Startup Accelerators have been around since 2005 when Y Combinator was born and since then we have seen literally thousands of them created across the world. But I believe the model is broken and that they have had their day. Sure, we will see a few new ones, particularly large corporate-backed ones, but we will also see lots silently close.
To understand why the model is dead you have to understand why it was born in the first place. The ability for a couple of smart people with laptops to create a business that could grow to be worth a billion dollars with very small amounts of capital has only been around for the last 10 years. Before that you needed lots of capital, big teams and years to develop a product and take it to market. The Internet changed that – we could now build, deploy and scale a web or mobile application for a few thousand dollars.
The first challenge that the Accelerator model solved was an injection of a small amount of capital into the startup, typically $20 – $30 thousand. This was money that founders often couldn’t lay their hands on, or required them hold a full-time job, restricting the time spent working on their startup. The injection of money brought them 100% focus on the startup, which meant they could do things much faster. They could also hire in the expertise they didn’t have. This capital injection was in the form of investment and typically took anywhere between 6-12% of the equity of the company. Accelerators were willing to take the high risk, providing capital to early stage startups when existing investors wouldn’t.
Accelerators provide a range of experts to support the startups they invest in. This support ranges from external volunteer mentors through to dedicated accelerator resource, available on tap. This is important because for the most part the startups joining accelerators have no previous experience of running a business, let alone the knowledge to scale one fast. I feel that the importance of this is often undermined, because it is difficult to quantify its value. In my experience this expert support is often the key driver for the progress of the startup – not the money.
Most accelerators last for 3 months, a marker laid down by Y Combinator when it ran its first programme in Boston during the summer college break. Everyone followed suit, presuming there was a good reason for the 3-month period – there wasn’t but it became the model none-the-less. Its seen as a short sharp intervention to accelerate the startup to the next round of funding.
What killed accelerators?
If accelerators solved a problem then what changed, when did they stop solving a problem? Its two-fold:
Firstly, accelerators changed – they stopped supporting people with ideas and started wanting more mature startups. Startups now need traction and probably even revenue to get on a top-tier accelerator programme. You will find that most startups now entering TechStars are already revenue generating; its not unheard of to have TechStars startups who already have $1million in revenue. That is a far cry from where it all began. Why did they make this change? Competition – as more and more accelerators entered the market they had to back winners to raise their profile and to keep the investors backing their programmes. You are more guaranteed to get winners not by starting at the beginning but by acting as a finishing school.
This change in criteria means that fewer startups fit the requirements of the accelerator, some are to early in their development, and some are too late. This increases the competition even further because, although accelerators are getting 1000+ applications, 80% are not suitable. This leaves accelerators fighting for the same small number of startups.
Secondly, the market matured which has had the following effect:
1- The accessibility of information for startups has grown exponentially – its all on the Internet and its free, so why go to an accelerator for it?
2- There is an accelerator in every major city so startups don’t need to re-locate half way across the world to get support and funding
3- Startup valuations have risen, making the average valuation by an accelerator look low for the best startups
4- Timing – many startups want to get cracking and don’t want to wait for an accelerators next round, so they either skip accelerators or go directly to one that is starting now.
5- Founders span a wider age group now. In the past it was more likely to be recent graduates but now we are seeing founders in their early 20’s through to those in their 50’s. These are less likely to re-locate because of commitments (mortgages, children, etc).
6- The availability of capital for early stage startups has significantly increased, particularly in the UK where tax incentives have played a key part. This capital is available for startups at a fairly early stage, but probably not as early as accelerators delivered when they first started.
What will happen?
For lots of accelerators they will die a slow painful death – they will find it harder to attract the quality of startups they need and the knock on effect will be worse results, making it difficult to find their next round of investors & startups. Slowly over time they will just find it impossible to run their next programme so they will silently slip away.
The top tier will increasingly morph into something that resembles a VC. YCombinator & SeedCamp have already made that transition by raising funds and supporting their startups through much more of the journey than just 3 months.
Some accelerators (StartupBootcamp) are trying to go for volume of startups in the hope that they will find a few winners across the total portfolio. Whilst that may work, the ratios will look poor and most analyses would suggest that this is the wrong model.
