Tag Archives: startups

Sequencing Business Models: Can That SAAS Business Turn Into a Marketplace?

As someone who has spent a lot of time building marketplaces in my career, a curious thing has happened over the last couple years. Founders have started reaching out asking for help converting their SAAS or SAAS-like business into a marketplace. The approach sounds a bit like this:

  • I’ve amassed a large group of X type of professionals
  • I’ve helped their business, but they’re asking for help driving more customers
  • Since I already have the supply, it should be easy to build the demand side to have a successful marketplace
  • My customers will be happy, retain better, and I’ll be able to charge them more

So goes the story. Now, this story itself explains why many businesses fail to make the conversion to marketplace. If driving more customers was your customers’ #1 need, and that’s not what you helped them with, you probably didn’t build a very successful business, or the problem of solving customer acquisition for that market is very difficult.

What Types of Businesses Are We Talking About?

Before we go any further, we should talk about what these businesses look like, and what they mean when they ask about becoming a marketplace. Many of the terms we use to define businesses today are features of the business rather than an encompassing definition, like the words SAAS or platform, which makes them not very useful. Note: I am blatantly stealing Brandon Chu’s platform definitions for this. Let’s break down these definitions so we know where we’re at:

  • SAAS: software that businesses access online and purchase via a subscription e.g. Slack, Adobe, Atlassian
  • SAAS-like: any number of different models where a business sells software to businesses online, but does not charge via a subscription e.g. transactional or pre-revenue
  • Marketplace: a business where sellers (frequently businesses) provide their services on a platform to attract additional buyers, and buyers come to this marketplace to seek out these services and find new suppliers. Marketplaces commonly process the transaction and charge a commission to either the supplier or the demander. If not, they usually charge some sort of lead generation fee to the supplier.
  • Developer platform: a business where developers can build businesses on top of the business’s software and charge customers. The end customer is usually not aware this company even exists e.g. Stripe, Twilio, Amazon Web Services
  • Extension platform: a business that enables other developers to make your product better where the platform owns the relationship with the customer and provides some of the direct value itself e.g. Shopify, WordPress, Salesforce
  • Networks: a type of platform where consumers interact with each other and/or content on the platform in a non-transactional way e.g. LinkedIn, Pinterest, Yelp

So, when we talk about businesses trying to become marketplaces, what we’re talking about usually is sellers of software to businesses trying to help those same businesses attract more buyers by aggregating buyers on their platform and aiding in the discovery of those buyers finding the businesses the company currently counts as customers.

The Weak Transition to Marketplace Arguments

Why is there a sudden demand of founders looking at this strategy? There are three fairly weak arguments I don’t like, but I’ll present them anyway.

#1 Saturated Growth in SAAS

Perhaps it is a natural extension of the SAAS explosion the last ten years. Kevin Kwok and I have often discussed that growth at some scale equals an adjacent business model:

  • Ecommerce businesses trend towards marketplaces over time e.g. Amazon
  • Marketplaces trend towards vertical integration over time e.g. Zillow
  • SAAS businesses trend towards extension platforms e.g. Salesforce

Perhaps as SAAS has moved into more niche verticals, the extension platform opportunities have dried up, so companies are looking at consumer marketplaces as a new potential growth lever. But SAAS companies continue to grow on the public markets. Perhaps as SAAS has expanded into industries where customer acquisition is difficult, they’ve found their businesses at best only solve the second most important problem for their customers.

#2 Desire for Market Networks

Perhaps it’s because of James Currier. He has blogged repeatedly about market networks being the companies of the future. These companies combine SAAS, marketplaces, and networks. But these founders are not using this term, and this supposed revolution looks no closer to happening five years after his original prediction. Some businesses attempting to build out market networks have become good SAAS businesses e.g. Outdoorsy with its Wheelbase product, but there is no evidence they’ve actually ended up building marketplaces or market networks. Honeybook has struggled, and Angellist and Houzz started as networks, not SAAS businesses. Angellist has never added a SAAS component. Houzz acquired IvyMark last year to launch a SAAS model after ecommerce, ads, and marketplace models for monetization disappointed, and it is too early to understand how well that is working. All evidence shows that if market networks are real, they are more likely to become them from starting as a marketplace or network first, then adding SAAS, not the other way around. Faire is a recent example of this.

#3 It Worked for OpenTable

Now this is a reason I actually hear. But it’s not a great one. The first reason is that OpenTable was a marketplace from day one. Customer acquisition was always a key value proposition, and they delivered on it. It wasn’t aspirational. Second, OpenTable is one of the largest public market disappointments of the last ten years. With an infinitely sized market, the company struggled, was acquired, and then written down significantly post-acquisition by Booking.com.

While these stories exist and do influence some founders, I do still think the main reason why is illustrated in the initial story above; it’s just the strange allure of ongoing customer development.

Why Changing Business Models and Customers is Always Hard

Ignoring the impetus for the rapid increase in desire for SAAS businesses to transform into marketplaces, let’s talk about why companies struggle to do this in practice, and how you fight these headwinds. Through my research and directly working with companies attempting these changes, I’ve identified some main barriers for this transition. If you can work through these barriers, your chances of making this mythical transition increase dramatically.

