I’ve just completed a hectic week of marketing workshops with startups in the UK and Ireland. There were insightful contributions from most of the attendees – the collective marketing discoveries of startups that conduct metrics driven experiments is amazing.
In Ireland we went deep in an all day session that included war stories from the founders and marketers that grew two very successful Irish companies - Hostelworld.com and Paddy Power. Hostelworld.com offers useful insights into an effective way to bring a “network effects” startup to market. I’ll try to get permission from the team to write a case study. Both companies provided additional validation to the recommendations in this post - http://startup-marketing.com/the-startup-pyramid/.
In other news, part 2 of my Venture Hacks interview is now live (bringing your product to market) – http://venturehacks.com/articles/sean-ellis-interview-2 . Nivi and I discuss what to do after getting to product/market fit. I’ve blogged about most of this stuff before, but there are a few additional details that Nivi was able to extract through his insightful questions.
I recently sat down with Nivi from Venture Hacks and discussed what it takes to build a successful startup. The full conversation is available here. There have also been some great thought provoking questions that I’ve answered in the comments section following the Venture Hacks post. Please jump in and join the conversation over at Venture Hacks.
“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.”
I spent a fun evening with Steve Blank’s class. Here are the slides from my guest lecture. There are a few additions to the slides I presented at Seedcamp last month in London. Slide 14 is new and there are major edits to slide 2.
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.
In the last year, Social Media sources (blogs, Digg, Twitter, Facebook, etc) have quickly emerged as the most powerful growth drivers in the startups I’ve helped launch. Despite this, I’d have a hard time writing a ten page book on Social Media Marketing. So on a recent trip to Barnes & Nobel I was surprised to see several thick books on the subject. One contained over 350 pages of social media marketing “wisdom.”
I’m sure there are a few useful nuggets in each of these books, but I doubt it would be worth wading through hundreds of pages to find them.
This will be a very brief blog post explaining how we’ve been able to drive hundreds of thousands of new users through social media in recent startups. OK, here it is: effective customer development… By figuring out who needs your product/service, why they need it, what constitutes a gratifying experience with the product/service and getting more of the right type of people to this gratifying experience (highlighting the right benefits and reducing barriers) social media can become a powerful driver for your business too.
You are probably asking: How can this possibly be an effective Social Media strategy? To understand this, you need to understand why social media is important for startup marketers. The most relevant part of social media is that it includes a person’s network of trusted online contacts. Some of these contacts broadcast their opinions widely through blogs, others a bit more narrowly through twitter and status updates and finally others through facebook wall posts, etc. Social media has given consumers better access to their expanded personal networks and a megaphone to broadcast their opinions and experiences to people who actually care.
So how does this help startups? The best innovations have always come from startups, but we’ve been blocked from the channels that were so critical for established companies. Over time these companies educated the channels and expanded their presence. A little startup had a very hard time competing even if they had a vastly superior product. And the channels were seldom awarded for trying to help the startup, since most startups went out of business anyway.
Today, social networks make it much easier for useful innovative products to spread to the masses (especially when combined with Google Adwords). But for a startup to leverage these social networks, they need to get their innovation into the hands of the right users and ensure they have the right experience. And if they are able to create a clear value proposition, these users will be able to more easily spread the innovation to their networks.
While social media makes it easier to spread useful innovative products, it also empowers vigilante customers that have been wronged. Therefore be very careful trying to game these systems. One of the most common short-term gaming tactics is address book scraping where users are prompted to invite their entire address book to join a service. This is often successful because a small percentage of users inadvertently agree to allow their address book to be scraped when they initially sign up for the service. If one in ten people get their address book scraped and each one has 100+ contacts, growth quickly goes viral. In the short-term the marketer looks brilliant as numbers go through the roof. But many of these (former) customers are now furious and let their network know about it. Eventually these tactics bite the company in the ass.
One of my favorite travel services recently burned my mother with this tactic (after I introduced her to the service). Not only has she expressed her anger to every contact, I will never recommend the service again. And that is after I earlier blogged about the service and verbally recommended it to many. I’d reveal the name, but a good friend is an investor. Was that really worth the short term gain of address book scraping?
