Milestones to Startup Success

Update added to end of post

When your startup accepts outside money (such as venture capital), you are obligated to focus on maximizing long-term shareholder value.  For most startups this is directly based on your ability to grow (customers, revenue and eventually profit).  Most entrepreneurs understand the importance of growth; the common mistake is trying to force growth prematurely.  This is frustrating, expensive and unsustainable – killing many startups with otherwise strong potential.

Most successful entrepreneurs have a good balance of execution intuition and luck.  This was definitely the case at the two startups where I ran marketing from launch through NASDAQ IPO filings.  While we didn’t follow a specific methodology, our CEO was intuitive enough to know the right time to “hit the gas pedal.”  We didn’t accelerate until verifying that the team had created a great product that met real customer needs and we could generate sufficient user revenue to support sustainable customer acquisition programs.  It’s taken years for me to realize that our growth was less a function of clever marketing tactics than beginning with something that customers truly needed.  Some growth would have been automatic; the marketing team simply accelerated this growth.

Several startups later I have a much better understanding of the key milestones needed for a startup to reach its full growth potential.  These are based more on observing universal truths than inventing some type of methodology.  Reaching the full growth potential of your startup requires focus, specifically focusing on what matters when it matters.  In my post on the startup growth pyramid I talk about the high level milestones you must achieve in order to unlock sustainable growth.  This post looks at it on a more granular level with links to several of my previous blog posts and other resources that provide additional details.

Day 1: Validate Need for Minimum Viable Product (MVP)

Before any coding begins it is important to validate that the problem/need you are trying to solve actually exists, is worth solving, and the proposed minimum feature set solves it.  This can best be achieved by meeting with the prospects most likely to need your solution.  Steve Blank has published a great post on this.

Eric Ries offers more details on the minimum viable product concept in this post/video.

Where’s the Love?

Vinod Khosla, one of the most successful Silicon Valley VCs in history, once suggested to me that startups should think of their early users as a flock of sheep.  He explained “the flock always finds the best grass.”

For you this means you should start looking for a signal about who loves your product and why as soon as you release your MVP.  Most products have at least a few people that truly consider it a must have.  These people hold the keys to the kingdom.  Learn everything you can about them including their specific use cases and demographic characteristics.  Try to get more of these types of people.

A good place to start collecting this information is the survey I’ve made freely available on Survey.io. You can read more about this product/market fit survey in this blog post.

If you’re lucky you’ll be able to use this early signal to find the product/market fit.

Expose the Core Gratifying Experience

The majority of our project focus at 12in6 recently has been helping startups find their core user perceived value and exposing it in messaging optimized for response.  Your objective should be to remove complexity from the initial user experience and messaging in order to highlight this core user perceived value.  Often this means burying or even completely eliminating features that don’t relate to this gratifying experience.

Metrics

Metrics don’t matter until you achieve product/market fit – then they are critical to your success.  Dave McClure has a great video on startup metrics that matter (relevant part is at about minute 2:20).

Most of the tools out there provide way too many irrelevant metrics and miss the essential few.  Both Dave McClure and I are advising KISSmetrics on a solution to this problem.

Start Charging

Another key step before growing your business is to implement a business model.  The ideal timing for implementing your business model is discussed in this blog post .

I’ve often heard the argument that startups are focused on user growth and prefer to delay revenue in the short term.  I believe the fastest way to grow is with a business model and explain why in this blog post.

Extreme Customer Support

Now that you have a business model in place, your first marketing expense should be to expand the customer support team.  Anyone that cares enough about your solution to contact customer support is a great source of insight about your target market.  Also, customer support will uncover issues that will help you grow faster without spending.  And fixing these issues will make it much easier to grow when you do start spending.

If your customer support team is overwhelmed now, I don’t recommend trying to grow until you address the issues driving most support calls. Once you’ve addressed these issues you’ll have fewer barriers to adoption and will be able to grow without overwhelming customer support.

This will enable customer support to go above and beyond expectations, which is an important way to drive customer loyalty and enhance word of mouth.  This approach pays more dividends today than ever before – as I explain in this post on Social Media.

Update: See comments for additional thoughts on extreme customer support.

Brand Experience Over Brand Awareness

Back in the “Dotcom Bubble” days billions were wasted on brand awareness campaigns for startups.  Today most entrepreneurs understand that brand awareness campaigns are a waste of money for startups.

Instead, it’s much cheaper and more effective for startups to focus on creating a fantastic brand experience.  While startups often realize the importance of brand experience, they focus on it too early, fine tuning things that customers don’t care about.  Instead, wait until you understand why certain customers love your product; then obsess over every element of this customer experience.