#1 Founders have to change the incentive structure for all or a significant percentage of the company

SAAS or SAAS-like businesses can grow very quickly. If you’ve spent a significant amount of years building a SAAS business and are considering the marketplace transition to drive additional growth and value to your customers, you’ve almost assuredly built a significantly large base of customers, still have growth targets on this core business, and are managing a lot of complexity already. What happens frequently is founders attempt to spin up a team to work on what’s usually a large, new addition to their current product offering. This initiative is considered a long term, strategic play. It’s important, but not urgent.

What happens to important, but not urgent, initiatives at fast growing companies? They usually get broken up by other important, but more urgent initiatives for the core business. Oh, our quarter was soft, and we need more resources to get back on track? Take them from the marketplace team. We’ll get back to it later. Have an initiative that could drive additional growth in the core business, but don’t have the resources? Take them from the marketplace team. We’ll get back to it later. And so on.

It’s always more attractive to take the more guaranteed optimization on the core business than risk those resources for the very long term, completely risky proposition that might drive a step change in growth for the business much later.

Fortunately, this issue is not new to fast growing companies, and there is a solution. In fact, we faced this very issue at Pinterest. Our largest strategic issue was international growth, but employees kept optimizing 1-2% changes in the U.S. business that moved the top line instead of international work that needed to begin from scratch. Founders usually have two tools to solve this problem. The first is to make the entire company’s growth revolve around this new initiative. That’s what Ben Silbermann did at Pinterest. The entire company was goaled on international growth at the expense of U.S. growth. And it worked.

The other tool is what usually happens at larger companies looking to expand into new product lines. They create a new team with separate goals and reporting lines. Frequently, they don’t even sit in the same building. This is what we did at Eventbrite. We created a Marketplace business unit with a GM reporting directly to the CEO. And while they sat in the same building, it had its own team and its own OKRs.

Changing the goals or creating an independent team with its own set of OKRs does not guarantee marketplace success, but they free you from the temptation of dismantling or impacting teams that frequently need to do years’ worth of work to find product/market fit for a second set of customers.

#2 Founders have to shepherd the right new and existing resources most likely to value the business model transition and change the company culture

Strong businesses usually build a culture of understanding their customers and their model very well and catering to those needs. What happens when you suddenly ask those employees to care about a second customer, or a new business model, and potentially trade off the needs? Old habits die hard. Employees still default to doing what’s best for the current customer/business model even at the expense of the new customer. And even if they do want to care about the new type of customer, they may not have the DNA. Consumer and B2B cultures tend to be very different, for example, attract different types of talent, and there are very few people who are great at both. 

Building B2B products can be very different from building consumer products, and many marketplaces (but not all) have consumers on the demand side. In this case, your customer is a less reliable narrator for their needs, so user research, while effective at identifying their problems, can be a lot less reliable at predicting what people will actually use. Consumer products require significantly more experimentation, and have the data to do it because there are so many more consumers than businesses. 

This cultural issue frequently requires new blood in the organization and careful recruitment of internal resources that are more passionate about the opportunity and usually have some background in consumer product development. Usually, leaders are brought in to lead teams like this with heavy consumer backgrounds, and they recruit more new people with consumer backgrounds. The use of advisors with that kind of experience (like myself) is also common—to suggest product development best practices that may be better suited for the task, to prevent common marketplace-building mistakes, and to more objectively monitor if progress is occurring at the appropriate rate.

How to Be Better Positioned to Build a Marketplace

While transitioning to new customers and/or business models and described above is hard, there are a few ways to make the transition to a marketplace more likely to be successful from a SAAS-like business.

#1 Founders need to confirm there is a demand side to this market, and the way you would engage with them aligns to you and your customers’ business models

One major reason marketplace transitions fail is that there isn’t actually a demand side to this theoretical marketplace to be added. These companies are selling to the supply side of a theoretical marketplace, and don’t understand if demand exists. There are two shades of this I have seen. One is that the SAAS customers make their revenue not by selling something people want to buy and find more, but that people feel compelled to support financially. Let’s take GoFundMe or Patreon as an example. These companies would love to have consumers come to their websites and find people and causes to support. Patreon even tried this. But are consumers searching for websites where they can donate more of their money to artists and local causes? No, not really. Do they support artists and local causes? Of course, that’s why those businesses have done well. But consumers generally aren’t searching for more causes.

The second shade is that the marketplace opportunity is only to find a vendor once on the demand side. In these markets, once a consumer finds a provider for a service, they tend to stick with them for long periods of time. Let’s say you are looking for a babysitter. If you find one that works for you, you stick with that person for a long time. This is in contrast to ordering food, where variety is a feature, not a bug, of the decision-making process. While successful marketplaces have been built in these areas, they are harder to build. SAAS companies struggle to transition in these markets because they have to build trust signals that may damage their relationships with their clients, and there are generally better platforms for researching these vendors than on the SAAS platform e.g. Yelp for local restaurants and services, Tripadvisor for hotels, and G2 Crowd for software. Also, how should the SAAS tool price these additional customers? Just once for the acquisition, or every time they use the product in the future? The clients and the company will usually be misaligned on this, creating leakage. In this case, the business model for the marketplace doesn’t align with the business model for the SAAS business or the SAAS customer. In a weird way, by trying to address the biggest problem you heard from your customers, you built a product that doesn’t work for that need, but for your own.

