Winning strategies for achieving growth and scale
Having spent the last decade investing in seed stage companies at First Round Capital, I’ve seen the entire arc of company growth play out again and again. I’ve seen dozens of startups move into their growth phase and take on the unique and varied challenges of scaling. I’ve also seen many that never made it that far. While there are numerous paths to and through the growth and scaling phase, there are multiple strategies for survival that aren’t shared widely enough. When asked to contribute a chapter to this book, I thought one of the most helpful things I could do would be to share some of these observations about strategies that I’ve seen have an impact.
Customer happiness is the metric that matters most
Early in your company’s life, it’s all about product-market fit. According to Marc Andreessen, that means “you’re in a good market with a product that can satisfy that market.” That’s a solid definition, but I’ve also heard founders say, “I have a product- market fit problem on the market side.” Of course, that’s impossible. The market is always right whether you like it or not. In my experience, there’s a simple metric that’s more telling than this concept of “fit”—and that’s “happy customers.”
Yes, you’ll have to worry about customer acquisition costs and lifetime values, but you want to do everything you can to understand and maximize customer happiness to start. It’s a simple and powerful lens to view how people perceive your product and company. To get that information, you can start with three simple questions:
- Would your customers be upset if your product or service went away?
- Would they be willing to recommend you to other users?
- How often are people engaging with what you’ve built?
Other related questions you can add over time: Ask customers if they’d be willing to pay for your product if they haven’t already. And, would they be willing to talk to your investors? Having a good sense of these answers is an important sanity check for whether you’re ready to scale with more resources, processes, and capital.
These questions will also help you hone a crisp, clear definition of what a happy customer is for your company. Perhaps you track your net promoter score (NPS) or focus on just one metric to get a snapshot of how you’re doing. Using too many metrics can give you false precision in drawing big conclusions. At First Round, we keep tabs on how many of our existing founders refer us to new ones. So far in our current fund, over 50% of new investments were referred to us by executives at companies already in the portfolio, which for us is an important measure of customer happiness.
Engagement is another good one. If your product requires a login, how often are customers signing on? If email is a core part of your strategy, what are the open and click rates? If you’re selling an enterprise product, how fast does usage spread inside companies using it? Does it stop at one person? Are you getting repeat customers?
Simple analytics tools or short, low-lift surveys can help gather this data.
If your customers are lukewarm or ambivalent, then get back to the customer development cycle to discover what they really want and need. Consider picking a representative handful of customers and ask them to be on an advisory council to help you with development. People love having their voice heard—and it gets them more invested in your success. Don’t involve just your fans either. Have customers who are loudly or constantly complaining? Go see them in person. Make it clear you care enough and want to do better for them. That’s how you can get a handle on your happiness metric and closer to your early customers.
There's no such thing as self-service
This is a bit of an exaggeration, but not much for many “software as a service” companies. There’s a dream that enterprise founders tend to share: their product will be so straightforward and easy to use that their customers will be able to just sit down, log in, and immediately know how to use it. This doesn’t happen very often. Sure, they all want to offer a self-serve product because it’s cheaper and simpler, and they can sell it at a lower, more appealing price—and maybe that will be possible in the long run—but to get started, they need to be prepared to show customers how to use what they’ve built.
If this describes your company, you’re going to have to hire some people. And they’ll need to spend time with customers to get your product used the way it’s intended. Customers will say they want a self-service product too, but what they actually want is to get a lot for their money.
At First Round, I worked with a company called Invite Media, which was one of the first demand side platforms for online advertising. Their customers wanted the platform to be self-serve over time, but Invite also offered it as a managed service—and charged them more to do it. It worked, the company’s reputation in the industry grew, and Google acquired it in 2010.
When you’re introducing a new concept or breaking into a new market, it’s vital that your product works well. It’s okay to have your people run the software for your customers if it gets you there. Let it shape your hiring and pricing. You’re much more likely to have happy customers who get value from the product, and they’re much less likely to get frustrated and cancel their contracts.
