Roadmap: Consumer Earthquakes
In this video series, Partner Kent Bennett details what makes a consumer earthquake startup and the keys to a viable business model and long-term defensibility.
We’ve been fortunate to have supported and witnessed first-hand how consumer companies like Pinterest, LinkedIn, Skype, Twitch, Yelp, and more launched and scaled products that truly changed how we all live, play and engage in the real and digital worlds.
But let us be clear. Building a successful consumer startup is really fricking hard.
Of the 10,000+ consumer companies founded every year only a handful (less than four each year in the US) will ultimately make a $1 billion splash. These consumer wins are so rare, fast-moving, and unpredictable that calling them “unicorns” doesn’t quite capture it. We call them “earthquakes”.
And there’s only one way to set off a consumer earthquake—to build a product with such a stunning value proposition that jaws literally drop…at least until they start spreading the word virally about the new seismic shift.
In this mini-series, Partner Kent Bennett explains the common pattern that unites the world’s most recognizable consumer brands from the past fifty years and breaks down the product characteristics and business model attributes that result in earth-shattering consumer businesses.
Every year, thousands of consumer businesses are founded but only a handful will truly succeed on a meaningful scale.
These consumer earthquakes grow orders of magnitude faster than a typical consumer product and often elicit intense fanaticism and customer love.
A jaw-dropping, competition-crushing product tends to perform on four dimensions:
- IT’S BETTER: The product has an undeniable functional advantage over any legacy alternative. If it’s even a debate, it’s not good enough to be an earthquake
- IT’S CHEAPER: The product seems to most consumers to be a bargain (or is often free!)
- IT’S EASIER: The product is easy to adopt and frictionless to use.
- IT’S LOVELIER: The product has a deeper resonance (e.g. mission, voice, point of view) that makes consumers proud to endorse it.
Delivering on all of the above almost always requires an earthquake to have an unfair advantage vs. a competitive approach. As an entrepreneur, if you can’t clearly articulate what that unfair advantage is, then it’s likely you don’t have it yet.
Churn is one of the most misunderstood numbers in venture capital.
The health of a consumer business is best seen in user retention after an initial “getting to know you” period.
A big chunk of customers will almost always drop off after a first product interaction. It’s more important to see whether usage becomes highly predictable and stable over time from returning customers (e.g. Do you see an asymptote in a retention curve showing ongoing predictable engagement from loyal customers?).
Over time you might even see loyal customers’ usage or purchases increase (e.g. the asymptote curves up a bit, or “smiles”).
If however, customer engagement continually declines, even after customers have gotten to know a product, it is almost impossible to build a large business.
In the early days, an influx of customers that drive the novelty of a product may mask a longer-term retention problem. Often startups only spot this “leaky bucket” after fad-driven growth dies down.
Episode 4: How to calculate Customer Lifetime Value (LTV) for consumer startups and what it really means
There is no standard way to calculate Lifetime Value (LTV), but that doesn’t stop everyone from talking about it! When investors ask for LTV, we think they’re really asking three different things.
- Does a business have real margins? It’s important to understand a consumer startup’s True Variable Profit (TVP), which can be found by taking revenue and subtracting the cost of goods sold (COGS), but also subtracting all other reasonably variable costs (asking yourself whether at 10x the volume you’re likely to need close to 10X spend on the expense item.) Credit card, shipping fees, warehousing, local team members, and more should be fully allocated to understand the true margins of a product or service.
- How do the dollars flow in and out of a business over time? Based on a cumulative profit curve, startups can make smarter decisions on how to invest dollars to grow. The best consumer startups are extremely disciplined and insist on rapid returns on marketing dollars invested..
- How big could this get, really? Although inherently flawed and impossible to truly calculate, even crude LTV measures can speak to the size of a particular consumer opportunity.
Consumer earthquake products turn their customers into their best marketers and advocates. This is the most important growth engine for a consumer startup
While some companies use paid advertising to fill their leaky bucket, consumer earthquakes focus on building a product that people love so much that their own customers drive organic growth through social media, word-of-mouth referrals.
Here is the most important growth test: Without any paid marketing, do you still grow? We call this unpaid growth rate the “resting growth rate” (RGR) and it’s the best long-term predictor of efficient growth.
RGR is typically stable as a % growth rate over time, and thus a positive RGR can drive compounding/exponential growth and help a company saturate a market without needing to burn insane amounts on paid marketing.
With a positive RGR, returns on paid marketing are much more efficient. Every customer acquired with paid marketing will turn around and drive more organic growth.
But beware of the paid marketing treadmill. If your consumer startup depends on paid marketing for growth, then as time goes on you’ll need to increase spend on paid marketing to keep growing and as you scale the marginal cost of acquisition will increase making the problem worse over time.
Consumer earthquakes don’t last forever. After the earthquake is through, a startup should have moats in place to defend against copycats and future earthquakes
There are four elements of defensibility that help consumer earthquake startups sustain for the long run.
- Network effects: Does your product get better as your user base scales? What features can you add to your product that would leverage the scale of your user base and make it difficult for other competitors to copy?
- Distribution: It’s old school, but distribution matters. You need to be everywhere and on every channel that your consumers could expect you to be. Even better if you’re on channels your competitors can’t access (e.g., front page of Google, exclusive retail partnerships, etc).
- Product and brand quality: Two of the most difficult moats of defensibility to uphold because they require constant innovation and vigilance, but sometimes it’s all there is!
As a founder of a consumer business, you’ve signed up for a lifelong battle against future invaders as they (and as a result you) race to constantly make the current version of your product obsolete.
If you’re an entrepreneur with a consumer earthquake on your hands, we’d love to hear from you. You can reach me via email at Kent@bvp.com.