Again, this is a solvable issue. It can be mitigated through a lot of customer research on the demand side. Not only understanding the consumer your clients are targeting, but finding a critical pain point for them that isn’t solved on the market by another product that your company can actually solve due to its relationships with all of the suppliers in the market. Then, try to align revenue to the value you create in a way your SAAS customers will understand. And be prepared not to capture all of the value.

#2 Make sure the opportunity actually aligns to the characteristics of other successful marketplaces

Transitioning to a marketplace effectively requires founders to understand what makes a successful marketplace, and those characteristics are surprisingly opaque to people who haven’t worked on marketplaces. Rather than reinvent the wheel, I encourage founders to read Bill Gurley’s treatise on 10 factors to consider for marketplaces. One other factor Bill neglects to mention that is important is that normally marketplaces are built on top of under-utilized fixed assets:

  • Excess kitchen space for Grubhub
  • Idle cars for Uber/Lyft and Getaround/Turo
  • Empty bedrooms for Airbnb
  • Empty land for Hipcamp
  • Empty hotel rooms for Booking.com/Expedia
  • Excess SMB Inventory for Groupon

Do your current customers have this characteristic?

Can the Transition to Marketplace Ever Work?

It’s clear that evolving a SAAS business to a marketplace is an emerging strategy that more and more founders will research. What is important is to make sure you’re doing it for the right reasons, and that you’re prepared to fight the main barriers that prevent this transition from working. It’s also important to remember that even if you fight these barriers, this transition takes time. Marketplaces tend to take 2-3 years to find product/market fit. You need to be in a position where you can invest for that long before seeing a return.

In the Advanced Growth Strategy course, Kevin and I talk a lot about minimum scope. Minimum scope is the activation energy that makes a strategy viable. In the course, we talk about the minimum scope for cross side network effects to emerge. And in our examples, we do show that most cross side networks (but not all) emerge with the supply side first. But you have to remember that you do have to hit minimum scope for the demand side as well. And many businesses find they do not have a good answer for this.

Another existential issue for founders looking at this transition is that it inverts the typical company building model. When building a company (especially if you are raising venture), you typically have different assumptions you have to validate to receive funding rounds and eventually build a successful, long-term business. The harder the assumption you validate, the more likely you are to be successful, and the easier a fund raise will be. Ask any founder whether building a SAAS business or a marketplace business is harder. I bet you almost all will answer that a marketplace is harder. With the SAAS to marketplace strategy, you defer the hardest part of your strategy.

When looking for inspiration, it’s true there isn’t a cohort of companies to emulate, and that’s scary. In fact, almost every other business model transition related to this has more data to support. Flexport started as a SAAS business from the demand side (called ImportGenius), and built a marketplace on top of it, for example. Almost all marketplaces add a SAAS component eventually to their model. But don’t be too scared if this is your strategy. If you can answer positively:

  • Can I change the culture?
  • Can I change the structure?
  • Have I vetted a demand side exists?
  • Does the demand side actually exhibit great marketplace characteristics?

Then you are off to a great start in building a new scalable model of growth for your business.

Have transition to marketplace questions? If so, hit me up in the comments.

Thanks to Kevin Kwok and Gemma Pollard for giving feedback on this post. Also thanks for Brandon Chu for letting me use his platform definitions.

Currently listening to my 2010s Shortlist playlist.

On The Spectrum: Thoughts on Zuckerberg, Tradeoffs, and Cultural Values

Many founders spend a lot of time trying to codify their culture and get culture right for their company. Yet many companies end up with serious cultural issues as they scale. Frequently, this is due to a forest for the trees approach to culture. Companies think they maybe they can hide lack of alignment and political strife with pool tables and company offsites, and are surprised when they still have employee attrition problems. Most founders get past that and try to codify strong cultural values that instill how they want to work to get things done at their company. But these values are frequently some mythical view of how things could work vs. how things actually do work. The average response of an employee to a complete set of these values is slightly better than an eye roll. I can’t tell you how many times I’ve seen goals like “Be aggressive” at a company, but everyone is the opposite, or something is set as a cultural value that is just a thing all people should do anyway, like “Think like a founder,” when the problem is people don’t know how.

Mark Zuckerberg has taken a lot of flack for some of his management at Facebook over the years, but I believe it was he who most clearly defined what a cultural value is and isn’t.  Company values (among many other parts of building a company) are about asking, “What are you willing to give up?”. When Facebook chose “Move fast and break things” as a cultural value, they put speed and quality on a spectrum, and said they biased toward speed.

Screenshot 2019-08-18 16.45.52.png

Compare that to Slack. On Slack’s website, they list a few cultural values, including: Craftsmanship, Courtesy, and Solidarity. They too are picking a place on the speed vs. quality spectrum, and I bet with those words it’s a lot closer to quality.

Screenshot 2019-08-18 16.45.38

Neither of these is wrong in isolation. It depends on your market, your competition, your value prop, etc. In all cases, it’s important to pick where you are though. More recently, Facebook switched its core value to “Move fast with stable infrastructure.” It doesn’t have quite the same ring to it, but it’s a signal to the company that at their scale, they need to prioritize quality a little more.

Screenshot 2019-08-18 16.45.16

There are other spectrums to consider when managing culture for a company. One is around openness. Again, here, Facebook has a value that mentions specifically how they think about it, with “Be open,” where they say “We work hard to make sure everyone at Facebook has access to as much information as possible about every part of the company so they can make the best decisions and have the greatest impact.” Stripe is another company famous for swinging to the open side of the spectrum. Most of the email at Stripe is available for anyone at the company to read, for example. Compare this to Apple, where most projects are handled in secret, and information is given on a need-to-know basis.

