At Hustle Fund, we back both first time founders as well as repeat founders. One thing I’ve noticed is that almost every repeat, previously-successful-founder focuses on the same thing for their respective startups: customer acquisition. These founders not only think about customer acquisition first, but in many cases, they will even:
- Abandon a startup idea altogether if the customer acquisition strategy isn’t strong
- Pre-sell or generate leads well before building a product to try to validate demand
Some thoughts on customer acquisition from my own learnings over the years both as a startup operator and talking with a lot of startups:
1. Unit economics matter A LOT.
Unit economics are something I’ve found most entrepreneurs (and investors!) don’t think about at all. Forget about traction and hockey stick growth. It’s hard to get there without ideal unit economics. Very simply, your cost to acquire a customer needs to be lower than the value of that customer (lifetime value).
This is obvious. Diving in a bit more into some thoughts here:
a. Ad-based revenue streams generally have terrible unit economics.
A typical ad-based revenue stream on a media website is around $5 per 1000 eyeballs ($5m CPM and give or take $1-$20ish CPMs). In other words, if you can get 1000 people to come to your website consistently for under $5, then this business model works for you. This is incredibly hard to do, and most sites cannot do this at scale. As always, there are exceptions: if you build a viral consumer product (such as an Instagram) where people are just coming to your site or app in droves at no cost to you, then you’ve got a great business. If they are not, it’s very hard to use paid acquisition to generate that type of traffic for under $5.
As a result, second time founders very often shy away from ad-based consumer ideas, but when they do, they think about what viral mechanisms you can implement first and engineer the product around that mechanism. Marketing first. Product second. Here is a good case study on LinkedIn (scroll down to see how they grew). Second time founders focus on lucrative verticals that pay more per eyeball or focus on ad formats that pay more (such as email newsletter sponsorships).
Ads can also be cost-per-click or cost-per-action ads. Although you can make more money by running per-click or per-action ads on a per conversion basis, it’s also a lot harder to bring about these actions. In particular, one thing to consider if you’re trying to make money off affiliate ads is to think about how unique the product/service is in the ads you’re running. For example, if you are running affiliate ads for hotels, you might get 3-5% on a sale. So if someone books a hotel at, say, $100, then that means you might make $5 on that transaction. If this is a generic hotel, then there are likely other affiliates who are doing paid marketing to try to get users to their sites/apps to convert users as well. Moreover, the hotel itself may be running ads to drive traffic to their site/app, and for them, a conversion is worth far more than $5. You will likely get outspent on any paid marketing channel you may use to drive traffic to you at scale if there are other people trying to drive traffic to the same property.
Even if you are not scaling with ads, partnerships and SEO also cost money, and your competitors or even complementary companies are all spending money on partnerships and SEO in order to drive as much traffic as they can. One way to make an affiliate-ad-based revenue stream work is to have access to unique products that no one else online is trying to sell. This could mean partnering exclusively with someone who makes products offline (and who is not tech savvy to compete online with you).
Another way is to have unique promotion channels, but these must be scalable. Honey, for example, is a browser extension that is always in your browser and helps find coupons for you for any site you browse. This allows them to retain users for a long time and make some affiliate revenue by directing you to particular offers that they get paid for. There are some hardware companies, for example, that make money based on affiliate revenue. They sell their hardware at cost – say, a new refrigerator. When you buy food on a recurring basis, they make recurring revenue by your buying food through their affiliate channel. You will use your fridge for a decade or more, so the retention here is high.
There are clearly many companies making money on ads of some sort, so this is not to say that you cannot build a big company with ads. You definitely can, and there are many who do. Remember, the key insight is you need your revenue stream to be much more lucrative than the cost to acquire your customers who generate that revenue.
2. B2B startups have high margins. Sales cycles matter though.
Many serial entrepreneurs tend to gravitate towards building B2B startups. I can’t tell you how many founders I know whose first company was a consumer company and then built only B2B companies after that. B2B companies can have great unit economics. Business customers, depending on the problem, are less price sensitive than consumers.
HOWEVER, the length of a sales cycle is a strong consideration for most repeat successful founders. For repeat founders, this can actually work BOTH WAYS.
