Lean startup viability: how to know when to quit

This post was prompted in part by a discussion a few weeks back by former Joost COO Hedrik Werdelin’s post, “Twitter used to be a crappy idea”,  about Twitter and their viability as a startup based on user metrics. While I think the article was more linkbait than reasoned analysis, it did raise an interesting question. How do you determine the viability of a lean startup? Or more importantly, how do you know when to quit?

In a VC or even angel-backed startup your viability, assuming you are not profitable, is generally based on one thing…. The ability to raise additional funding. When the money runs out either you raise more funds or you go home.

In a lean startup however, there is no such Darwinian fate. By the very nature of a lean startup and its iterative customer development process, a lean startup can live virtually forever and perhaps never find success. Therefore it falls to the entrepreneur to decide when to cut bait.

In this post I have applied the customer ecosystem model below (also see examples for Zynga and Twitter) as a means of determining lean startup viability.

Wederlin’s point was that Twitter had poor user acquisition growth and user numbers in the early years of the business.

Now, I think this point is debatable, but let’s assume for a moment that this is the case for StartupX.  StartupX launches and sees low to moderate user adoption. Despite this, there is no reason to necessarily throw in the towel. However (contrary to Wederlin’s assertions), mere faith in the technology or the team is not enough. You need to have strength in one of the following customer ecosystem areas: conversion, upsell, or retention.

Conversion

Almost more important than user acquisition is converting those new users once they arrive at the site. Obviously each type of web startup has has its own metrics, but  if conversion and usage is high it can more than make up for poor acquisition results. Consider the case of Twitter. Sure it’s user base may have been growing slowly, but is that how they were measuring success? More than likely they were looking at other metrics as being important:

  • % of unique visitors who register
  • % of users who send a tweet
  • % of users who follow someone
  • % of users who have followers
  • % of users who tweet 5 times a day
  • % of users who have more than 100 followers

Merely looking at the number of new registrants is a poor way of measuring success, but also growth. Internally, even though acquisition growth may have not been growing as they had hoped, my hunch is that metrics like those above were growing strongly, indicating that they were on the right path. They weren’t just flying blind.

Now let’s look at imaginary StartupX:

After a brief write-up in a techblog, StartupX gains 15,000 new users. Six months later they are adding only 500 new users a month and the active userbase is steady. Time to cut the cord? Not necessarily.

Consider:

  • 65 percent of unique site visitors register and create a profile (up from 33% just two months ago)
  • 35 percent of users post content on StartupX (up from 25% three months ago)

Metrics like these are good and would indicate that (contrary to the acquisition numbers) that StartupX is still viable. There obviously are acquisition issues (wrong target market, poor virality, etc.), but when one aspect of the customer ecosystem is executing well, it means that with a sufficient pivot, the startup is viable.

Upsell

Are people paying money for your product? Usually this excludes about 90% of web startups, but cash money can be an amazing salve for a startup which is not experiencing substantial new user growth. If you are able to get users to pay either a one-time fee or a subscription then you have something to build upon.

Let’s look at the StartupX upsell scenario.

StartupX has a premium service for active users which includes and enhanced profile and unlimited uploads. Despite the fact that user growth is slow, more than 5% of active users pay for the premium service. Not only that, only 1% of users paid for a premium membership 4 months ago. Growth in premium subscriptions is a much more valuable metric than total user growth. Some users are more equal than others.

The trick here is that if you are getting people to pay for your product, you need to work to identify how large the realistic addressable market is and determine strategies to get traction in this market. If you’re bootstrapping, it does you no good to be exaggerating your addressable market (as opposed to when you’re trying to raise VC). However it behooves you to look far wand wide and identify other groups that may pay for your product. The key here is to continue growth in this revenue stream.

Retention

Retention is the kissing cousin of conversion in the customer ecosystem model. For conversion, is the content/experience compelling enough to for you to register or participate? For retention, is the content/experience compelling enough to keep you coming back.

If, for example, 80% of registered users are coming back on a weekly/monthly basis, there’s a lot of potential in what you are doing. Even low to moderate user growth with high retention levels can be a success.

Overcoming Acquisition Issues

In order to be successful, every startup will eventually need to figure out the acquisition puzzle. Sometimes there are businesses where the acquisition costs are just too high for a viable business. The point however of this blog post is that startups need not initially live and die by acquisition numbers. Other components of the customer ecosystem model are equally important components to figure out and basing viability on initial acquisition efforts is foolhardy.

Knowing When To Quit

If your acquisition efforts are failing, there need to be signs from other places in the model (conversion, upsell, retention) that the business is on the right path. If you’ve been at it for a long time and acquisition is poor and everything else is muddling along, then it’s time to quit. However, if you have found that you can either convert, upsell or retain customers well, then keep plugging away.  The feedback from users is that your startup is on the right path…. now it’s time for incremental improvements in the other areas of the model to allow the business to reach the next level.

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One response to “Lean startup viability: how to know when to quit

  1. Great post. Thoughtfulness is getting harder to come by these days.

    And you were so kind! 🙂 Weredlin’s post was crap, based off assumptions made from a graph that didn’t even show what he said it did. Twitter was a hit very early on (early 2007), with strong viral growth. Sure, it wasn’t mass-market yet, but its vitals were always strong.

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