7 Reasons high growth startups stop growing

If you’re an entrepreneur who’s built a startup that consistently scales it’s userbase, you deserve a hearty congratulations.  It’s hard enough to build a startup, and that much more challenging to build one that seems to be growing at a steady clip.  You’re part of a small group of founders who have actually executed on building a working growth engine.  You’ve probably growth hacked your way to a viral factor great than one, or maybe your lifetime value per customer is greater than your cost of customer acquisition.  Is it time to break out the champagne and start brainstorming ticker symbol ideas?  Not so fast.  Many seemingly working growth engines are unsustainable, so remain paranoid.  Here are a few reasons growth engines can sputter:

1. Virality erodes:

Some products are ridiculously viral for some period of time.  They manage to generate invites to a huge number of users on the platform on which they are built (e.g. Facebook).  Then response to invites decreases as they run out of new users who will fall for their viral tricks.  For example, at the end of 2007 there was a Facebook app class at Stanford in which multiple students built apps that reached millions within a couple months.  Then virality decreased and with low retention, usage quickly plunged.  See Andrew Chen’s great article for more on this topic.

2. The platform owner makes changes:

Building on existing platforms can get you access to many users but also leaves you vulnerable to changes the platform owner might make.  Facebook has historically changed policies in ways that have deeply impacted growth for many developers.  Likewise, If Apple changes their app ranking algorithm or Google changes their search algorithm your growth can go down the tubes.

3. The platform grows competitive:  

Even if you have a great product on a stable platform, you aren’t necessarily safe.  If you are early to a fast growing platform, you may enjoy tremendous growth until everyone else finds out that it is the place to be.  Many developers who were early to iOS reaped the benefits of the first mover advantage until the platform became competitive.

4. Your platform shrinks: 

Let’s say you built on top of a platform like MySpace.  It would have been pretty hard to grow the last few years. ‘Nuff said about that one.
5. You saturate advertising markets 
To illustrate, let’s say that up to a certain monthly spend, your lifetime value (LTV) per user is 3X your customer acquisition cost (CAC). Then you increase you spend and realize you can only drive a 2X return.  As you increase spend, you realize that your CAC is quickly approaching your LTV and you can no longer invest more in advertising without threatening the solvency of your business.  This dynamic may be driven by a number of factors: a limited number of highly profitable target customers, competing firms within your industry introducing better products, or even competition from other types of advertisers vying for your users.   Either way, your growth will come to a screeching halt if your LTV/CAC ratio degrades because you won’t be spitting off cash to promote your product and increase your userbase.
6. Scaling difficulties lead to poor performance  
If your site performance takes a turn for the worse, sustainable growth will prove fleeting.  Friendster is a good example. At least the knowledge to keep fast-growing social sites stable is much more widely accessible now than in the days Friendster was a rocketship.  Still, this is an area to watch like a hawk.
7. Not enough people like your product:
This one relates some of the others, and speaks to the holy grail within entrepreneurship.  To grow for the long haul, you need to achieve product-market fit for a massive market. If not enough people like your product, it could mean your product isn’t good enough to appeal to people beyond some segment of early adopters. Or maybe something much better comes along. Alternatively, it could mean that your product is great, but is only really suitable for a small to medium sized market that you have already saturated.   In any case, your growth engine will hit a ceiling.
What can you do to keep your userbase growing?  It certainly depends on your company, but a good place to start is to be perfectly honest with yourself as to whether you are at risk for falling into one or more of the seven categories above.

