Why distribution is the #1 reason for startup success (Part 1)
As the saying goes, the tech graveyard is riddled with great startup products. Yes, some were terrible ideas in the first place, but I'd argue that reason number 1 for startup failure is a lack of distribution. Tech founders and VCs tend to focus too much on product vs. distribution. It's simple. If you can't get your awesome product in front of the right users, you don't exist...
While it is a natural instinct to build a product first and, then, to figure out distribution, we need to figure out product and distribution together. In the next two posts, we discuss the why and look at some consumer companies that did so successfully.
If you have ever fundraised, I bet somebody asked you this question: 'So, what's your organic growth?' Why does every bloody VC ask you this same question?
As I explain in this post on what VCs are looking for at each funding stage, VCs want to see if you can scale your business efficiently at the Series A stage. Marketing dollars are just not enough. Especially at the early stage when you don't have enough of them. The digital world has become a very noisy place (and not only for D2C brands...). So we need to find efficient ways to stand out.
3 Main Distribution Hacks
There are three main distribution hacks to do drive the growth of a consumer product early on. Depending on your product, you can use one or a combination of them. We will have a look at each of them over the next blog posts.
But, before we talk about them, let's talk about marketing talent. Finding great consumer tech marketers is tough, especially in Europe. So, make this a priority from day one on. Your great product is just a pre-requisite to be in the game. But, marketing capabilities are the differentiator that will make you succeed. We have seen this in so many of our consumer companies. As Reed Hoffman puts it:
It is their mission to get your product out there: Set up a go-to-market strategy, manage performance marketing, test acquisition channels early on, and find your distribution hacks...
1) Leverage Existing Networks
The first distribution hack is to leverage existing platforms to scale. Here some examples. There are many more.
Let's take for example Zynga. They leveraged the Facebook platform. The distribution power of this pervasive platform proved a remarkable vehicle for many companies, particularly gaming companies such as Zynga. Founded in 2007, Zynga, which was particularly adept at surfing the Facebook wave, catapulted to $1 billion in revenue in its sixth year of existence! Back then, Facebook was still new to most marketers, and decent acquisition budgets allowed social games to spread through players’ personal networks quickly.
Paypal found product-market fit with the help of eBay. After many tests by the marketing team, they finally spotted the customer segment that was desperate to use their product. They dropped everything else and went all in. As David recalls: 'In November 1999, our customer service rep forwarded me an email from an eBay power seller. The eBay seller had turned the PayPal logo into a nice-looking button for her auctions and asked for our permission to use it. We went to the eBay website and searched for ‘paypal’. Hundreds of auctions appeared in the search results because PayPal was mentioned in the item description as a possible method of payment. Our minds were blown! The truth is that we initially thought “emailing money” was a terrific product idea, but we had no idea who would actually use it or what the market would be. A colleague had come up with PayPal’s now-famous $10 signup and referral bonuses to encourage the product to spread. But without a clear picture of the ideal user, we didn’t know who to target, and adoption had been tepid.' Fueled by the powerful incentive of the referral bonus, the PayPal spread like wildfire in the tight-knit eBay community...
Linkedin built its distribution mechanism on top of the email platform. The first key challenge was to get people to invite other people to populate the platform. So, they tested a bunch of invitation features. Every time a new user got onboarded, they would connect their email contact list. Then they asked them if they would like to invite other new users by mail and send an invite to the people from the contact lists. They would also notify you if one of your contacts joined in the future.
Pinduoduo leveraged clever growth tricks on Tencent's emerging distribution channel WeChat (often called the Facebook of China) and its in-app digital wallet to acquire hundreds of millions of overlooked customers for practically free. China’s fresh fruit market was growing fast in 2015. PDD's initial model consisted of cutting out the middlemen by buying fruit in bulk from farmers and selling it directly to consumers on mobile. The business grew entirely through group chats on WeChat. In 2015, they spent a few hundred US dollars to run an ad. They had more than a thousand employees, relatives, and friends of the company share the post. By May 1st, they’d fulfilled a total of 5k orders. Daily order volume surpassed 10k soon after. They paid an average of $0.30 cents for each of these earliest orders...
Spotify leveraged Facebook in the US shortly after the US launch mid 2011. 'The tipping point for them was Facebook’s f8 developer’s conference where the social network announced a new partnership with Spotify to be the “default“ music provider. This allowed Spotify to publish listening, reading, and viewing activity to users' timelines.'
Medium leveraged the Twitter platform. First, they onboarded influential bloggers. Then they built a solid integration with Twitter helping Medium writers to auto-publish on the Twitter platform, which helped Medium leverage Twitter’s traffic big time.
Looking at these examples and others, you realize that existing networks lose their growth hacking potential after some time. Email as a distribution hack worked from 2001 to maybe about 2007. Facebook probably from 2007 to 2012. But there are many other and new platforms out there for you to test. Zoom, TikTok, Alexa, etc. I invite you to think out of the box. You just need to find the right ones for your users.
Finally, while leveraging a platform is a fantastic distribution hack for the early days of a product launch or a market expansion, there is potential risk attached to it. Platform dependency. The businesses that do well diversify and build large stand-alone businesses off the original platform (e.g. Veeva, AirBnB), but some never build a large enough independent business (e.g. Zynga, Yelp)...
Distribution led thinking
Getting your product to the right people who want to use it is tough, and this even more so on a startup budget. Surround yourself with the right people early on and try to find as many hacks as possible. The most extreme way for founders to apply distribution led thinking is to flip the coin entirely and ask yourself: 'I have discovered a distribution advantage. What product can I deliver with it?'
More on the other distribution hacks, mechanisms for viral and social growth, in a next post. Stay tuned.
I escaped the heat the last week and spent some time in Varenna on Lake Como. For all kitesurfers out there, the location is absolutely amazing.
Life is awesome,
Other content I have found useful
- An interesting Twitter thread by Chris Herd on why the 2020s are the Remote Work decade with a few more predictions of which trends he thinks are likely to emerge.
- 20% of Harvard's freshmen have deferred. So far. This is a lot. Especially for Harvard. As expected, higher education will have a tough year. If you are building something exciting in the edtech space, please do reach out to me.
- The 'great acceleration' of tech: The 1st post-COVID earnings quarter proves the resilience of tech companies. A great review by Alex Taussig.
- The 5 Fairytale VC Tactics As Taught By Toddlers these last months. A funny and insightful article in Forbes by my friend Deena.
- A cool post on how to monetize newsletters by Marie.
- The Coronavirus Is Never Going Away. Definitely one of the best articles on COVID 19 I've come across, by The Atlantic.
- Netflix commissioned Hans Zimmer to extend its "ta-dum" soundmark for theaters and ... it's awesome.