Effective social media marketing is really just about good old fashion doing the right thing for your customers. Once you’ve accomplished this, you can use these networks to enhance your relationship with your customers (through a company blog, twitter account, facebook page, etc), but I believe these tactics are minor compared to the approach described above.
In addition to recently starting two new customer development projects, I’ve also been busy prepping for my guest lecture in Steve Blank’s Customer Development course at Haas (UC Berkeley business school). The lecture was Tuesday night. One of my key objectives was to help the students understand that everything seems intuitive and easy in the classroom, but in the heat of execution you quickly get overwhelmed. A single board member demanding quick growth can easily push you from a logical sequence of figuring things out to desperately throwing money at potential growth drivers. Anyone who thinks it’s going to be easy is in for a big surprise.
This blog shares the objective of grounding entrepreneurs is reality. Most entrepreneurs (especially first timers) are unrealistically optimistic. If they logically thought about the risks, they probably wouldn’t be starting a company in the first place. The chances of failure far outweigh the chances of success. But everyone thinks they are the exception to the rule – and some actually are…
I’m often disappointed that I don’t have more time to update this blog. I guess if I did have a lot of time to update the blog, it would be full of impractical theory that isn’t grounded in reality. Real entrepreneurs (not the armchair wannabe entrepreneurs) would quickly recognize it as an exercise in mental masturbation. But I understand that the infrequency of my posts causes some readers to forget about it. So rather than risk the impression that I’ve given up on the Blog, I’m going to try to start posting on a regular schedule – a new post every Monday. Fortunately the majority of my readers don’t have time to read several posts per week. They are busy growing their own startups, etc.
I kicked off this quarter’s two new customer development projects earlier this week. It seems like I just started with Dropbox and Eventbrite, but we’ve actually completed the full six months with Eventbrite and we’re in the last few weeks with Dropbox. Eventbrite and Dropbox were really the “Beta” customers for my six-month customer development program. I am extremely grateful to both for taking an early risk on my program. We’ve made enormous progress, but you never really finish customer development, so I look forward to continuing to help both however/whenever I can. Going into these next two projects, I feel like I have a much clearer understanding of the customer development success hurdles and opportunities so we can make even faster progress.
On a personal note, I’m thrilled that I can make a viable business out of working with startups on their customer development. I couldn’t imagine doing a job that would be more fun. This is by far the most exciting time in the company creation process – watching the startup get validation for years of hard development work.
One of my biggest challenges these days is keeping focus on execution while still finding time to select the next quarter’s startups. I’m averaging 15-20 introductions per month for the two spots I have to fill each quarter. Of course in this economy, this is a much better problem to have than the alternative.
I’ve gotten fairly efficient at determining which companies are a good fit. We start with a quick 10 minute phone call to see if the company is too early, late or competitive with an existing/previous client. I then give the founder/CEO a quick overview of my background and the customer development program. If they are still interested, I ask if they would be willing to have their users fill out a brief survey. This gives me some idea about early user perceptions as to how well the product meets their needs, the intensity of those needs and potential substitute products. When I combine this with potential viable angles to approach customer acquisition and information about the business model, I can quickly narrow down the list. So for the two openings for May I have it narrowed down to 7 very good fit companies. But I’m reluctant to fill both spots because I’m getting several more interesting intros each week. I’ll probably commit one of the spots in the next couple of weeks and leave the other open through the end of March.
The whole process is pretty time consuming, but essential for finding the right companies.
I apologize to anyone who I’ve been introduced to recently if this seems a bit impersonal. Hopefully this blog post will help to put it in context a bit… If we do end up working together in the future, you’ll be happy to know that I’m not spending several hours per day with prospective new startups. Once it looks like a good fit, I’ll definitely spend the time to make sure we have the right chemistry.
One other quick request for anyone that is considering working together… Please wait until we both agree there is a good potential fit before reaching out to my existing/former CEOs. As you can empathize, they are very busy. Once we agree it’s a good fit, I feel very comfortable having you contact them.
That’s the zillion dollar question. And no one knows the answer definitively. Even the most successful VCs have major duds in their portfolios. But every startup that becomes a large profitable company has the following two elements in common.