Six responsibilities of consumer internet founders

1. Assemble a team of makers in the early days
I recently ran across a consumer internet startup with no traction, one part-time developer, and five business development people.  Early stage consumer startups typically need teams comprised of people who can make stuff.  This means a team should be mostly developers, a designer and someone managing product.  The product person can be a founder or a focused product manager.  The reason why the early stage team should be focused on makers is that the number one goal in the early days is to create something amazing that customers will be excited to use.  This usually requires frequent iteration that can only be done by developers and designers.  Plus, with the rise of potential for growth hacks, even scaling usage of consumer products often requires engineering versus traditional marketing techniques.
2. Empower employees
Early on in my recent startup’s development, I was very concerned about efficiently utilizing my startup’s engineering resources.  I felt that we had to be extremely focused and could not afford to spend time on projects that were not part of my plan.  Over time I learned that my goal should never have been to have people simply execute on my list of projects, but to create a team of entrepreneurs, all motivated to bring forth their full potential to make our company successful.  Over time, we transitioned to cross-functional teams, each one focused on a key strategic area.   Each team collaborates to generate a plan that includes the metrics they will use to measure success, the goals they intend to achieve during the quarter, as well as the key initiatives to reach those goals.  Every member of the team participates, no matter the level of experience.  The result is a more autonomous team that is happier, more entrepreneurial, and comes up with better ideas to propel us forward.
3. Interact with customers
I strongly believe that this is the founder’s or CEO’s role as much as anyone’s.  This is obviously the case if the founder serves as the initial product manager.  Even in startups with community managers, customer service agents, product managers, UX designers and more, it is critical for the founder to deeply understand customer needs.  Over the years, I used many methods for understanding customers: approaching random people in coffee shops, users tests in our office, surveys like Foresee, or forums like Uservoice.  I also handled all customer service for the first eight months after our launch.  It’s great if many early employees are involved, but the founder should not delegate customer interaction away from him/herself.
4. Create the right communication structures
When my company was small, we had a daily standup meeting where each member of the team would explain for one minute about what they accomplished yesterday and one minute about what they were doing today. We operated in a semi-agile way, and individuals would place post-it notes on a board to indicate whether a task was upcoming, in process or complete. Over time, we supplemented the post-it notes with project management solutions including Trac and now Jira.  As the team grew, we starting having multiple standup meetings.  Eventually we were having six independent meetings, and so we added a weekly lunchtime meeting in which I would make general announcements and each group would give a brief update on their week.  This update was usually a reflection on what the team had learned in the last week and what they were working on.  We tried to avoid having very many meetings, but at least a few were necessary to keep the  company coordinated and motivated.
5. Establish a rhythm of rapid iteration
A startup must move quickly to validate assumptions about how it will create value.  And it only has as much time as it has cash. Of course, working hard is part of moving fast.  But there’s more to it than that.  In order to learn quickly, startups should iterate often.  There’s no better way to run of time than by working on a product for 6-12 months and then releasing something no one wants to use. Although it was challenging at first, we ultimately made it to a stage where we were releasing code on a daily basis.  Every feature we released was AB tested, and within a week, we normally had enough data to understand whether to keep or kill a particular section of code.  The entire company had access to the AB testing data and everyone was involved in this rhythm or progress.
6. Take care of yourself
Eat, sleep, exercise, and find time to relax.  For many founders, this is often the hardest responsibility to fulfill!

Hacker Culture: The Key To Future Prosperity?

Note: This post originally appeared on Techcrunch.

One of the most exciting trends of the early 21st century has been the explosion of hacker culture around the world. By hackers, I don’t mean people who pose security threats to computer networks. I’m referring simply to people who use technology to create useful products. For a number of reasons, the next few decades will see more hackers added to the global population than at any time in history. Because of their skills, hackers are uniquely positioned to become entrepreneurs and start companies. While not all hackers want to become entrepreneurs, those who do need much greater access to training and capital in most places around the world. If we can streamline the path from hacker to entrepreneur, the world can unlock immense innovation and prosperity.

Just a few short years ago, we would have been amazed by any story in which a small team of developers created a service rapidly adopted by millions of users worldwide. Today, we have what seems like a multitude of examples to point to: Facebook, Skype, Dropbox, and many more. The truth is, we haven’t seen anything yet. The striking thing is no longer the existence of such successful hackers — it’s the fact that the sheer number of hackers is expanding so rapidly.

It is becoming less expensive to create web-based services due to the cloud and prevalence of open source technologies. Social media allows well-liked services to spread quickly, and inspires new innovators to jump into the game. As the global middle class grows, increasingly large numbers of engineers are being trained. China alone graduates 600,000 engineers per year. Plus, free educational resources like Codeacademy and Kahn Academy abound for people to learn new technologies.

While hackers can make useful products, in many cases they need mentorship and capital to turn their early progress into massively successful, globally-distributed services. The venture capital industry provides much of the capital, but is mostly structured to leverage local networks of trusted relationships. Venture activity skews heavily toward Northern California and a handful of major cities around the world. Yet, over time, it is becoming more likely that hackers with enormous potential will spring up outside of the few major venture hubs. Why shouldn’t a bright young hacker in Ankara, Turkey have just as much chance to become an entrepreneur as one in Palo Alto, Calif.?

You would think the Internet was designed to solve such problems. After all, why not use the online dating model to simply match hackers with VCs and mentors? The solution isn’t as simple as that. Someone needs to identify and vet the best hackers. Plus, these talented developers and designers often benefit from minimal financial support and experienced in-person mentorship to launch startups that VCs think are ready for further capital. By providing these supporting services, accelerators like Y Combinator and Techstars, and educational organizations like Founder Institute, are at the forefront of clearing the path for hackers to become entrepreneurs.