Screenshot 2019-08-18 16.39.22

Another classic tradeoff is good for company vs. good for world. Take a company like Netflix that ruthlessly measures performance, and focuses on time spent on the platform. It very much biases towards good for company on this spectrum. But take a company like Etsy or Warby Parker that is certified as a B corporation. That’s an explicit signal that they are trading off some company performance for social responsibility. Then there’s of course companies like Kiva, which are non-profits.

Screenshot 2019-08-18 16.39.06

There are others like data vs. intuition, but you get the point. Plotting your company values on a spectrum is important to setting values that actually matter and driving decision-making at scale. Most that make “company value” level should be ones where you are taking a more extreme position. 

What’s really interesting is if you spend time working at companies is many companies don’t appear to be on the spectrum for some of these company company trade-offs. Now, for direct opposites like open and closed, that’s impossible, except for being inconsistent. But some companies are neither fast, nor do they deliver quality products. Some companies are not providing great financial returns or social returns. In this case, our spectrum becomes a 2×2.

Screenshot 2019-08-18 16.38.21

For illustration purposes only. I do not purport to know where Slack and Facebook actually sit on this 2×2.

As in all 2×2’s, it’s the worst to be in the bottom left. If you find this to be the case, the first step is to get on the spectrum. Make a decision about where you want to be, and work to get there. Then, once you’ve landed on the spectrum, you can try to optimize toward getting to the top right of the 2×2. Even though Facebook changed its value, I bet it’s still faster at building and higher quality than a lot of other companies. The same can be said for Slack. Except for Slack Threads. They definitely drifted into the bottom left on that one. I… really hate Slack Threads.

Whether you update your company values to reflect these spectrums is not the point of this post. The point is to be intentional about the tradeoffs you’re making, and revisit them over time to make sure they still make sense, like Zuckerberg did. You may find you’re not making a tradeoff at all; you’re just performing poorly on both axes, or you may find that the value you picked five years ago no longer matches the needs of your company.

Thanks to Brian Balfour for reading through an early draft of this and providing his feedback.

Currently listening to Flamagra by Flying Lotus.

The Problems With Martech, and Why Martech is Actually for Engineers

Since I spent some time in VC land and have a background in marketing, a lot of people ask me about martech, or technology built for the marketers. Are these good businesses? Which tools should they use/are on the rise?

In short, I hate martech, and think martech will decline as a category, and most martech businesses will not be very successful. I think there are a few reasons for this that are not well understood, but if you understand them, it can unlock some martech opportunities that are still quite large for entrepreneurs, and help marketers understand which technologies to bet on vs. bring in house. The main misunderstanding is that successful martech is actually for engineers, not marketers. Let’s talk about why that’s the case.

Martech is a Response to Engineering Constraints
A controversial opinion I have stated before is that the marketing function in technology companies is usually a response to engineering constraints. If you don’t have enough engineers to build a system to manage bidding for performance marketing, you hire a marketer. If you don’t have engineers that can work on SEO, you hire a marketer. If you can’t build a great email system, you hire a marketer. Most key marketing roles are manual tasks that can better be solved with engineering. The smartest marketers, realizing this, started automating a lot of their work through third party tools, and if they could, even better, first party tools. This is how martech exploded over the last decade. Marketers actually had important, if not critically under-weighted, responsibilities for the company. For example, I was in charge of getting new people to try ordering online at Grubhub, and to keep them coming back once they did. My team used a lot of martech tools to do that.

Engineering Constraints Are Being Laxed
While hiring engineers inside companies to solve these problems is still extremely competitive, engineering constraints are (slowly) being laxed across every technology company I meet. Startups and technology companies today have many more engineers working on more functions (due to improvements on engineering technology) than we had at Grubhub during similar stages of our company.

These engineering constraints being laxed means martech companies have to compete with the engineers at the company for the best way to solve a marketing problem. And besides there being more engineers in a company to work on these problems, engineers are now more likely to want to work on these problems or reject these tools as best practices. Growth teams have emerged to work on a lot of the traditional marketing problems marketing teams bought software for: email, SEO, landing page optimization, onboarding, etc.

Martech now finds itself in a more competitive environment since “build” in the “build or buy” equation is more likely than it used to be. Also, if engineers inside a company do decide to build instead of buy a solution, a lot of times what they build is more effective than what the martech provider can offer. This is not to say engineers inside tech companies are better than engineers inside martech companies; engineers inside tech companies simply have unfair advantages. Not only can engineers building the solution for their company build directly to the needs of their company instead of adapt some generic solution; they can also more easily integrate with the data needed for these tools to make the right decisions. It is notoriously difficult, for example, for many martech tools to integrate conversion data, and certainly much harder for lifetime value data. This is much more easily done with an in-house built tool.

Platforms Also Limit Martech’s Reach
Martech companies face the squeeze from the other side of the integration as well. Usually, martech companies integrate into some other system: advertising companies like Google and Facebook, adtech companies like exchanges and demand side platforms, email service providers and email clients, etc. What happened is these martech companies built value added features on top of a platform to deliver extra value to customers. What is happening now is those platforms are either integrating those best features themselves, so you don’t need the martech company for it anymore, or deleting the access that enables it, because the platform doesn’t actually want that level of transparency.