Apple is probably the best tech company out there on coordinating a perfect brand experience for its target users. I cover more on brand experience in this blog post.

Driving Growth

Once you’ve achieved all of the previous milestones, then you can focus on driving growth.  CEOs must take an active role in driving customer growth whether or not they have an interest in marketing. Nearly all of the risk and upside in a startup is in your ability to gain customer traction and then drive scalable customer growth. The CEO should not abdicate this responsibility to the marketer.

It’s important to stay aggressive and take all slack out of the market (make it completely uninteresting to pursue the market for any other competitor).  Your early advantage is the ability to iterate on the customer feedback loop and leverage strong customer loyalty to drive word of mouth.

While ROI lets you know if a user acquisition channel is sustainable, the key focus should be on exposing lots of the right people to your fantastic product experience.  It’s much easier to get passionate and creative about this than purely thinking about things from an ROI perspective. Of course positive ROI is essential for any customer acquisition program to remain in the mix.

When it’s time to hire a marketing leader to partner with the CEO, this post explains my recommendations for an ideal startup marketing leader.  The most effective startup marketers are relentless about experimenting with channels until finding things that work.

Start by building out free channels such as listing in directories and basic SEO.   When you begin building paid channels, extra effort should be put into channels that show strong potential for scale.

Unfortunately you can’t count on effective online tactics working forever.  I’ve seen many hot online marketing tactics lose their effectiveness over time.  This is because online tracking makes it easier for marketers to quickly figure out what actually works.  As a result we start piling into the most effective tactics.   Eventually online tactics get saturated, as explained in this post.

Business building

Fast growing businesses are difficult to manage.  This is the point where you should bring in some experienced operations people if they aren’t already on the team.

It Won’t be Easy

Finally, the top three risks to growing via these milestones are:

  1. You lose patience and decide that one or more of the milestones really aren’t that important.
  2. VCs and/or board of directors lose patience because you did not achieve conceptual agreement on this approach from beginning.
  3. You delude yourself into believing that for “our type of business” customers really don’t need to consider our product a “must have”.  For us, “nice to have” is good enough.

Building a successful business is hard.  Hopefully this milestone driven approach to growing your startup will make it a bit easier.

Update: It’s hard to write a blog post on “milestones to startup success” that covers every type of startup.  Some startup types may need to reverse the order of some of these milestones.  For example, with marketplaces (EBay, social networks, dating sites, etc.) user gratification increases with more users so there is a bit of chicken and egg here…  Ad supported sites also benefit from early scale. Many of the articles linked to from this blog post also cover exceptions such as when a startup should start charging (it’s different for enterprise targeted startups).

More on CEO’s Role in Driving Growth

I just wanted to highlight a reply to a comment on my post Founders Make the Best Startup Marketing Leaders :

“In hindsight, probably one of the most important points of the blog post is that CEOs must take an active role in driving customer growth whether or not they have an interest in marketing. Nearly all of the risk and upside in a startup is in your ability to gain customer traction and then drive scalable customer growth. The CEO should not abdicate this responsibility to the marketer.”

Founders Make the Best Startup Marketing Leaders

CEOs often ask for my advice on the ideal candidate profile to lead their ongoing customer growth efforts once we’ve completed the key steps to unlocking growth. You would think that after running marketing at two startups through IPO filings that I could easily answer that question. But I’ve struggled to define the ideal profile of a successful startup marketing leader. After many course corrections, I finally believe I have it figured out. But to really understand the ideal profile, it is important to comprehend why the role is so challenging.

Based on anecdotal evidence, I’d guess that 90% of startup marketing leaders don’t work out. This corresponds to the overwhelming majority of startups falling short of expectations of founders and early investors. When a startup falls short of expectations, the startup marketing leader is the first to go. Even those fortunate enough to gain early user traction still face the uphill battle of finding cost effective ways to acquire users at scale. And if they do succeed, then startups are often tempted to hire a “next level marketer” to replace them.

A successful startup marketing leader must be undaunted by these risks and believe they uniquely have what it takes to succeed. That sounds a lot like the profile of most startup founders. So it’s not surprising that the best startup marketers are entrepreneurs at the core. Entrepreneurs are willing to take the risk and are generally tenacious enough to uncover the channels necessary to drive long-term growth.