The rise of the corporates
We will see more and more corporates enter the market as late adopters. They don’t have the same requirement for economic return and therefore can have a wider criteria of acceptance.
The problem hasn’t gone away!
The problem that accelerators set out to resolve hasn’t gone away. Startups still need that really early investment to create an minimum viable product (MVP) now more than ever. Today we talk about bootstrapping a startup through to MVP and early revenue; in years gone by we would have been saying ‘apply to an accelerator’. Its no longer economically viable for an accelerator to operate in the super early space unless they are corporate or government-backed – this is a market failure.
Birmingham is in a bit of a craze about the High Speed 2 rail link which is going to be built between Birmingham and London – its great news for Birmingham, it brings jobs (40,000 est) and puts Birmingham 49mins from London. They are somewhat tongue in cheek referring to Birmingham as Zone 4 of the London underground. Beneath the eye-catching 49 minute journey times is the real benefit, which is that it will free up capacity on the local lines, meaning more trains and more reliable trains, both of which are a massive issue as anyone who commutes into Birmingham on a daily basis can testify to.
All that said, I am wondering if we are about to make a £22bn mistake. We are putting in technology that has been around for fifty years and is likely to be completely redundant in the next 20. One of the challenges of our railways has been that of legacy infrastructure, which has been in place since 1825, that we have had to maintain, upgrade and replace. Many countries (such as Japan) leap-frogged and put in infrastructure capable of running High speed trains (>200 km/h) from day one.
It can be likened to the mobile commerce in Africa?—?many African countries are leading the way because they leap-frogged the laying of cable & fibre and just built modern 3g & 4g mobile infrastructure. They now don’t need to deal with the legacy issues that the UK does with old slow copper in the ground which is very expensive to maintain and upgrade.
If there was a future-proof alternative to mass transport at speed, should we at least not consider it before committing to a £22bn project that is going to take 9 years to complete (likely much longer given that these things always overrun)? I suspect we are way to late for this but there are viable alternatives and I think history will show how stupid it was not to have considered it.
I am not talking about driverless buses, cars or flying drone taxis that are all going to be viable alternatives in the next 20–50 years. I am talking about Hyperloop.
Hyperloop is a conceptual high-speed transportation system originally put forward by entrepreneur Elon Musk, incorporating reduced-pressure tubes in which pressurised pods ride on an air cushion driven by linear induction motors and air compressors.
In May 2013, Musk likened the Hyperloop to a “cross between a Concorde and a railgun and an air hockey table,” while noting that it has no need for rails. He believes it could work either below or above ground.
Hyperloop operates by sending specially designed “pods” through a continuous steel tube maintained at a partial vacuum. Each capsule floats on a 0.5-to-1.3-millimetre (0.02 to 0.05 inch) layer of air provided under pressure to air-caster “skis”, similar to how pucks are suspended in an air hockey table, thus avoiding the use of maglev while still allowing for speeds that wheels cannot sustain.
Concept design of Hyperloop by Camilo Sanchez
Linear induction motors located along the tube would accelerate and decelerate the capsule to the appropriate speed for each section of the tube route. With rolling resistance eliminated and air resistance greatly reduced, the capsules are theorised to be able to glide for the bulk of the journey.
Hyperloop will travel at 760 mph (1,220 km/h) so as to maintain aerodynamic efficiency; the design proposes that passengers experience a maximum inertial acceleration of 0.5 g, about 2 or 3 times that of a commercial airliner on take-off and landing.
Is it far fetched or is it a viable option? Hyperloop Transport Technologies (HTT) are building an 8km test track in the Californian desert with the hope of running full tests by the end of 2016. They expect to have a passenger ready system by 2020, just 4 years away, which means we could hold HS2 to see if Hyperloop works and still build Hyperloop between Birmingham and London before HS2 is completed. Lets be honest, we all know that HS2 is not going to deliver on time, these things never do.
Birmingham to London 140miles
HS2 cost £22bn est
Hyperloop cost £5.1bn est
HS2 time 49 mins
Hyperloop time 14 mins
Hyperloop is cheaper and faster.
HTT have just signed (March 2016) an agreement with the government of Slovakia to build a Hyperloop, with possible links between Bratislava, Vienna and Budapest.