Where Can Martech Be Successful?
So these companies have the platforms stealing their features or cutting off the access that makes them possible on one side, and engineers at the companies of their clients building deeper integrations themselves. So, if most martech solutions have a disadvantage to competing with in-house engineering solutions, or the platforms starts competing with them, what type of martech tools have an advantage?

Option 1: Leverage Data Network Effects
One key example where martech thrives is when the external data becomes more important than the internal data. If a martech tool can be gathering data from multiple companies, and create a data network effect from this aggregation, thereby helping all companies improve in a way they could not on their own, they are very defensible. Sift Science is a great example of this. By being used as a fraud provider across thousands of companies, they have data any individual company won’t have in determining if a transaction is fraudulent or not.

Option 2: Manage Pain
Similarly, integrations with a bunch of key operators or vendors are very defensible in martech. Litmus is a classic example historically. Email providers have notoriously finicky rules around what renders in their systems and how, and they are not very transparent. Engineers and designers hate coding for email, and it’s hard for them to remember all the rules for all the different types of email clients. Litmus allowed you to preview what your emails looked like across all major clients to spot errors before you send the email, and generally became an all-encompassing email QA tool. No engineer internally wants to build that, and they will never be as good as Litmus at doing it because Litmus has been doing it for billions of emails, so it has seen many more cases, and has better integrations with email providers. Another example of removing engineering pain is Heap Analytics, which auto-tags events, removing one of the most painful parts of setting up a new analytics vendor.

Option 3: Leverage Cross Side Network Effects
A more modern example is the customer data platform companies Segment and mParticle. These companies integrate with hundreds of other companies marketers use for various purposes: web analytics, conversion tracking for performance marketing, crash reporting, et al. Integrating these companies saves engineers time because they integrate once, and any other solutions they need can now be enabled instantly. These integrations not only help marketing, but product, and engineering as well. These companies have created a cross side network effect between customers and other technology providers. Data platform companies are hard to rip out once you integrate because they are so integrated in all of your processes.

The Real Answer: Change the Target Customer
Okay, so all of these are great options, but they actually share one thing in common: they have really shifted the target customer to the engineer instead of the marketer. Sure, the marketer may be the person requesting the solution, but the solution is chosen because the engineers like it. Many things an engineer has to do are painful, and as much as engineers like to solve their own problems, if you show value to them, they will appreciate it. So I am very bullish on engtech companies masquerading as martech. Other examples of this besides the ones above are data visualization platforms like Mode and Periscope.

Bonus Option: Pick the Right Marketing Customer
One other strategy that is very successful for martech companies is to build targeted solutions for the types of companies where marketing is more central to the organization’s success. While marketing is ebbing in importance in most tech companies, one area it is thriving is in ecommerce companies, whose main playbooks are logistical on product delivery, and where brand + performance marketing drive all sales. The product is something delivered offline, so the product and engineering teams are more subservient to marketing than in other functions, and because the product is delivered offline, these teams usually have less engineers than other companies. Narvar is a great example for ecommerce tracking. Buffer is a great example for social media marketing. Canva is a great tool to help design creative for marketing campaigns and social media posts.

Martech is a very challenging space for an entrepreneur. If you are going to tackle it, there are distinct strategies like data network effects, pain management and maintenance, and cross side network effects that make it more possible to build a sustainable business. Approaching the right customers, either in role (engineering) or space (ecommerce) also make the road easier.  If you have any other tips on building a great martech business, feel free to leave them in the comments.

Currently listening to Slide by George Clanton.

Getting Smart About Growth Podcast with Andrew Chen

Andrew Chen recently wrote a blog post about how growth is getting harder. I invited Andrew to the Greymatter podcast to chat more about why growth is getting harder, and more importantly, what to do about it.

We talk about how viral growth is on the decline in consumer, but not in B2B, and how to leverage paid referrals effectively. We also walk through trends in paid acquisition, how to find your first channel of growth, and much more.

The iTunes link is here, and here is the Soundcloud link for email readers.

Why Focus Is Critical to Growing Your Startup, Until It Isn’t

When I was a teenager, I told my dad about a friend and his dad and how they had seven businesses. He immediately replied, “And none of them make money.” I thought it was an extremely arrogant thing to say at the time, but later, I realized it might be the smartest piece of advice he ever gave me.

When I joined Grubhub, I quickly noticed the founders were incredibly good at staying focused. They said we were building a product for online ordering for food delivery — and only delivery — not pickup, not delivery of other items, not catering, and that’s all we would do for a long time. I remember thinking, “but there’s so much we could do in [XYZ]!” I was wrong. By staying focused on one thing, we were able to execute technically and operationally extremely well and grow the business both very successfully and efficiently. When we added pickup functionality four years later, it proved not to be a very valuable addition, and hurt our conversion rate on delivery.

If you have product/market fit in a large market, you should be disincentivized to work on anything outside of securing that market for a very long time. There is so much value in securing the market that any work on building new value propositions and new markets is destructive to securing the market you have already validated.