Longer sales cycles
On one hand, I know some really successful founders actually opt for a longer sales cycle. (I use “sales cycle” loosely; by this I mean the time it takes to get a product paid for, and so this involves both product development and time to get a check from a customer). Some successful founders would prefer to go after a REALLY lucrative revenue opportunity that has a “longer sales cycle” because they can capitalize their company long enough with their own money + friends’ money to gain the sale. In some sense, their moat is capital because most people will not be able to access enough capital (either by raising or by bootstrapping) to go after a similar opportunity. Examples of this include startups that are building a new airplane, car, rocketship, power plant, etc… Most first time founders cannot just start bootstrapping a new rocketship startup.
Shorter sales cycles
Sales cycle, as a consideration, also works the opposite way. Many repeat successful founders would also actually prefer to go after opportunities with a much shorter sales cycle. If we use Christoph Janz’ animal framework for building a big business to identify types of customers you can be going after, these founders won’t be hunting elephants, but they might go after rabbits or deer business customers.
Because these companies are often able to move a lot more quickly than elephants, founders can often pre-sell before a product is ready. Or at a minimum, generate a lot of leads before generating momentum and starting to validate a business opportunity with real people and real money. This pre-sales strategy, of course, can also be used for consumer businesses that sell things.
As a side note: many companies in our portfolio at Hustle Fund, regardless of what they’re building, have pre-sold their products before building anything.
3. Does your business have naturally short retention?
Repeat successful founders also think a lot about retention. Some ideas seem like a good ideas but actually are not because of the retention component (or lack of). Here is an example:
I used to run some wedding-related sites; there’s obviously a real need for products and services in the wedding space. Plus, engaged couples pay a lot for weddings! On the surface, this seems like a good space to be in, but the retention is terrible or non-existent. Once someone gets married, in many cases, this person won’t ever come back and generate revenue… at least not for a decade or so later (Although I did once have a customer who bought from me, then called off the wedding, and then a few months later came back to my site to buy more because she was now engaged to someone else. The vast majority of my customers were not in this camp). This is not to say that you shouldn’t do a wedding-related startup, but it’s important to think about how to retain a customer and convert him/her towards other things.
The Knot is a great example of a site in the wedding category that tries to retain people. The Knot would not consider themselves a “wedding company.” They would consider themselves a “lifestyle company” – they retain their users by moving their users to “The Nest” and later “The Bump” as you start settling down into married life and then having children. This allows them to make money on their users for a much longer timespan.
Retention applies to B2B companies as well. For example, there are a lot of startups who offer products/services to startups. When their customers outgrow them and become big companies, can they grow with them and offer products that make sense for larger companies? Hubspot is a good example of this. Initially, they focused on SMBs, but today, a lot of enterprise businesses use them. They still do partnerships with startup organizations/accelerators so that startups can start using their platform and grow up in the Hubspot ecosystem.
If you are starting a company around a person or a business’ stage of life, think about how you can retain your customers and users over time.
4. It’s nice when someone else pays for a customer.
This is a very rare customer acquisition situation, but in some cases, a company can jump on the opportunity where a consumer benefits but someone else pays on behalf of the consumer. This is nice because the consumer gets something for free and is still your user/customer. The customer acquisition is easy because this person doesn’t need to pay money. Rather, someone else is footing the bill and must do so. This is a fantastic customer acquisition situation.
This type of scenario often happens in weirdly regulated situations. In health, for example, almost all online pharma startups are in this category. A startup gets a consumer to sign up for service to get his/her medication for free. His/her insurance pays for it.
This type of inefficiency happens in other industries as well and is something that I personally look for. We’ve backed a couple of companies that fall into this category (they are not all in health). The customer acquisition is incredibly fast and high growth (i.e. easy to convert users when something is free to them and that something is awesome).
In summary, when I evaluate startups, a big initial criteria for me is evaluating how deeply the founders have thought about customer acquisition (and retention) and whether they are customer acquisition-centric founders. This does not mean the founders need to have marketing and sales backgrounds; in fact, most of our founders do not have this background. Thinking about the unit economics as a business owner BEFORE building your product is incredibly important regardless of your background.