I finally got around reading Dave McClure’s investment thesis and agree with almost all he says. There is one especially interesting paragraph when Dave talks about the “market stage” which caught my attention as it has been the topic of discussion with a few of my portfolio companies as of late:
“Next, you’d like to be able to improve the user experience and engagement / retention, get them to increase their love for the product. If you can do this well enough, your customers will become your marketing… at very low cost. Even if you can’t get to strong word-of-mouth or viral marketing, you can still hopefully reduce customer acquisition cost by getting incremental social amplification. Regardless, your job is to discover SOME kind of scalable distribution channel that seems like it COULD be optimized to a point where it’s cash-flow positive at some point in the future. Hopefully this doesn’t take more than $1-2M and 6-12 months to figure out. But most of this spend should be on MARKETING channels & testing, NOT on adding more features… you can pivot to discover new customer use cases, but DO NOT keep adding features. in fact, you might want to remove them (see KILL A FEATURE). If it looks like you’ve got scalable distribution, even if not quite break-even, then double-down”
Product-driven teams often forget about the market stage and continue to add features and develop the product. But as Dave points out this is not where you create value at this stage in the life of your company (you should be even thinking about killing features instead). The “market stage” is really about scaling the existing business and more specifically about 4 areas:
- Customer acquisition: how efficiently can you acquire customers at scale?
- Customer activation: how do you move people from signing up to your service to actually using it on a regular basis?
- Customer retention: how do you maximize the length of time that people use your service?
- Viral loop: how do you get them to spread the word about your service / product to their friends?
Optimizing all 4 areas will literally require hundreds (if not thousands) of a/b tests for ad campaigns, landing pages, process flow, email copy, etc. and will take some significant attention to detail and metrics. But this is the only way how to scale an online business and entrepreneurs that don’t take this seriously will not succeed.
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- MoneyBall for Startups: Invest BEFORE Product/Market Fit, Double-Down AFTER. (500hats.typepad.com)