1) Product/service people really want or need
A “product/service people want” is the starting point for any successful startup and part of the reason that I love working with Y Combinator startups. They drill the mantra “make something people want” into hackers’ heads who are actually capable of executing the vision.
MBAs often spend way too much time obsessing over the business model before they’ve figured out how to create a useful product. A great business model can never make up for a product that doesn’t meet a want or need.
I don’t really consider myself an expert on creating useful products. In fact, I’m not sure anyone is an expert. Steve Jobs may be considered the world’s best product visionary, but NeXT Computer was hardly a smash hit. And the executive behind Microsoft’s lucrative Xbox business has added much less value with the Zune.
I was lucky in my first two startups to work with great products - the original founder’s vision really resonated with users. I helped both companies reach their potential, but I didn’t create that potential. Luck of stumbling into great products can’t last forever, so I now obsess over finding better ways to figure out if a product has potential before committing to take it to market. Every launch program starts with a discovery phase where we dig into how well the product is resonating with users, who really needs it, and why it’s resonating. Then we decide a timeline for going to market.
The only way to know if a product will resonate is to get actual users on it – and the sooner the better. If the product isn’t striking a nerve, it’s better to delay an aggressive go to market push. Many startups succeed with a refined vision rather than their original product. See this list for examples.
Sean O’Malley’s blog and Eric Ries’ blog are both great resources for helping you hone your product. But remember, the only way to know if you’ve succeeded is to trickle some users onto it. Sean O’Malley’s slideshare presentation below is also very helpful.
2) Business model that works
Ultimately startups get VC funding based on their potenital to create a thriving business. This requires combining a needed product with a business model that pays the costs of building a lucrative business. There is as much art in creating a strong business model as there is in creating the perfect product. It is a thing of beauty when all the pieces fit together in a perfectly tuned economic engine. Each ingredient is relatively simple, but making them work together at scale is extremely difficult.
These are the key variables to consider when developing a business model that supports profitable, scalable user acquisition channels:
Lifetime value of a user
Cost of acquiring a user
Marginal costs (besides acquisition cost)
The lifetime value of a user must exceed the cost of acquiring the user and any marginal material/service costs (costs that increase incrementally with each customer). This is generally pretty easy to achieve if you have low marginal costs. Most traditional software has zero marginal cost, which is why freeware is possible (it may not be profitable, but it is sustainable). If you’re lucky, the lifetime value of each user is significantly higher than the marginal cost. In this case you have a lot left over to spend on profitable customer acquisition. On the other hand, if you have marginal costs that exceed the lifetime value, then this is a non-starter, no matter how useful the product is.
If your product is useful and the basic business economics work, then the next part of the business model puzzle is figuring out ”customer acquisition channels.” VC funded businesses must have very scalable customer acquisition opportunities. No VC is interested in funding a business that maxes out at $1 million/year in revenue – even if it has 90% profit margins.
Once you have a basic engine that works, keep tuning all pieces to make it work better (improve conversion rates, bring marginal costs down, find ways to increase LTV…). This will open additional profitable customer acquisition channels. And obsessively tuning all these areas has been a major factor in my ability to attract 10’s of millions of users for startups that ultimately filed for NASDAQ IPOs.
The Ultimate Startup
The ultimate startup would be one where the product meets a critical need for a huge addressable market, users have a very high average lifetime value, there are no marginal costs and there are very scalable user acquisition channels that are completely free (ie viral). Unfortunately I don’t know any businesses like this. Facebook comes close, which helps explain their valuation of $15 billion (who knows what it is now??)… The only piece they are missing is a high lifetime value per user.
The science behind viral marketing has rapidly evolved in recent years, so I’m axiously waiting for this ultimate startup to launch. Hope I can get some of the early equity in it.
Here are the latest updates to my presentation on Slideshare giving an overview of my go to market approach. I simplified the overall presentation and contrasted the 12in6 Methodology to the typical approach taken by startups.
For those who are new to the Startup-Marketing.com blog, this is the approach that I’ve used to launch several successful startups including two that have gone on to file for NASDAQ IPOs (Uproar in 2000 and LogMeIn in 2008 – pending). Recent startups using the methodology have included Dropbox (runner up for best startup in 2008 at the Crunchies), Xobni and Eventbrite.