Get smart about inorganic growth
One way to grow is organically on your own. Another is to grow via mergers and acquisitions. This is something most startups don’t think about much in their earlier stages—and it’s not surprising why. My friend Alan Patricof at Greycroft Partners says that private-to-private transactions are like “me trading my dogs for your cats,” and the biggest discussions tend to be around relative valuations. I recommend approaching these opportunities from a different angle.
If you’re thinking about any type of merger, the first thought experiment to run is: “Would you take it if it were free?” Too often, I’ve seen a whole bunch of discussion and argument about price and structure and who reports to whom before that simple question gets answered. If you can’t answer it, then you should stop right there. But if the answer is yes, then you can start thinking about strategic fit, strengths, and benefits the combination could have.
One good example of a private-to-private acquisition was our company Pinch Media merging with Flurry. These companies complemented each other really well, leading to their ultimate acquisition by Yahoo!. One was really good at pure analytics, the other at monetization and advertising. Their existing investors actually found new capital to put into the combined, re-energized entity. This type of symbiosis is not something people think about as often as they should. More companies should consider this type of inorganic growth before they need to merge or sell out of necessity.
Don't wait to think about strategic partnerships
I tell every company I work with to add a slide to their board deck called “STRATEGICS.” On it, I want to see a list of the five companies most likely to acquire the business over time. And I want to hear what they’ve done to further those relationships since the last board meeting. The goal is to build strong ties—the kind that can only be truly built over the long term. Start with creating awareness, get to know the people involved, and aim for familiarity with the most important strategic players in your industry.
The last thing you want is to find yourself in a position where you desperately need to get to someone inside a company for an investment or partnership or to sell. One of our past founders was looking for a buyer for his social media company. He eventually ended up selling to one of the largest Internet companies in the Valley but had eight identical conversations going with other companies at the same time. That’s what you want. You don’t want to be scrambling to figure out who runs corporate development at a likely buyer when you’re a month away from running out of cash.
Nurturing these relationships can have another positive byproduct—a commercial relationship. In fact, you should aim to focus conversations on the commercial side and let the strategic side be a natural evolution. When you start early, commercial relationships can expand into strategic investments. A few years back, I helped introduce one of our companies, Percolate, a rapidly growing marketing startup, to one of the biggest consumer goods companies in the world, Unilever. When there is an enormous player like that involved, it’s not unusual to see them try to throw their weight around to get the startup to do everything for nothing. They’ll often ask for big discounts or product customizations without doing much in return. It doesn’t have to go that way, and Unilever was a visionary partner that ultimately combined a commercial and strategic partnership with Percolate, its product got rolled out globally, and Unilever is still one of their largest customers. You do need to be aware that if a commercial relationship is structured incorrectly, it can send a negative signal to others in the market or have a dampening effect on future financings, but when it works you can have real strategic alignment.
What’s in it for the big company, you ask? They have a lot to gain in terms of optics and energy. Partnering with a startup gets them closer to the innovation and the hottest new developments and talent in their industry. They can learn to move faster and get more done with less. And it reserves their first place in line if and when the newer company wants to sell.
Create scarcity and exclusivity
Scarcity and exclusivity are your friends—and can be important tools, if not weapons, as a forcing function to get a deal done. Let’s say you’re looking to do a big deal with American Express. You know it’ll take everything you have—all your product, sales, and customer support bandwidth—to serve that one customer. There’s no way you could work with another partner even if you wanted to. Exclusivity can become an extremely handy tool. You can tell AmEx, “Hey, if you sign this deal by the end of the month at this level, we’ll commit that you’ll be our exclusive credit card partner for the next year.” Companies love these opportunities to block their competitors. In a way, you’re selling the sleeves off your vest, in that you couldn’t do multiple deals if you wanted to—but the value and commitment is still there.
There are several variations on this theme: give clients the chance to be the first to do something—like eBay offering 20th Century Fox to be the first customer to do a homepage takeover and get some major press out of it.