This is a forward thinking government that is building for the future, not for the past.
Email newsletters have been around since the internet began and in most cases they have been provided for free. However, increasingly people want to monetise their email content and there are a few way to do this.
Here are some technical services to help you start creating email subscriptions:
Ponyexpress.io – mixes stripe & mailchimp to create a solution $20 per month
A DIY solution using Zappier, Fancy Hands, Mailchimp & Paypal to keep the costs down
Campaignzee – uses stripe & mailchimp but costs you 10% commission on each subscription
Samuel Pierpont Langley was born 22nd Aug 1834 in Roxbury Massachusetts; he was an Astronomer in his early career. In 1887 he started to experiment with heavier-than-air models & gliders and by 1898, based on the success of his models, he received a grant of $70,000 from the War Department & Smithsonian to develop the first piloted plane. Langley wanted to be the first person to achieve powered manned flight, so with his handsome sum of $70k he set about hiring the best team money could buy – leading engineers, administrators and a star pilot, and they embarked on a number of experiments. They had the best engineers, they were well funded and they had powerful connections, but….
On October 7th 1903, Langley attempted his first manned flight. He was so confident this was going to work that he had assembled the worlds media on the banks of the Potomac River. He had built a houseboat and put it at anchor on the river. On its flat roof a catapult launch pad was fitted, from which they would launch the aircraft. The moment came and they held their breaths as they launched the plane from the catapult; it dived into the air and then promptly fell like a sack of cement into the water.
Meanwhile, in Dayton Ohio, two brothers who failed to graduate from school with Diplomas had launched a bicycle repair shop, and then a bit later a factory producing their own bikes. By the late 1800’s the brothers were interested in flight and had started some experiments using objects they could find from their bike factory.
On December 17th 1903, only nine days after Langley’s last unsuccessful attempt on the Potomac, the Wright brothers successfully launched their flyer from the dunes of Kitty Hawk, North Carolina. The longest flight lasted 59 seconds, traveled 852 feet, and ushered in the era of manned flight.
The Wright brothers conducted their own research and hired no administrators; they just had a rag tag bunch of people who had volunteered to help out. The Wright brothers launched their aircraft from a 60-foot track that cost $4 to construct – in total they spent just $2000, compared to Langley’s dream team and $70,000 funding.
This story goes to show that you don’t have to be a large corporate to innovate; in fact many large corporates find it difficult to innovate. That’s not because they don’t have amazing talent, they do, and they can afford to hire the best people. Its not because they don’t have amazing ideas, because they do. I think the main reason is fear, fear of change, fear of standing out, fear of compromising existing revenue streams.
Standing still is not an option
We know that standing still is not an option for any business; we know because history is littered with companies from every industry that were all-powerful one day and gone the next. The speed of that change is the thing that has altered, from decades to years, and it will not be long before we are measuring this in months.
The most innovative companies in the world today didn’t exist 50 years ago; most of them didn’t even exist 20 years ago. And next years most innovative company may not even be born yet.
Technology & the internet are allowing markets and sectors to be disrupted in quick time. I don’t believe there is a single industry that is exempt from this disruption. Only a few years ago people were saying that they will never disrupt the nuclear fusion industry or space travel, and yet we now have SpaceX, who have taken the cost of getting something into space from billions to 100’s of millions, and we have startups creating nuclear fusion in a shipping container.
Here are examples of just two companies who decided to stand still:
Kodak invented the digital camera. It didn’t commercialise this invention because it wanted to protect its film business. So when the smart phone came along, fitted with cameras, it was in trouble and made losses from 2007 until it went bankrupt in 2013. Like a phoenix from the ashes it made a profit in 2014, but a lot of its revenues have come from selling off its patent portfolio. This is the strategy of a company backed against the wall, not one that is innovating, and whether it survives long term is highly questionable.
Blockbusters had 60,000 employees and 9000 stores at its peak in 2004. It was bankrupt just 6 years later in 2010. Did the Board not see the innovation coming? Were they not aware of startups like LoveFilm, who were allowing you to order DVDs from a web site and have them delivered next day through the post? Or did they not see the Internet streaming revolution, like Netflix, marching down the tunnel towards them? I am certain they did – I can’t believe that they were unaware of big changes in their market, but they chose to do nothing. They probably thought that if they did something with this new world then it would affect their current revenue streams. What they probably didn’t realise is that by doing nothing, within 6 years they didn’t have a revenue stream to bastardise.