There is an interesting switch in the mindset of a startup that needs to occur when a startup hits product/market fit. This group of people that found product/market fit by creating something new now have to realize they should not work on any new value propositions for years. They now need to work on honing the current product value or getting more people to experience that value. Founders can easily hide from the issues of a startup by working on what they’re good at, and by definition, they’re usually good at creating new products. So that tends to be a founder’s solution to all problems. But it’s frequently destructive.

If a product team can work on innovation, iteration, or growth, they need to quickly shift on which of those they prioritize based on key milestones and value to the business. In this scenario, it’s important to define what innovation, iteration, and growth mean. In this context:

  • Innovation is defined as creating new value for customers or opening up value to new customers. This is Google creating Gmail.
  • Iteration is improving on the value proposition you already provide. This can range from small things like better filters for search results at Grubhub to large initiatives like UberPool. In both cases, they improve on the value proposition the company is already working on (making it easier to find food in the case of Grubhub, and being the most reliable and cheapest way to get from A to B in the case of Uber).
  • Growth is defined as anything that attempts to connect more people to the existing value of the service, like increasing a product’s virality or reducing its friction points.

I have graphed the rollercoaster of what that looks like below around the key milestone of product/market fit.

Market Saturation
The time to think about expanding into creating new value propositions or new markets is when you feel the pressure of market saturation. Depending on the size of the market, this may happen quickly or slowly over time. For Grubhub, expansion into new markets made sense after the company went public and had signed up most of the restaurants that performed delivery in the U.S. The only way the company could continue to grow was to expand more into cities that did not have a lot of delivery restaurants by doing the delivery themselves.

All markets are eventually saturated, and that means all growth will slow unless you create new products or open up new markets. But most entrepreneurs move to doing this too early because it’s how they created the initial value in the company. Timing when to work on iteration and growth and when to work on innovation are very important decisions for founders, and getting it right is the key difference to maximizing value and massively under-performing.

Starting and Scaling Marketplaces Podcast

Brian Rothenberg, VP & GM at Eventbrite, and I discuss how to start and scale marketplaces. We discuss certain topics such as the chicken and egg problem, going horizontal vs. vertical at the beginning, and traditional and non-traditional growth tactics to grow marketplaces. You can check it out below or read the summary here.

The iTunes link is here, and here is the Soundcloud link for email readers.

You Are Not Your Customer

Startups are successful in the early days usually for one of two reasons. One is having a unique insight or pain point in the world that you want to solve (usually for yourself as the founder first), and assuming it is pain experienced by others. The other is to listen to customers, deliver value to those customers, and make sure they understand and appreciate the value you’re providing. The second way requires founders to hone specific skills in the early days of a startup — which can actually make it harder to scale out of the early stage, but pays off with sustainable growth in the long term.

The people that try your product early on see the potential of your product and are willing to forgive flaws — at least for a while. They have done an incredible amount of work to make the product work for them. By most definitions, they become “power users.” These power users are heavily engaged with your product, but they also deliver a ton of feedback on how the product could be better for themselves.

The early employees of your company tend to be very similar to your early customers. They (hopefully) use the product quite a bit, and joined the company because they understood the long term vision. These employees then start recommending and building products for themselves also, especially in consumer businesses. Everyone is excited to build these features because employees want them and existing customers want them, so the company builds them. The features get built, and there is no impact on growth of the business. Our partner Sarah Tavel talks about this in her lessons from scaling Pinterest.

Why is that a problem? Well, in an old Quora question someone asked, “What are some of the most important things you’ve learned in marketing?”, and my reply was “You are not your customer.” As a company employee, even if you look exactly like the early customer, and you built the product for people exactly like you, you have way too much domain knowledge to truly represent the long term customer. Your early users are also no longer the customer. Both employees and early users have have built up too much domain knowledge.

Your customer focus should always be on new or potential users, not early users. Early users will bias experiments, prompt you to build more and more niche features, and stunt growth. Power users can’t be much more engaged, so building more things for them doesn’t usually help the business. It does, however, make the product harder to understand for new customers. Sure, you have to do enough to keep these power users happy enough to stay, but the much more daunting and important task is to find new people to delight, or to figure out how to delight people who weren’t initially delighted by your product.

This post originally appeared on the Greylock blog.

Currently listening to Ambivert Tools Volume One by Lone.

The Death Spiral of Startup CMOs

I’ve met with a lot of CMO/VP Marketing types at startups. Generally speaking, they do not have a long shelf life. I was curious why so many startup CMOs leave the company after a short period of time, so I dug in a bit to figure out why. I found that it’s partially due to bad hiring practices for startup executives (which I have previously blogged about), but even more common was that big brand traditional marketers have a tough time “scaling down” into the scrappy, digital-first world of startups tactically.

The traditional marketing executive is more likely to be a brand marketer from a large company than an online marketing or growth person from a startup. These marketers have built careers deploying big budgets and leveraging a few channels that really matter to tell the brand story. The main one of course is still TV. TV is great for brand building, but startups cannot wait for multiple years of investment in brand advertising to start to pay off. They typically will run out of cash before they start seeing a return on the investment in TV. (This problem is particularly acute if you’re a startup that is live only in a few cities and gradually expanding across the country — i.e. most marketplaces.)

How does a marketing executive get a quicker read on effectiveness, especially if their startup doesn’t cover the entire country? One way I’ve seen marketers try to solve this problem quickly is to buy local TV brand advertising in a test market and compare to a control test market where they have not bought TV advertising. They measure if brand metrics improve in the paid market during a three month test. If brand metrics improve, it should be leading indicators for sales to improve.