While progress is being made, there is more work to be done, especially as brilliant hackers start to pop up with increasing frequency in areas across the globe that current accelerators have not yet reached. Now, I’m not necessarily saying that every city on earth should have an accelerator, or that VCs from Silicon Valley should spend most of their time running all over the world.

However, I am advocating for governments in every country to recognize that the health of their economies will be increasingly dependent on whether there is a decently paved path for hackers to start companies. Leaders in both the public and private sectors should be asking questions such as: Are there excellent programs to train potential entrepreneurs and angel investors in my country? Do my country’s most talented hackers have a realistic chance to attend a relatively local, high quality accelerator? Is it easy to incorporate and invest in businesses? Is there reliable Internet access in my country?

Nations should consider hackers to be a precious resource. The amount of innovation and global prosperity in the 21st Century will be directly proportional to how well we nurture this resource. What do you think is the best solution to ensure that hackers everywhere have the opportunity to become successful entrepreneurs?

Ranking Countries by Investment Attractiveness

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Ranking Countries by Investment Attractiveness

Several researchers at European business schools have put together a very interesting tool that ranks countries by their attractiveness for VC/PE investments. It is very descriptively called “The Global Venture Capital and Private Equity Country Attractiveness Index.” The tool makes it very easy to visualize investment attractiveness on a worldwide map and then click through for more information on particular regions.

The study takes into account many key factors that impact investment performance and risk: “economic activity; size and liquidity of capital markets; taxation; investor protection and corporate governance; the human and social environment, and entrepreneurial culture and opportunities.”

I think it would be fascinating to create an adjusted report that specifically focuses on the likelihood of successful early stage tech entrepreneurship. It might weight specific factors more heavily such as presence of universities with top computer science programs, number of developers in a population, and presence of accelerators and other forms of entrepreneurship education.

Nonetheless, the current tool is quite useful so check it out. Thanks to Alexander Groh, Heinrich Liechtenstein, Karsten Lieser, and everyone else who participated in this project!

Should Governments Promote Entrepreneurship?

As an entrepreneur, I once thought that any and all efforts to promote my craft should be supported.  Of course, the real answer to the question in the title is a lot more nuanced.  Harvard Professor Josh Lerner wrote a great book on the subject called Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed – and What to Do about It.

Professor Lerner analyzes the underlying assumptions of those who believe that governments should be involved:

  1. Innovation promotes economic growth (economics didn’t always believe this but now most do)
  2. Entrepreneurship and venture capital support innovation (there’s lots of evidence to support this)
  3. Governments can be effective in promoting entrepreneurship (a tough one, which Professor Lerner spends much of the book exploring)

A main takeaway is that government intervention can play a critical role in promoting entrepreneurship especially when the startup ecosystem is young.  The government actually played a key part in catapulting Silicon Valley  to the center of the tech startup universe during its early days.  However, many government-run programs are poorly run, which at best wastes taxpayer money and at worst hinders development of a healthy entrepreneurial ecosystem.  Success of public sector programs depends on paying attention to the history of other efforts and avoiding the major pitfalls.  

Today I happen to be writing from the 160 Varick Street Incubator, partially funded by the government of New York City.  Hopefully those who designed this program took into account Professor Lerner’s advice.  Any government-sponsored programs around entrepreneurship would be wise to consider his analysis.  Should Governments Promote Entrepreneurship?  In many cases, yes!  But they need to pay attention to the details.  Execution matters here as much as in any startup. 

Accelerate through the challenges

Many of my high school cross country races were held at Holmdel Park in new Jersey. The course was notorious for a huge hill about two thirds of the way through every 5km race. Almost everyone would slow down and many would walk as they struggled to complete the race. The pain was greatest at this point in the race, and everyone else was taking it easy. Our coach’s advice was to do the opposite. He told us to accelerate up the hill! Those that avoided the natural tendency to slow down during the tough parts were more likely to pass competitors, more likely to remain energized for the rest of the race, and more likely to win.

This lesson applies to entrepreneurship too. Like a cross country race, entrepreneurship is full of major obstacles: key employees leave, you don’t get the funding you wanted, a major bug causes downtime, and a thousand more.
Of course, these events happen in big companies too, but when it is your baby and you are racing against time to reach your next milestone, the emotional impact can be huge. You even start to become jealous of your friends who work 9-5 in giant corporations! Especially when you have that particular thought, it’s time to realize that it’s time to accelerate up the hill. This is exactly the time you need to keep fighting and remember that you owe it to yourself to make it to the next challenge.

Entrepreneurship is a rollercoaster of highs and lows. Celebrating the highs comes naturally to most, but it takes discipline and determination to accelerate through the low points. Those that remain disciplined in tough times are more likely to win the race, whether that means having a successful exit, or having the ability to look back and say you did everything possible to make the company successful.