While start-up culture gets a lot of attention these days, the reality is that almost two-thirds of businesses fail within the first three years. And one of the challenges many new businesses face is that they lack data and insights to help them make the best decisions. So, what does it take to be in the 40% that make it?
Mark Bartels is the global CFO of Australian success story Invoice2go. He’s been involved in the start up scene here and in Silicon Valley and has learned many lessons along the way.
Can your product scale?
The world is full of great ideas. And, even after the idea makes it from someone’s brain to a product or service that is used and liked, there remains the challenge of scale.
“Product markets are the accomodation of two things,” said Bartels. “One is people like my product and two, the product can scale”.
That scaling can be via organic channels such as word of mouth or by advertising. But it comes down to the economics of the product. They may work where there are small numbers with huge engagement but what happens when you have thousands of customers?
Many startups break when they grow. Even when their revenue grows, the costs of providing the service or making the product at higher volumes don’t work out.
Moving from customer acquisition to retention
Another challenge, said Bartels, is that a relentless focus on growth distracts people from the “down funnel”. Hanging on to customers, renewing subscriptions and up-selling to higher value options are and can increase revenues more cost effectively than acquiring more customers which is becoming increasingly expensive.
As more businesses turn to advertising, the competition for eyeballs is increasing. Fewer than five years ago, the cost of acquiring a customer using social media advertising was very low. But is is now much higher and increasing.
Even App Store models are changing. There was a time when being listed as a featured app was ticket to huge revenues from the App Store and Play Store. But the app stores have fragmented and added lots more categories, diluting the value of those highly sought after positions.
What is success for you?
Bartels said one of the problems some businesses face is that they don’t know what success means for them.
“It used to be about ‘get big and get bought’. But now it’s about strategics. Bigger companies have got smarter about what they need in their roadmap and they don’t have a fear of missing out. The fundamentals of a company need to be a lot stronger”.
Businesses need to also shift their focus from growth to business fundamentals like cash flow. He says cash flow has become more important, even in smaller companies.
The nature of competition is different
It’s now much easier to create products and services that can scale said Bartels.
Cloud services and developer tools have significantly lowered the cost of entry for startups. As a result, there are more competitors in markets and their focus is shifting.
“If I look at it from an Australian point of view, most Australians start locally but think globally very quickly because of the size of the market in Australia. But if you’re in the States, you think all you need to tackle is the North American market,” he said.
App stores have given businesses the “rails’ in over 100 countries if you’re will to translate your app.
Starving and indigestion
Not every company needs to be a billion-dollar unicorn to be a success said Bartel. In fact, he says there are some companies that fail, despite having a sound product and strategy, because they lack the resources to continue development and grow.
Yet others fail despite having secured lots of funding. Their problem is that they have been so successful in securing VC money that they struggle to scale at a level that justifies the investment.
So, some companies starve while other die from indigestion.
The key metrics
So, what are the key metrics and attributes startups need to focus on? Bartels said they are:
- Daily active users: not just signed on, but actually using the product or service
- Conversion rate: the movement from installed to subscriber (the gold standard is about 20%)
- A viral hook: what is it that will get customers to tell their friends and share your app or service
If you get those things right, Bartels said revenue and cashflow will follow.