On paper, this makes sense, but in practice, it is the first trigger of the CMO death spiral. The problem is twofold. First, the cost of local TV is 10x more expensive than national advertising. That premium is hard to make up. Second, TV brand advertising is generally not very effective and even harder to drive quick results. With a typical brand-based buy, ads will run at many different times during many different, popular shows. So even though many people will be watching and thus exposed to the brand, the viewers’ focus is on the show and not on a call to action.

In short, big brand marketing executives have used large budgets for a test and gained small bits of exposure for the company. That exposure usually doesn’t transit into brand lift or sales, and the founders quickly lose confidence in the CMO. From there, I’ve seen it is a matter of months before they either get fired or lose their budget, which will make them leave.

But its not all fire and brimstone! There are savvy ways for marketers with big brand backgrounds to be successful at startups. For one thing, start by testing national, direct response TV. This type of ad buy targets people who are watching TV because they are bored — not because they are super engaged with the show. In this scenario, ads run at off-peak times or on less popular networks and only cover a small percentage of the country. You get the data on the exact times and areas where the ads run. Then, you can watch for an immediate response in website/app traffic right after the ad, and track those users to see what they end up doing. Agencies that sell direct response typically offer data science services to measure the impact, and you can augment their reports with tools like Convertro or C3 Metrics that do it.

Grubhub and Seamless are both good on-demand startup case studies before they merged: Seamless bought national, direct response TV ads while the service only covered 20% of the U.S. population. Grubhub did it with only 40% coverage. Seamless then used all the website traffic data outside their coverage areas to determine where to launch next. At Grubhub, we saw a response immediately during some of these ads airing, and could actually calculate not just brand lift surveys, but CPAs due to transactions.

A broader lesson here is that traditional target marketing can be expensive as the people selling advertising have learned that traditional marketers will pay a premium for it. And while that math still works for a CMO of a CPG brand, it won’t typically work for a startup.

What is the the best way for a CMO to be successful and stick with your company for the long term? First, they need to find ways to reach the target market they want to reach in a cost effective way. (I go deeper into this topic on my post on remnant inventory.) Seamless reached an insane amount of people in New York with DRTV ads, so it didn’t matter that some people in Boise saw them, too. Secondly, CMOs need to work on other ways to add value to the business besides telling big brand stories. Depending on the business, that can include understanding customers better, building communities, performance marketing, or product driven growth.

Currently listening to Children of Alice by Children of Alice.

The Real Value of PR for Startups

Many startups get obsessed with press. Not just CEOs, but also employees, friends of employees, and investors. Press, like paid acquisition, can be a drug though. I’ll talk about some of the ways the startup ecosystem perceives press is bad, what it is actually good for, and some outliers.

Press Abuse
First, let’s talk about some of the abuse of press by startups in the past. Business insider has a great recap of some of the issues Evernote faced in the couple years before their CEO stepped down. I’ll highlight this quote in particular.

“There was a feeling that we were working on the wrong priorities,” a former employee said. “It was clear the motive was to just continually drum up press. They had no idea how to optimize and improve growth.”

From The inside story of how $1 billion Evernote went from Silicon Valley darling to deep trouble

Startups frequently correlate press with growth, and think that they need to create new stories to drive growth. Then they start changing their entire product roadmap to drive press instead of value to customers. Startups should not look for PR to drive growth. PR doesn’t usually drive growth. And when it does, it’s a bump, not an engine. In startups, you want to build growth engines.

This is arguably a better problem than the second way PR drives bad acting in the ecosystem: founders getting addicted to the attention of press. It feels great when there’s a picture of you in the Wall Street Journal and your mom sees it and your dad’s friends. And founders frequently want to create that feeling. It’s as if appearing successful is more important than being successful. This can be a dangerous pattern.

Another problem with press is that it helps competitors understand exactly what you’re doing. I’ve talked in the past of the advantage of being a silent killer and why seeking press attracts unneeded competitor attention. I won’t repeat that here.

What Press Is Good For
A common refrain I tell startups is that press is good for three things: investor interest, employee interest, and links for SEO. I’ll break those down a bit, and talk about why they matter. First, let’s talk about investors. Very few businesses make sense for venture capital, but when they do, they increasingly need larger amounts of it. The venture business has extreme cases of FOMO. One deal can make all the difference. So investors rely on a lot of signals, and the tech press is one important one they look at not only to find new business to research, but to also get comfort in their interest in certain businesses. When Grubhub was raising its Series C from Benchmark, we got written up about our iPhone app on Techcrunch. For Grubhub’s growth, it didn’t matter at all. But it looked great for our fundraising.

Likewise with investors, potential employees rely on press to hear about potential new places of employment and to feel comfortable they are making a good move. Recruiting outreach will have a lower conversion rate if the person has never heard of your company, or if the person’s network hasn’t heard of you when they ask around. This can be overcome, especially if you’re well connected or can tout amazing metrics privately (like WhatsApp), but my guess is WhatsApp always had a harder time recruiting than Snapchat.

Lastly, press is very helpful for SEO. SEO is about relevance and authority, and links from press are a great way to increase authority in the eyes of search engines. Not only can press drive a quantity of links, but the quality of links are probably the highest most startups will receive. So many people link to news publications that they have among the highest domain authority on the internet. Now, getting one of these links won’t make you rank #1, but it’s part of a healthy SEO strategy.

