understanding of the market betters, the risks will begin to crystallize, if certain risk factors prove insurmountable, you must:

Pivot but not jump

By changing an element of your customer-problem-solution hypotheses or business model, based on actual learning from a customer. As Eric Ries writes “by testing, each failed hypothesis leads to a new pivot, where we change just one element of the business plan (customer segment, feature set, positioning) – but don’t abandon everything we’ve learned.

The way to test and learn from your market is to build an:

MVP (Minimal Viable Product)

Don’t forget that an MVP is a product with the fewest set of features needed to achieve a specific objective and that you should require a trade of some scarce resource (time, money, attention) for the use of the product, such that the transaction demonstrates the product might be “viable”.

For non-paying milestones, you must define the currency (the scarce resource) and your objective (what you are trying to learn). For example, intermediate MVPs might include: landing page click-through that prove there’s some amount of interest in a product; a time commitment for an in-person meeting to view a demo that shows the customer’s problem being resolved; or a resource commitment for a pilot program to test how the product fits into a particular environment.

Once you have users using your MVP, listen for and tune into the:

Must-have signal

that demonstrates the core product functionality that your customers absolutely must have, while testing your assumptions and learning the characteristics of your market segment that will allow you to reach out and acquire them efficiently.  Sean’s survey, mentioned earlier, can be useful in finding your must have signal.

Once you successfully developed a minimal viable product and have found the must have signal, it is time to:

Double-down and strip away the unnecessary

Now you know what your customers want, you need to focus with laser-like intensity in building a gratification engine that does not disappoint.

If you can do all of the above successfully and throw in a hearty amount of luck for good measure, there is a good chance you can get to Product-Market Fit.  It may take a significant amount of time and persistence, but potential customers always hold the answer to creating a must have product.

June 29, 2010

My Mixergy Interview

The video from yesterday’s interview with Andrew Warner is now live on Mixergy.com (see embed below).   While Andrew initially characterized me as the “secret weapon behind start-ups that have had incredible growth” I explained that a lot of their growth was based on the pre-existence of great products that met important user needs. I helped these startups build a strong growth foundation around early users’ passion, but the continued momentum is the result of product/engineering teams that keep enhancing the products and great marketers accelerating customer acquisition. Startup success is truly a team accomplishment and if the team starts to focus on who deserves the most credit, success will likely evaporate.

As a successful entrepreneur himself, Andrew did a great job of steering the conversation to the topics most interesting/useful for entrepreneurs. It took me a while to get warmed up (it was a Monday morning after a weekend in Vegas), but there is a lot of new and useful information – particularly in the second half.

Successful startups are only possible with founders who have the guts to go for it so Andrew and I spent a lot of time at the end of the interview trying to analyze the qualities of the best entrepreneurs. Each of the founders I’ve worked with deserve to be on this list, so I regret not mentioning all of them. If the video isn’t loading below, try this link.

June 29, 2010

Deconstructing Startup Growth

Elements of a startup growth curve

After product/market fit, driving sustainable growth is probably the most important/difficult part of creating value in a startup.

For most of the last 15 years of my startup experience, I’ve been the point person responsible for primarily one thing: driving growth.  Even after two IPOs, I didn’t really have a firm grasp of the essential elements of driving growth.  My view has evolved from externally focused metrics-driven marketing, to a more holistic approach built on a solid foundation of product/market fit.

Growth Foundation

Even the greatest marketers can’t sustain growth on a weak foundation.  Eventually, their growth curves crater.

So what is required for a strong foundation?

Must Have Product

The most important element is having a large percentage of users who consider your product a “must have” (over 40% is a good benchmark).  This gives you two key benefits:

  1. The first is that your churn will be relatively low (if it’s a “must have” why would users leave?), so you won’t be wasting resources filling a leaky bucket.
  2. The second is that “must have” products generally maintain strong word of mouth.

Together, these two elements give you a steady upward trajectory of your growth curve until you reach market saturation (hopefully you are in a big market!).

Must Have is Perishable

An important caveat is that your product will stop being a “must have” if a competitor offering a viable substitute enters your space. If they are really a good alternative to your product, then you’ve been downgraded to a “nice to have” and your foundation starts getting shaky.  Therefore, once you become a “must have” it is critical to get to the growth phase of your business as quickly as possible.