I came to this conclusion after finding the common thread between myself and the two most effective people I’ve met at uncovering growth channels. One is still CEO of his company but has done more to drive customer adoption with a fraction of his time than most startup marketers do with undivided attention. The other highly effective startup marketer is a founder that transitioned to leading marketing. They share a persistent desire to connect their innovative solutions with the people that really need them. After implementing critical tracking systems and an efficient customer acquisition process, they are now relentless about experimenting with channels until they find things that work.

Contrast this to a typical marketer, who is generally more focused on marketing activities than marketing results. Most of these activities do nothing to move the needle on the business, but make the marketer feel good because they are working hard.

It may be tempting for a startup CEO to read this and think that aggressive targets can steer the marketer in the right direction. I don’t think that will work. Effective marketing leaders will challenge themselves by pushing the boundaries of the startup’s growth potential. The CEO should be a partner in this process rather than setting arbitrary unrealistic goals. If you don’t have confidence in your marketing leader, the founding CEO should micromanage the process by being an active participant in channel brainstorming sessions and challenging the marketer to ensure tests have been implmented to perfection. Once you have created a product that people really want, most of the remaining company risk and upside lies in your ability to aggressively drive customer adoption. This is not something a CEO should abdicate to the marketer until they’ve demonstrated a relentless drive to uncover profitable customer acquisition channels.

The CEO can also facilitate channel discovery by ensuring that the marketing leader gets the tracking systems they need to execute marketing efficiently. Of course the marketer should be able to make a case for why these resources are important.

What about successful startups that had an initial marketing leader with a more traditional background? First, there is nothing wrong with a traditional marketing background if at the core the marketer is entrepreneurial. Second, the marketer does not always deserve credit for strong user growth. Sometimes great products really do market themselves. My experience with Dropbox certainly supports this assertion. Also, I recently spoke to the former VP Marketing at a company that sold for billions and he agreed that his most important growth contribution was not getting in the way of the viral growth engine.

Of course the risk in hiring an entrepreneur to lead your marketing is that they’ll eventually leave to start their own company. Agree that this is an acceptable outcome if they are willing to give you at least a couple years.

Finally, only the marketing leader needs to be entrepreneurial. In my experience, it is not an essential characteristic for the rest of the marketing team.

Seedcamp in London

Seedcamp is an innovative program that brings experienced entreprenuers together with a batch of several promising new startups from all over Europe for a week of mentoring.  The best of these startup receive 50,000 pounds, but the mentoring is worth far more than that…  Seedcamp provides a fantastic model for any region trying to replicate the startup ecology that has helped Silicon Valley thrive.

In addition to mentoring several of the startups directly, I also had an opportunity to present to the full group yesterday.  Here are the slides I presented:

Quick Thoughts from TC50: SeatGeek

My favorite startup from the third session at TC50 was SeatGeek.  Overall SeatGeek appears to have a strong value proposition – “buy event tickets at the right time and save substantially over the peak price.”  It’s very similar to farecast, but for event tickets (sports, concerts, etc.).  The product, market and business all seem to work/fit since SeatGeek is already profitable.  The big question for a startup that reaches profitability and overcomes these big challenges is: Can it scale?

Based on their stated metrics, net proceeds from the average transaction to them is around $50 (10% of $500).  Once they’ve acquired a user, lifetime value could be substantial (if we assume 10 transactions over their lifetime, lifetime value would be pushing $500).  Within that allowable acquisition cost, there should be many scalable marketing opportunities. 

I may have missed it, but I didn’t hear them address the specific way they would market the business.  My assumption is that they would market primarily through search (both SEO and SEM).  Given the breadth of events, there should be several keywords to test in order to find profitable, scalable customer acquisition channels.  They also have strong alternative monetization ideas to further improve their allowable acquisition cost and/or profit per customer.

One potential competitor is FanSnap, which is a price comparison engine on tickets across sites.  I believe the primary improvement SeatGeek brings is a price predictor, since according to SeatGeek prices often drop.

Quick Thoughts from TC50: ToyBots

It’s a bit strange that I’ve picked another “kids targeted” startup from the second batch of  startups as my favorite – kids are a notoriously difficult market to acquire online.  But in the case of ToyBots, I believe they are targeting a fantastic opportunity. It is likely that connected toys will be the next generation in toys and I love their example of having grandma read a story to the grandkids through the toy. 

I believe Webkinz laid out a good marketing roadmap for this type of startup.  My kids couldn’t walk into a Justice (previously called Limited Too) without asking for another Webkinz.  I didn’t mind buying a stuffed animal, but am a little more hesitant to offer the kids my credit card for online purchases.  From a business perspective, I was intrigued when my kids ripped off the virtual currency and threw the toy into the corner – never to be played with again.

