Previously published on Crunchbase.
Startups will be key to economic recovery from the global recession. It’s in the DNA of these vibrant companies to drive employment and economic growth, while also providing the innovation we need in our transition toward a greener and more tech-driven economy.
But chances are they’ll be doing it with a lot less money in their pockets. According to a recent report, four out of 10 startups have three months of runway or less. While VC funding has remained strong, investors are focusing on pouring their money into a smaller number of startups, typically later-stage companies.
To weather the storm, startups need a solution that is low-cost, high-impact, and that will empower their expansion into new markets despite continued global uncertainty. Cue product-led growth, or PLG.
Product-led growth is when a company focuses on creating a product so appealing, easy to use and accessible that users will fall in love with it and rapidly bring in other users. This is not as easy as it sounds. It means truly letting your users’ needs shape the product, rather than the founding team’s ambitions. It’s the secret ingredient that allowed companies like Zoom and Miro to dive into 2020 mayhem as if they’d been preparing for it their whole lives.
But that was 2020. Today’s startups will need to be looking ahead at the new landscape of 2021. Some consumer behaviours that emerged with COVID-19 will be lost, while others have become fixtures. But other sands are also shifting, like advertising norms and VC investors’ priorities, all of which will place users at the heart of any startup’s growth strategy.
This is why product-led growth will be preferred by all serious businesses in 2021, and how to harness it properly.
Biggest winners of 2020 will teach us how to enter 2021
Some of the biggest success stories of 2020 came from outside the United States and took over the world. This could not have been possible if they didn’t already have the infrastructure and the loyal user base to scale rapidly into new markets when the time came.
Imagine a beach with a few dozen surfers paddling out to catch the waves. There’s a big one on the horizon, closing in. The surfers who are able to ride that wave have been watching it approach, preparing themselves physically and mentally, and working out how they will catch it. The surfers who aren’t ready are too rigid, and when it hits, they tumble.
Miro was one of those able surfers. The Russian-born collaborative whiteboard platform was ideal for remote teams, but that’s not the only reason it succeeded.
As a B2B startup, the company initially focused on designers and product managers. But rather than sticking to that audience, it let its users shape its growth journey. Those product managers shared Miro with marketing and sales teams, and Miro began adapting its product offering to those different teams. It was able to focus on its core customer, and piggyback on the associated usage to branch into new markets. When you have the infrastructure — a product in constant expansion, software that is accessible on all platforms, and a tool that anyone can learn to use in a matter of minutes — and your market suddenly opens up, you can hit the ground running. So when the pandemic wave came, Miro was ready to execute.
The year 2021 will not offer the same opportunities to all startups. But those who saw players rise and fall now know what it takes to go big: Products that don’t crash when too many people come online. Products that don’t make users jump through hoops to get to their value. Products that offer low-cost or free versions that people can benefit from during a recession. Products people talk about with excitement.
Fewer roads to VC investment
The VC industry did not suffer nearly as much as people expected during 2020. VCs are benefiting on the rise of tech and the IPO market, and institutional investors are funneling them more money. But they’re still minimizing their risk by putting that money into a smaller subset of companies, those they can tell are winning. The mindset is “big gets bigger,” making it harder than it was in 2019 for the smaller up-and-comers to get noticed.
So what does this mean for early-stage startups? It means those who will get noticed will have to prove to VCs that they have the resilience to grow their user base in 2021. The most important metric that VCs are looking at here is retention.
Retention is not about how many new users sign up in a month, but whether or not you’re keeping them onboard. Aka: Are they finding value in your product that will keep them coming back; opening up the app after the initial download? The majority of founders are active users of their own product, so they don’t really grasp the fragility of the moment in which a user is looking at the product with fresh, critical eyes. They don’t understand the importance of retention (which is far easier) vs. customer acquisition.
Retention is at the heart of the PLG mindset. PLG startups don’t spend nearly as much money and effort drawing in new leads, but they work hard to retain existing users. Which means making onboarding seamless, easy and exciting. At the same time, they maximize the likelihood of those same users advocating for their brand, and organically generating more revenue. They hyperfocus on Day One and Day Seven retention: How many users stay after X days of usage?
So for VCs, retention is synonymous with value through 2021 and beyond. Those founders who have it will be prioritizing the development of their core technology, engineering talent and user experience, over traditional marketing and advertising budgets.