Here are some examples of companies that are leading innovation drives today:
Uber launched in 2011, is now worth an estimated $50bn and is operating in 58 Countries in just 4 years. Their innovation is such that it is disrupting the whole taxi car industry. The ability to order a cab from your phone and know which car, which driver and exactly when it will turn up is revolutionary in the UK. To then have the payment taken automatically so you don’t have to carry cash or card is a great feature. The final advantage is that you can rate your taxi driver – how nice they were, how tidy was the car was, etc. This is an innovation of service, using technology, and consumers are buying into it in their millions because it makes life easier and provides a better experience. Local cab companies are going out of business and black cab drivers are finding people stood at taxi ranks ordering Uber’s rather than getting into an expensive alternative.
Airb B&B is on target to become bigger than any of the hotel chains in terms of nightly room availability and yet it doesn’t own a single hotel or property.
Estate agents are being eaten by the likes of Right Move & our very own Purple Bricks. The pace of change in this market has been quite slow but I think we are going to see much faster change over the next few years.
Banking & payments are being eaten by Apple Pay & our own Droplet. The days of using credit cards are numbered as we see people move to mobile contactless payments.
I know from running my own businesses that when you see innovative ideas come into markets your immediate thoughts are that it will never work, or it won’t happen in my market, and yet it does. So how do we as small business owners tackle innovation? How do we become more innovative and therefore more competitive? I have 5 tips for innovation:
1. Iteration vs Innovation
When we think of innovation we think of those world-changing innovations like the invention of electricity or aeroplanes, but very few innovations are truly that. They are never the overnight success that is reported, rather they are the results of millions of little iterations that lead to a breakthrough innovation. So its not necessary to sit in a room with a whiteboard and think how to disrupt or game change the industry we are working in (although that might be fun). instead, we have to think about what leaps we could take and then what iterations we could add to make us more innovative. Those iterations may not be about the product; it could be the way you run the company. For example, Buffer, a social media web service which started in Birmingham have decided that transparency is going to be part of their culture and they publish the salaries of every person in the company on their website. As a result they get a lot of media attention which in turn brings them lots of customers.
Where iteration doesn’t work is iterating on your existing business. You have to decide on the leap then iterate on that rather than trying to eat the whole elephant at once. So if we take Buffer’s transparency culture as an innovation, you could start with just sharing the Senior Managers salaries and see how that goes then slowly iterate on your transparency by releasing more information.
2. The right people
Your current staff may not be the best people to help you with innovation as it may be seen as a threat – it equals change which is often perceived as a bad thing. You may need to look outside your organisation for people to help lead innovation change, or someone who is close but removed from the day to day operations of the business. The phrase ‘can’t see the wood for the trees’ is a good analogy for the difficulty to spot innovation opportunities when you are fire fighting with the day to day running of a business.
You may need to find an entrepreneur or innovator – someone who thinks differently – to lead the change within your business. Bringing in an outsider is certain to be an uncomfortable experience for lots of companies but it is a vital one.
3. Necessity is the mother of invention
We hear this phrase used a lot and its very true, many innovations are born out of adversity. The obvious ones are during times of war, when literally thousands of new inventions are created because its a matter of life or death. Thankfully for most businesses its not quite a life or death struggle, but it could easily be the difference between survival and bankruptcy. In order to give impetus to innovation in a business there has to be a sense of urgency, something you are driving towards. It could be legislation change, it could be a new competitor coming in or it could be an artificial self imposed deadline, for example when Kennedy said “I am going to put a man on the moon by the end of the decade” he was setting an artificial deadline that kicked off the space race. In our businesses we need to find that impetus for innovation otherwise it will not happen.
4. Create an innovation culture
It should be woven into the fabric of the business and be given a prominent place in job descriptions, procedures, and performance evaluations. Innovation should be defined to include incremental as well as revolutionary improvements.
Google famously had a thing called 20% time, where every employee in the business could have 20% of their time to work on anything they wanted – mini projects if you will. From these 20% projects Google Mail, Google News, Google chat, Google earth and many other products and services were created. Its one of the things that has made Google so innovative over the last 10 years.