When Can Press Be an Engine of Growth?
Now that I’ve set an argument that press doesn’t usually drive growth directly, I want to talk about some outliers of when it does. Press can drive growth if a certain story about your startup is self-perpetuating. Then, the volume of articles written about you happens in such a regular cadence that readers eventually act on it. I have seen this happen in two major startups over the last ten years in Twitter and Uber. With Twitter, it received such a tremendous uptake from journalists that they kept writing stories about it. This drove their readers to try it, and it became a sustained vehicle for organic acquisition (unfortunately with a low activation rate, but that isn’t press’s fault, but the product). Uber’s growth via press was a little more sculpted. They were able to create a story about the business of Uber fighting against corrupt incumbents and governments that were preventing a better product from succeeding. It was almost a movement. For years this created a headline about Uber almost every week as they faced this resistance in almost every city in which they launched.

I want to highlight that these are anomalies, and it’s unlikely you will be able to create sustained growth directly from press in your company. But that doesn’t mean press is worthless. Just remember what it’s good for, and make it work for you for those interests.

Don’t Become a Victim of One Key Metric

The One Key Metric, North Star Metric, or One Metric That Matters has become standard operating procedure in startups as a way to manage a growing business. Pick a metric that correlates the most to success, and make sure it is an activity metric, not a vanity metric. In principle, this solves a lot of problems. It has people chasing problems that affect user engagement instead of top line metrics that look nice for the business. I have seen it abused multiple times though, and I’ll point to a few examples of how it can go wrong.

Let’s start with Pinterest. Pinterest is a complicated ecosystem. It involves content creators (the people who make the content we link to), content curators (the people who bring the content into Pinterest), and content consumers (the people who view and save that content). Similar to a marketplace, all of these have to work in concert to create a strong product. If no new content comes in, there are less new things to save or consume, leading to a less engaging experience. Pinterest has tried various times over the years to optimize this complex ecosystem using one key metric. At first, it was MAUs. Then it became clear that the company could optimize usage on the margin, instead of very engaged users. So, the company then thought about what metric really showed a person got value out of what Pinterest showed them. This led to the creation of a WARC, a weekly active repinner or clicker. A repin is a save of content already on Pinterest. A click is a clickthrough to the source of the content from Pinterest. Both indicate Pinterest showed you something interesting. A weekly event made it impossible to optimize for marginal activity.

There are two issues at play here. The first is the combination of two actions: a repin and a click. This creates what our head of product calls false rigor. You can do an experiment that increases WARCs that might actually trade off repins for clicks or vice versa and not even realize it because the combined metric increased. Take that to the extreme, and the algorithm optimizes clickbait images instead of really interesting content, and the metrics make it appear that engagement is increasing. It might be, but it is an empty calorie form that will affect engagement in a very negative way over the long term.

The second issue is how it ignores the supply side of the network entirely. No team wants to spend time on increasing unique content or surfacing new content more often when there is tried and true content that we know drives clicks and repins. This will cause content recycling and stale content for a service that wants to provide new ideas. Obviously, Pinterest doesn’t use WARCs anymore as its one key metric, but the search for one key metric at all for a complex ecosystem like Pinterest over-simplifies how the ecosystem works and prevents anyone from focusing on understanding the different elements of that ecosystem. You want the opposite to be true. You want everyone focused on understanding how different elements work together in this ecosystem. The one key metric can make you think that is not important.

Another example is Grubhub vs. Seamless. These were very similar businesses with different key metrics. Grubhub never subscribed entirely to the one key metric philosophy, so we always looked at quite a few metrics to analyze the health of the business. But if we were forced to boil it down to one, it would be revenue. Seamless used gross merchandise volume. On the surface, these two appear to be the same. If you break the metrics down though, you’ll notice one difference, and it had a profound impact on how the businesses ran.

One way to think of it is that revenue is a subset of GMV, therefore GMV is a better metric to focus on. Another way to think of it is the reverse. Revenue equals GMV multiplied by a commission rate for the marketplace. So, what did they do differently because of this change? Well, Seamless optimized for orders and order size, as that increased GMV. Grubhub optimized for orders, order size, and average commission rate. So, while Seamless would show restaurants in alphabetical order in their search results, Grubhub sorted restaurants by the average commission we made from their orders. Later on, Grubhub had the opportunity to test average commission of a restaurant along with its conversion rate, to maximize that an order would happen and maximize its commission for the business. When GrubHub and Seamless became one company, this was one of the first changes that was made to the Seamless model as it would drastically increase revenue for the business even though it didn’t affect GMV.

This is not to say that revenue is a great one key metric. It may be better than GMV, but it’s not a good one. Homejoy, a service for cleaners, optimized for revenue. Their team found it was easier to optimize for revenue by driving first time use instead of repeat engagement. As a result, their retention rates were terrible, and they eventually shut down.

Startups are complicated businesses. Fooling anyone at the company that only one metric matters oversimplifies what is important to work on, and can create tradeoffs that companies don’t realize they are making. Figure out the portfolio of metrics that matter for a business and track them all religiously. You will always have to make tradeoffs between metrics in business, but they should be done explicitly and not hide opportunities.

Currently listening to A Mineral Love by Bibio.