When Steve Jobs was launching Apple’s iAds product, he made it clear there would only be a limited number of launch partners. To get access, they’d have to pay millions and sign immediately. Similarly, Facebook promoted its new video product by saying each spot would have the same audience and value of a Super Bowl ad.
Creating scarcity and exclusivity arms you with desirable forcing function to get things done sooner than later.
Host a conference (and maybe start a movement)
I’ve seen several companies do an incredible job creating events that bring together customers, press, and even competitors to accelerate their brand and leadership in their industry. Of course there are the big ones like Dreamforce, Oracle World, and Oculus Connect. But the ones I’m talking about are put on by growing startups, like Mashery’s Business of APIs conference, Percolate’s Transition Conference, and Performline’s annual COMPLY event.
How can smaller companies throw events with this kind of impact? The key is that they don’t just make it their own conference. Yes, they host it, but they’re not afraid to bring in voices from across their industry. In doing so, they take things up a level. Their events don’t seem like sales pitches. They tackle the broader issues and challenges that impact everyone in their ecosystem. Done right, this can fill a room with the most important people in your business, especially if you’re the first one to bring this specific cross section of leaders together.
When Mashery launched its conference, APIs were not a major topic of conversation and definitely not from a business perspective. The company gave sales leaders a platform to talk about how APIs could be used strategically in a way that wasn’t purely technical for the first time. It became a signature experience to offer their customers and prospective partners. Think bigger and more broadly about the types of conversations people want to have about your business. If there isn’t already a venue, that’s your opportunity to reach out to the luminaries in your field. Asking people to keynote at your conference is very different from asking them to buy your software, and it’s much more likely to get you into a conversation and relationship with them.
Gamify your board of directors
Your board is one of your most powerful tools for achieving all of the above. Every board deck you make and every email update you send should include an “HTBCH” section—How the Board Can Help. Be specific. Ask directly for introductions to customers, help closing candidates, and referrals to investors. Be sure to thank the ones who do pitch in and say exactly how big of an impact they’ve made for you. That’s where gamification comes in. All of your investors, advisors, and board members want to be the most helpful and get recognized for it. If one is going above and beyond for you, seeing that will galvanize the others.
It’s not just about networking or contacts either. You also want to reward use of your product. It’ll win you more support and valuable feedback. I work with growth startup Hotel Tonight, and one of the first pages in their board deck is always a leaderboard showing how many nights each member has booked using the app. Believe me, it’s influenced my behavior and gets those competitive juices flowing.
Build a robust sales culture
Another powerful acronym is “HTDWW”—How the Deal Was Won. Several companies we’ve worked with at First Round send out regular emails chronicling and celebrating how they closed deals. The first time I saw this was at BazaarVoice, which ended up going public, largely on the strength of their sales culture. Not only does it reward high-performing employees, it is an invaluable knowledge share and a training tool that shows how deals can move from suspect to prospect to client. It also gives you a chance to recognize everyone who helped and showcase plans for expanding the business going forward.
I can’t stress enough how important it is to celebrate these types of wins. Too often, deeply technical founders don’t fully grasp the value of acknowledging sales triumphs. It’s a remarkably effective way to balance your company so that salespeople feel invested and not expendable. It doesn’t have to be a big display, just consistent. For example, one of the companies in our portfolio, Troops, has a tool that can celebrate every closed deal with a victorious GIF on Slack, and people love it. Other CEOs make sure to spend plenty of time with their sales people and going on sales calls. Their presence alone shows how valuable the team is to the company. Don’t let sales be an afterthought when it’s this easy to build a positive culture where people want to win for more than the money.
Entering the growth stage can be daunting. It’s surprising how different and distinct it can feel from the early days—like everything has sped up as the decisions and challenges get more layered and complex. But that doesn’t mean that the same scrappiness that made you successful in the first stage won’t be useful. If anything, I hope you take away from this that it’s the small actions, being thoughtful, starting early, and paying close attention to your relationships and messaging that can still go a long way, and maybe even get you to that next level up.
Chris Fralic, Partner, First Round Capital