If you build it, they might not come

A while back I wrote a piece for The Battery Charger, my firm’s quarterly newsletter, about our investment focus within the Internet and Digital Media sectors. As I noted in that article, we invest in both consumer-facing media properties and enabling technologies. In my meetings of late, I’ve noticed a disturbing trend amongst companies that belong to the first category. While almost all of the presenting media companies have slick demos and whiz-bang product features, very few of them have gone to the trouble of outlining their strategy for possibly the most important and difficult piece of building any successful media business: acquiring consumers.

 

As a VC, one of the fundamental questions I ask when meeting entrepreneurs is about the unit economics of their business. How much does it cost to acquire a consumer and what is the lifetime value of that consumer once you acquire him or her? Most thoughtful entrepreneurs have considered this issue and can offer an answer. However, when I ask what strategies they are using to acquire users at the cited costs, I’m surprised by how often the response I get is a simple statement about some combination of SEO, SEM and viral marketing. Without fail, the entrepreneurs cite examples of other products that have been built on largely word-of-mouth alone.

 

I would argue that the next level of detail is critical to a well-thought out strategy for user acquisition. What are the specific tools and techniques that will be used to improve and optimize your SEO and SEM results (e.g., avoid dynamic URLs, use descriptive page titles, etc.)? What other steps will you take to create awareness for your product or service (e.g., blogging, content syndication, email marketing, etc.)? Which aspects of your product encourage sharing and linking or generate network effects? Good investors or advisors will not only ask these questions but offer some tips and tactics or relevant contacts of their own. They’ll also look to understand the overall quality of the traffic that is being generated, seeking that coveted shift in traffic from paid sources and organic search to direct navigation. My rule of thumb is that 30% direct navigation indicates the beginnings of brand loyalty and that 50% is evidence of strong traffic quality.

 

Admittedly, tackling the problem of user acquisition is extremely challenging and complex. But that doesn’t mean that it should be ignored or given short shrift. There are many resources that can help identify best practices for various consumer acquisition strategies and tactics. For example, Google itself publishes some good SEO guidelines and other helpful hints can be found on SEOmoz.org and SEObook.com. However you identify the strategies or whatever the approaches you choose, the crucial thing to remember is that a good product typically isn’t good enough, especially if you’re competing against incumbent players. Investors are certainly aware of that fact and entrepreneurs should demonstrate that they are as well.

Scaling startups is more than technology

In the “Web 2.0” startups of today, innumerable technology choices are the topics of the day when talking about scaling the business. Countless hours and meetings are spent debating the virtues of Ruby on Rails, Amazon Web Services and server virtualization. A fortunate few companies find themselves in the enviable position of having to devote even more time and attention to even more critical, non-technical scaling challenges. When a startup delivers a product to market that fulfills a clear customer need, sometimes the biggest challenge can be addressing that demand with operational scale. In a market with so many startups and established companies competing for dollars, customers and talent, outstanding people and defined processes are vital to any business that is hoping to scale successfully. I encourage the teams that I work with that are lucky enough to be in this situation to answer two key questions to determine whether they are set up to scale effectively.

First, are there any single points of failure amongst your people and processes? A challenge with so many startups is that there a small handful of the oldest employees who have the majority of the business, technical and product knowledge contained within themselves. Pitching the product clearly, implementing customers or addressing bugs can all be bottlenecks to success if only a single expert can manage those tasks. Systematizing the dissemination of knowledge through various media, and importantly, through person-to-person guidance, is as important to scaling a business as documenting code is to scaling an engineering team. Further, even if several people have the ability to execute as needed, without clearly defined processes, those people may be ineffective, inefficient and demoralized. That is not to say that bureaucracy and rigid rules are needed to scale a business. On the contrary, a process that is both flexible and regularly modified based on business needs can aid in delivering consistently good performance.

Second, are you hiring and transferring knowledge to make yourself obsolete? The first step is being disciplined about hiring only the best people for your organization. That doesn’t mean that you are hiring the smartest, the most educated or the most accomplished people. Instead, the goal is to hire people who have the skills and the values needed to be successful within your organization. I hesitate to use a term as soft as “values”, but the importance of a shared culture, commitment and vision can’t be overemphasized during the development of a young company. If you are successful in making yourself obsolete, not only have you hired great people, you’ve supplied them with the tools, knowledge and processes needed to do their job (previously yours) consistently well. 

So is your organization built to scale? If you’re lucky, you’ll get to find out, because the opposite of scaling isn’t nearly as fun or rewarding!