3m have a process they call “run it up the flagpole” where they celebrate innovations. The Post-It-Note was created by a couple of employees that used their 15% time to generate the idea and champion it through the 3M business.
5. Embrace Failure
Innovative companies recognise that failure is an important step in the process of success. They understand that with each failure, the company moves one step closer to success. If you are trying things new then you will have failure. Its not a maybe, its a definitely, and you need to be ok with that. Its not the time for a witch hunt, or a blame game, its time for post match analysis, learn and try again.
Time for innovation
I truly believe that all businesses posses the talent to innovate and by harnessing innovation they can be built into international superstars. If you don’t innovate you will be eaten by an innovating competitor. Follow the 5 tips for innovation, take some risk and you will be amazed at what can be achieved.
I was listening to the HBR Idealist podcast where they interviewed Phil Libin of Evernote about new ways we will work. In the interview he revealed some interesting stats that I think is great insight for all startups who are developing multi platform aps (web, mobile, wearables).
Its probably fairly obvious to say the more mobile the device, the smaller the form the shorter the session time (time spent using the app), your unlikely to read a 50 page document on your Apple watch but you might glance at a txt message. What was interesting but not something I had really thought about was that as the device shrinks the session time goes down but the number of sessions goes up. So when you are designing for mobile or designing for a wearable you are really not designing for a smaller screen you are designing for less time. Phil Libin used the term designing snackable content which I think explains the user behaviour well. This means if you have a web app today you are deciding what elements are important for the experience on a wearable not how do we cram what we have into the small screen space.
Evernote figures show the difference between platform session times and session numbers and its very different. How do you build a product that is used 200 time a day for just 5 seconds per session, that’s a very different product to one that is used for 40 minutes once per day.
It’s certainly something I had not really thought about but it shows a lot more thought and therefore cost is going to be required when you are developing across platforms as diverse as desktop, mobile and wearables.
I changed the watch face to one with less animation and my battery life is now upto 3 days, I am guessing if I had zero animation on the watch face I could probably get 4 days battery life, still short of the 7 days advertised.
My new Pebble Time arrived in late May after ordering it via KickStarter sometime last year, I have to say I was quite excited to see what it could do. Well one month on what is it like compared to its predecessor which I had on my wrist for well over a year?
The new Pebbble Time is much sleaker and less plastic looking than its older sister and the strap is softer which make for a more comfortable fit. The most obvious change is the new colour screen which is nice but can be difficult to see in bright sunlight which was not a problem I had with the previous version.
I had read that the battery lasts up to 7 days so was looking forward to not having to charge it every 4 days, that extra few days meant I could charge it on a Sunday night ready for the week ahead. So with the same features on as my old Pebble I am getting just over 2 days of battery life which is about the half of the old Pebble, not happy about that. I can only imagine that the colour screen is doing the damage on the battery. I haven’t tried turning everything off to see if I can match the claimed 7 days battery life but to be honest if your turn everything off you may as well buy your self a cheap digital watch.
Well I have been a Pebble fan & supporter since day one and specifically decided to buy the Pebble Time rather than the Apple watch so did I make a mistake? Well I have not tried the Apple Watch so can’t really compare but this is certainly not a revolution and on the face of it looks to be behind Apple already. I think the future of wearable watches is certainly for apps to be able to run locally and have their own 3G/4G connections.
In summary its a nice upgrade but nothing life changing and given the cost of £179 this is going to get expensive very fast if they make small upgrades every couple of years and expect customers to always upgrade as they have done with mobile phones.
What is cost per acquisition?
A quick explainer for those not familiar with the term. Cost per acquisition is the cost of an activity that generates traffic to your website or downloads of your app. If I buy a banner advert (who buys banner adds these days?) for $60 and 3 people click on that banner add per day and visit my website then the cost per acquisition is $60/3 = $20. My Cost Per Acquisition (CPA) is therefore $20 per customer/user.
You may have heard people say “do things that don’t scale when starting out”, this means doing things that are resource intensive that you know you couldn’t scale because it wouldn’t make financial sense.
So why do non scaling stuff in the early days?