Check out my earlier post to determine if your product is a “must have.”

Conversion Optimization

Your ability to accelerate growth will be greatly enhanced if you optimize conversions.  There are many ways to define a “conversion” but for me, it’s a person who reaches the “must have” experience.  If 1000 new visitors come to your website and only 50 experience the “must have” benefit, it’s very difficult to efficiently grow your business.   However, with focused attention on fine-tuning the first user experience, startups often see a 2x – 10x improvement in conversions.

This immediately enhances your growth curve since word-of-mouth referrals begin “sticking.”  It also greatly enhances your ability to find viable, scalable ways to grow your user base (especially when combined with a good monetization approach).

Driving Growth

Most startups entering the growth stage obsess too much on finding a VP marketing capable of building and managing a large marketing organization.  At this stage your more immediate challenge is finding sustainable, scalable growth drivers to augment the organic growth achieved through solid product/market fit and conversion optimization.  If you are compelled to bring in a VP Marketing at this stage, make sure he/she has a track record of developing scalable growth drivers and is willing to make this their core focus until it is figured out.  Otherwise, I recommend instead bringing in a scrappy growth hacker to generate a strong flow of ideas for experiments that will scale if successful.

The faster you run high quality experiments, the more likely you’ll find scalable, effective growth tactics. Determining the success of a customer acquisition idea is dependent on an effective tracking and reporting system, so don’t start testing until your tracking/reporting system has been implemented. Once scalable growth tactics are developed, then a VP Marketing may be important for building and managing the marketing team that will execute these tactics.

One benefit that is emerging from advising multiple startups is that our rate of collective discoveries is accelerating across the non-competitive network of startups. With sharp, creative growth hackers in each startup we are able to brainstorm and test many more tactics.  The best ones are exchanged across the network for everyone’s benefit.

Growth

As the preceding paragraphs hopefully demonstrate, growth is a function of multiple factors.  Focusing on the right factors at any given time offers the best chance of ultimately becoming a high growth startup.  One exception to this rule are startups like eBay, Facebook, and Twitter, where “must have” status could only be achieved after critical mass.  In these startups, they did not have the luxury to focus on one element at a time – instead they had to work on the full growth ecosystem at one time.  But for most startups, you will approach your full growth potential by obsessively focusing on the most important goal for your particular stage.

June 8, 2010

Figuring Out Your Way to Startup Success

“Team.”  It’s the cliché response from VCs when asked about the most important factor in deciding to fund a new startup.

But what separates great teams from weak teams? I believe it’s the team’s ability to “figure stuff out.” Founders figure out potential customer problems that are worth solving.  Engineers figure out how to build a well functioning product that meets this need.  Marketers figure out how to reach people who really need the product and how to convert them into customers…

While natural talent is a big part of figuring stuff out, we can all benefit by improving our work environment.  There are two areas in particular that prevent creative problem solving.

1) Too much focus on financial rewards

It is obvious that the effort required to raise VC funds can be a major distraction from executing the business, but few realize that the repetitive discussions about financial outcomes can also shut down your ability to figure stuff out. In my 15 years in startups, I can’t think of a single breakthrough epiphany we experienced while fundraising.

Daniel Pink demonstrates the potentially negative effect of financial incentives in his new book Drive, The Surprising Truth About What Motivates Us.  He describes several experiments where people who were offered a financial reward to quickly complete a challenging task actually performed worse than those who simply did it for enjoyment.  An important part of figuring things out is getting into a state of flow (sometimes known as being in “the zone”) and a focus on financial incentives often prevents this state of mind.

The book mostly challenges the effectiveness of typical incentive structures inside more established businesses, but I believe the implications are even stronger in startups where survival is contingent on our ability to figure stuff out and the financial rewards of doing so are potentially enormous.

2) Too much pressure

I’ve also realized that I’m not good at figuring stuff out when I put too much pressure on myself.  A few months ago I had a beer with a friend and successful serial entrepreneur, Antony Brydon, and he zoomed right in on my problem.  I had put myself under so much pressure to help the startup with which I was working, that I had virtually shut down my creative abilities.  He mentioned that he’d been reading Andre Agassi’s autobiography where similar self-induced pressure had destroyed Andre’s ability to play tennis.  His career only recovered when he remembered to loosen up and have fun.   Every time I feel myself getting tense, I now remind myself to loosen up and immediately feel my creative problem solving abilities return.