ToyBots can create a tighter link between toys and a web experience than Webkinz, but leverage the same types of marketing channels. My recommendation would be to link the licensing to the marketing opportunities.  The toy makers already have great distribution, but very few subscription opportunities.  ToyBots can improve the ongoing engagement with kids for each toy manufacturer – increasing monetization opportunities and possibly creating a direct customer acquisition opportunity for manufactures to cross promote new toys.

It’s difficult to know how much progress they’ve achieved, but announced partnerships suggest that this isn’t a half baked idea.

Quick thoughts from TC 50: ToonsTunes

I’m at TC50 and plan to write quick thoughts about demos that catch my attention.  This is very “on the fly” so it will be pretty rough. I’ll try to clean it up later.   Videos of the demos will be posted online, so I’ll add links when they are available.

ToonsTunes is my first…

  • Who needs it/why?(They claim to be targeting Tweens, but the demo looked like it would appeal to a younger demographic.  I think children 7-12 would probably enjoy this product, but would want to validate with research.)
  • Product progress? (Great graphics, looks well developed.)
  • Are they willing to pay for it/how/how much? (business model)
    • Freemium (enhanced), Sponsorship, Merchandise
    • I’d recommend premium subscriptions to save music
  • Are there realistic ways to acquire users within economic constraints? (marketing)
    • Viral (via parents social networks) – this is a great idea.
    • I’d also recommend marketing via popular sites for kids.
  • Is the likely cost of acquiring users plus marginal cost of service less than value per user? (business economics) – This would require a lot more exploration.  But I like their idea of giving parents the ability to display their kid’s work via FB, etc.  Not sure about licensing costs to music labels if they “borrow” from popular songs.

When Should a Startup Start Charging?

I’ve recently changed my long held belief that all startups should charge immediately upon the release of a new product.  I now believe that non-enterprise targeted startups should only charge once you have achieved product/market fit.  As explained in this earlier post, I define product/market fit as at least 40% of your active users saying they would be “very disappointed” if they could no longer use your product.

The evolution in my thinking to charge only after product/market fit is based on finally working with some “normal startups.”  The first five startups I helped take to market all amazingly achieved product/market on the initial release.  For these startups it was right to encourage a quick implementation of the business model.  However, for startups that haven’t yet found product/market fit, a business model can hinder the process of figuring out how to deliver value.  Users are forced to quickly decide if the product is worth the financial investment (and we already know it’s probably not since most wouldn’t be “very disappointed” without the product – when free).

It is safest to assume you won’t have product/market fit right out of the gate.  If your initial release hits (think winning the lottery), then you can quickly implement your business model as you transition to a growth company.

If however, you are like most startups, you will spend an undefined period of time engaging users and evolving your product to better meet their needs.  When surveys tell you that you’ve reached product/market fit, the final validation is charging for your product (or a version of it).

It’s Different for Enterprise Targeted Startups

For startups targeting enterprises, it actually does make sense to charge before reaching product/market fit.  This is the best way to help the enterprise figure out how to get value from your product (somebody on the inside will be motivated to work with you to unlock value since they’ve already spent the budget).  If you haven’t charged anything, your attempts to engage the customer and find value are likely to be perceived as an aggressive sales annoyance rather than genuinely helpful.

Growing Your Startup with a Business Model

Startups often delay implementing a business model claiming “we’re focused on growth right now.” But once you’ve achieved product/market fit, most startups will grow faster with a business model (I wrote a post on this earlier).  A business model gives you rational constraints within which you can execute very aggressively – otherwise you are held back by fear that you may be wasting money on paid marketing programs.

Without a business model, you don’t know if your business is real.  Of course some prefer to hope that a business model implemented in the future might work rather than know that one implemented today doesn’t work.  If you are truly offering value (have achieved product/market fit), then there is a business model that will work.  The only way to find it is to start experimenting.

Great Resources for Achieving Product/Market Fit

A few people have asked for more guidance on getting to product/market fit.  I updated my previous blog post with another quote from Marc Andreesen, but recommend that you read his full full post via archive.org (it has been removed from his blog).

Here is the quote that I added to my previous post:

“When you are BPMF (before product/market fit), focus obsessively on getting to product/market fit.

Do whatever is required to get to product/market fit. Including changing out people, rewriting your product, moving into a different market, telling customers no when you don’t want to, telling customers yes when you don’t want to, raising that fourth round of highly dilutive venture capital — whatever is required.”

Andrew Chen also has an excellent post on the same subject.