You are seeding your startup trying to build momentum so you can afford to do things that will not scale because you know or believe their will be a tipping point where momentum takes over and you no longer need to put as much effort in to meet your targets. Think of it like pushing a giant rock down a hill, getting it going requires huge effort probably by a group of people pushing with all they have but once it starts to roll it requires little effort to keep it going.
In the early days of testing an idea you are acquiring customers/users to test your hypothesis and iterating the product based on the feedback from those customers/users. Therefore you are also going to be doing things that don’t scale to acquire those customers/users (social media, blog posts, content marketing etc) and if you are looking for quick tests then you are almost certainly going to have to do some paid acquisition. Given that you are in testing hypothesis mode and you are in no way optimising your customer acquisition strategy there is no need to measure your cost per acquisition. Of course it does start to give you some valuable data and some ball park figures but its far from accurate and shouldn’t be used to base your financial model around.
It is very possible to go from $10 cost per acquisition down to $0.20 after you learn what works and optimise your strategy. So to base your financial model on $10 when it could end up at $0.20 is going to make it way out, of course if the financial model works at $10 per customer then its going to kick arse at $0.20.
Therefore while you are in the early stages don’t worry about the cost worry about which methods are effective, spend your time tracking which blog post and which tweets were more effective rather than the relative cost. By effective I mean activity which drove traffic to your website or to downloaded your app.
I sat down with the CEO of a tech startup who has a mobile product for large corporates and we got chatting about security startups. “No one cares about IT security, well accept the people who’s job it is to worry about it and those people who have just been effected by an incident (hacked) but that is a short term caring that fades quickly. So we are left with a small bunch of people around the world that actually care, but the vast majority don’t give a ****”. That was his opinion and i have to agree, security has always been a fear, uncertainty and doubt (FUD) sale, that has not changed in years.
So if you are thinking about launching a new product into the security market how do you deal with a niche market and an apathetic audience, I think the answer lies in not selling security you have to sell something else doesn’t matter how you brand it just don’t sell it as security. We have all been buying insurance and burglar alarms for years because we understand the consequences if it all goes wrong and how insurance and a burglar alarm may help, with IT security its very different. Most people don’t understand the cost of loosing data from them personally or a business, its difficult to quantify until it happens. Therefore the vast majority of security sales happen after an incident and not before.
Will security ever become a product people understand and want to buy whether that be a consumer or a business, I think yes and as the digital world evolves this day will come. Today most Microsoft Windows users now buy antivirus software because they understand the risk and so follows they will start to understand the bigger risks and buy services to mitigate these risk as well. The question is as alway when? I think consumers are at least 5-10 years behind enterprise and enterprises are not all there yet so we have a while to wait.
It’s true that the cost of starting a tech startup has plummeted over the last ten years; now all you need is a couple of talented people, internet access and a laptop or two. Once upon a time you would need servers, offices, expensive hosting and bandwidth, and lots of time to write bespoke code from scratch. In years gone by you would build the product with every feature you can imagine before you launched. Minimum viable product wasn’t even on the radar.
So now it’s easy right? Anyone can start the next big tech startup, no problem. Well I think this brave new world has created a new barrier and that barrier hits you a bit further into your startup journey.
Getting started is relatively easy and the number of new startups being created across the world shows this. We have millions more startups than we did this time ten years ago, particularly in the case of tech startups.
What’s the problem then?
You can get started, build a minimum viable product, test the idea with early beta testers in quick time. The biggest barrier facing startups today is acquiring customers. There is so much noise that getting your message (signal) through is becoming increasingly more difficult and expensive. If you are a Business to Consumer (B2C) startup, then you need a budget of hundreds of thousands to get any sensible market penetration. The days where £20k from an accelerator would get you there are well and truly over.
The world of startups has developed mechanisms to help with this new barrier and it all loosely comes under the heading of ‘growth hacking’. Growth hacking techniques help you acquire customers cost effectively. The problem with growth hacking is at the moment it’s very labour intensive and slow, compared to paid acquisition of customers. Time is often not a luxury a startup has, and in the words of Ben Franklin, “Time is money”. That’s not to say paid acquisition is not a great bootstrap technique – because it is – and in most cases it’s the only option a startup has for customer acquisition.