Watch out for the emerging markets
VCs are right to think that what was big in 2020 — e-commerce, telehealth, remote work tools — will get bigger. Because in the amount of time it takes for the vaccine to develop widespread immunity, many of those verticals will remain essential and gain in strength.
But there’s one thing many of us are missing: Most of those verticals are inherently local. Services linked to health, education, food delivery and e-commerce, are all supported by an individual country’s infrastructure, regulations, service providers and insurance companies.
That means there will be a growing number of local companies riding those waves.
Colombian telehealth company 1DOC3 is working with large local businesses to provide telehealth options to their employees. Its operations involve liaising with national health insurers, adapting to local payment methods (as credit cards aren’t widely used), and following national data storage and privacy laws. As much as a U.S. company may know about partnering with insurance companies, trying to bring that to Colombia would have been 10 times harder.
Until now, we’ve seen U.S. companies thrive at going global with 100 percent digital platforms that can easily be scaled. WhatsApp and Facebook don’t need to use Latin American highways, African service providers, or Asian curriculums to land in those markets. But the next generation of startups are revolutionizing traditional infrastructures and service provision. That is a mission that national entrepreneurs are primed for, which is why countries from Brazil to India are all building their own stuff. Ignoring the importance of that local knowledge is causing problems even for those aforementioned tech giants, who are now having to adapt their product under pressure by local legislators.
Product-led growth in traditional verticals like health and education will ensure that companies are focusing on that end-user experience. Many users — like school children, or the elderly — will not be immediately familiar with these types of tools, but they need to pick it up quickly to get essential access to care and schooling. About one in four adults globally are not digitally literate, so onboarding will be fast, and it will be simple for customers to understand how to use the product, which also means gathering feedback constantly and iterating improvements on a rolling basis.
Satisfied users will be these startups’ selling point, so they won’t need to resort as much to paid ads or discount offers. This is important in emerging markets because it’s a low-cost strategy that will allow companies to keep prices low for users who typically have less expendable income. And users in these markets won’t upgrade to a subscription unless they can prove it’s useful to their daily lives.
Economic recovery means spending will be hyperfocused
In the United States and abroad, both B2C and B2B users will have less money to spend on account of the global economic slowdown.
That doesn’t just mean users will be more cost-conscious; they will also be shifting their spending habits from what they were spending on before, to what they consider important now.
Here, PLG tactics mean companies will avoid the behaviors that pissed off many customers over the past year. People’s digital adoption has been fast and, as we enter 2021, they’re a lot more sophisticated about the digital products they’re using than at the start of 2020. They’ll be clearer on the types of apps they want and those they don’t. They’ll be tracking what they’re spending on digital tools, maybe as a percentage of what they used to spend on flights abroad or nights out.
There’s been a lot of backlash against companies sneaking their users into paying for a subscription. You’ve probably been there. But if someone bought into an app unwittingly and isn’t using it, they’ll cancel it. Obviously. Let’s come back to PLG: You have to be focusing on retention, which means putting users first. An angry user is worse than no user at all; they’ll harm your reputation and deliver little customer lifetime value. A happy user will be more effective than any aggressive marketing tactic.
The advertising shift
Last but not least, there’s a big shift happening in advertising. Apple is clamping down on privacy with the introduction of new features in iOS 14. It will soon be implementing a prompt that will ask users when they open each app whether or not they want their apps to track them for advertising purposes. Of course, that will probably see tracking capabilities hit the floor. Some think Google will follow suit for Android phones next year.
For all tech companies, it will become much harder to track their advertising dollars and know which of their ads are most successful in leading to downloads. Marketing teams won’t be able to understand the effectiveness of their spends, as they won’t know which of their campaigns is bringing in users and which is a dud.
Not many entrepreneurs see the massive impact this will cause. It’s even got Facebook scared.
By 2021, this shift will practically force startups toward PLG tactics in two ways. First, with traditional marketing losing efficacy, they’ll have to rely more on user-led growth — getting to know customers and their pain points, creating personality profiles, spending time talking to them, and making the app super easy to share with new users.
Second, apps probably won’t be able to make much money off advertising revenue, meaning they’ll have to focus on how to offer added value to their customers that they’ll be willing to pay more for.
The year 2021 will be a different beast to 2020. That doesn’t mean there will be fewer surprises. Your safety padding, no matter the type of startup you’re leading, will be your users telling you what’s working, what they need more of, and who else you should be helping with your product. Keep hard at that, and growth will eventually become a self-running machine rather than a black hole for VC dollars. And you’ll be helping real people face this next year and those to come.