While self-induced pressure is common in startups, pressure can also be applied externally by the Board (or the CEO to the rest of the team).  Most leaders don’t realize how counterproductive this can be in a startup.  It is OK to apply pressure for better execution of things that have been figured out, but it should be applied very sparingly when trying to encourage the team to figure out the remaining unknowns.

The solution: loosen up and have fun

When breakthrough thinking is needed, a fun, collaborative and supportive environment will generally yield better/faster results than the pressure of sticks and carrots.  This is especially important in the early days of a startup while the team is still figuring out a viable formula for the business.

Also, given the likely negative effects of fundraising, I recommend fewer/bigger rounds of financing (if possible).  Run leanly on your first round while you figure out the key success elements of the startup.  Then raise another round while executing the formula.  This may result in more dilution, but a more valuable company should offset this dilution.

Finally, encourage the team to obsess about solving customer problems rather than their potential financial outcome from success.  The best breakthroughs initially come from immersion in customer problems and then later from understanding the customer experience and benefits of your solution.

May 17, 2010

Key Elements of a Massively Scalable Startup

VC backed startups generally aspire to valuations in the hundreds of millions or even billions of dollars, but very few really consider all of the elements they’ll need to make it happen.  After analyzing several startups I’ve worked with that have reached or are approaching these valuations I’ve boiled it down to four interdependent commonalities that always seem to exist.  While they are easy to describe, they are of course very difficult to achieve.  Still your best chance of achieving them is to know what they are.

Element 1: Gratification engine

 

Your gratification engine is the repeatable process of turning cold prospects into highly gratified customers. Whether you are aiming big or small, an effective gratification engine is probably the hardest of the four elements for a startup to get right.   Tenacious execution works for a lot of things, but you can’t force customers to want, need or like what you have created.  Building an effective gratification engine is an iterative process driven by a lot of prospective customer feedback.  Once you get the basics right, your process of gratifying users can be optimized with tools like Performable for landing pages and KISSmetrics for full funnel tracking/improvement (I’m an advisor to both).

Element 2: Economic engine

Once you have figured out how to gratify prospects, your next challenge is creating a viable economic engine.  For your business to be sustainable in the long run your average revenue per user will need to exceed your average cost per user.  Beyond business sustainability, the right monetization approach will also be based on the value users get from your solution, the competitive environment and your ultimate growth strategy.

Element 3: Growth engine

Your growth engine is very dependent on your economic engine.  If you have relatively limited revenue per user, you’ll need to pursue tactics with a very low marginal cost such as PR, SEO or viral marketing.  With a higher revenue per user, you’ll also be able to effectively arbitrage growth through paid tactics like display advertising and SEM.  The most valuable companies generally choose an approach that allows them to capture the biggest share of the market in a sustainable way.  This often means a strategy with lower revenue per user.  They don’t invest too much time in one off gimmicks, instead they focus on growth drivers that can be repeatable and scalable.

Element 4: Huge addressable market

The best opportunities generally have the hardest markets to accurately size.  That’s because these are fast growing or whole new markets that are based on potential rather than existing customers.  Perfect accuracy on market sizing isn’t important here.  Instead creative scenarios that show how it will likely be big should generally suffice.  You also want to breakdown potential segments and people that are new to the market or coming from an existing related market.  Again, you just want to have approximations that are believable and big.

Start with a Hypothesis for Each Element

It is important to have a realistic hypothesis for each of these elements before you even get started with the business.  If you are having a hard time creating a realistic hypothesis for one or more of these elements, your vision probably isn’t viable.

I can often look at a business for less than an hour and decide if I believe it is massively scalable opportunity based on my hypothesis for each of these.  If I’m not confident on a specific element, I spend a lot of time vetting this with the CEO before committing to a project

Of course it won’t happen exactly the way you plan.  The best opportunities have multiple contingency plans in case your initial theory doesn’t work.  But if you can’t even creatively come up with a viable theory for each, you’ll likely have a very hard time raising VC funds.  Once you have a theory for each, start with the practical bottoms up execution described in the startup pyramid post.