How best to tackle this problem then? I think the collective wisdom in the industry (particularly out of Silicon Valley) is that you should build an amazing product and concentrate on that; the users/customers will follow. Whilst I don’t disagree with that wisdom, I think it lacks a few stages of detail on the path to ‘just build a great product’.
Building a great product is only achieved in conjunction and with feedback from customers, it is never done in isolation. With a B2C product that means talking and listening to thousands of customers to help build your great product. I believe you should be fanatical about getting customer feedback and your first hire or co-founder should be an experienced growth hacker. The difference between someone with experience in growth hacking vs a few co-founders giving it a go is quite remarkable.
After founder divorce the biggest killer of startups is not being able to acquire enough customers at the right price. Therefore, when starting out, think about how you will solve the customer acquisition problem in as much detail as possible. Don’t just say, “We will growth hack it” – that lack of detail is a sure fire path to failure.
The question for lots of startups is whether to Pivot or Persevere on your journey towards product market fit. A pivot is a change in strategy and comes in many different flavours, it could be a technology pivot (web to mobile), it could be a market pivot or more likely its a business model pivot. You thought your users would pay for x but all the data says they will not so you need to try something completely different.
Persevere means continue to iterate the product making small changes based on customer feedback. The difficult question to answer is always are users not paying for the service because its not quite right and a few more iterations will fix that or are they not paying for it because they never will, it doesn’t solve a problem that’s painful enough for them to part with money.
Pivoting for the first time is a little like admitting defeat because you sold the business on your initial plan and research, now it turns out it wasn’t correct and you are admitting it by changing direction. In reality no amount of planning or research can predict or replace customer engagement, what you now have is live data to base decisions on.
I have recently spoken to two startups who have both pivoted and asked them what took them so long to figure it out (one took 12-months the other 24-months) and what data finally made them realise they needed to make the pivot.
In both cases they were tracking all the metrics you could think of so it wasn’t a lack of data or the wrong data it was simply knowing which data really mattered. So in both cases the acquired user figures were rising month on month at healthy rates. The issue was around retention, the retention figures were not good in either case, they had the classic leaky bucket, they were putting new users into the top of the bucket but they were leaking out the sides before generating any revenue. Both startups could see this was the issue and both interpreted that data as meaning they were missing a feature or some of the existing features needed improving, while this might be a reasonable assumption it can lead you into an iteration loop. An interaction loop is where you just keep iterating and you are moving a metric but very slightly each time so you are encouraged and think a bit more iteration will keep this moving up. This can lead to months of iteration and months of lost time when what you should have done is pivot. The difficult thing is still knowing if you need to iterate or pivot.
The answer is that at the point you have a retention issue you should talk to customers again, work out what they want, what they are using and why. Dig deeper with customers as this data is the most valuable, get them in your office, go sit next to them, get a very deep understanding of their needs.
To show you a worked example of this problem I sat down with Jeremy Walker, CEO of Meducation (https://www.meducation.net/) who has just pivoted after 12-months fighting the iteration loop. Here is his breakdown:
We have the following per month:
New users per month = 1000
Returning users = 2000 (from previous signups)
Total active users = 3000
But the devil is in the detail because if you break the monthly down into day/week/month you get this:
Daily active = 200
Weekly active = 500
Monthly active = 3000
Which gives you a 1/5/15 ratio. So although the monthly looks like a good figure it is skewed by the 1000 new users per month, you really need to look at the daily & weekly to get an accurate picture. The 200/500/3000 tells you that the product is not that sticky you don’t have regular returning users (of course it does depend on the product type to know if this is really a problem) but as a general rule if people are using it regularly (daily/weekly) they will pay for it and its solving a problem.
Jeremy suggests, If we’d had 200/300/400 or something similar, we’d have been on much more solid ground, even though our actual numbers would have been lower. Because then it would have just been a scaling problem where as 1/5/15 as a ratio means it’s a retention problem. I’d aim for 1/2/3 as my minimum successful ratio now.
As a startup your focus should be on retention and not user/customer growth, work with your customer to solve a problem and once you are doing that your product becomes sticky. Once sticky stick your foot on the gas peddle and go hell for leather on growth.