Volume 85: Why Do Startups Get Such Bad Advice?

1. Why do startups get such bad advice?

Tl:dr: What Wedges and PLGs miss.

I did a presentation to some startups last week titled “A river of bullshit a mile wide and half an inch deep, AKA marketing” but afterward realized that while I used the term marketing, I probably should’ve extended the thought to more of the so-called strategic advice meted out to very young companies daily, often by the content marketing arms of their VCs. (Because giving money away has become so commoditized, every VC is now desperate to demonstrate their operating chops, even if they don’t have any).

As exhibit No1, someone shared with me a “VC du jour” idea labeled “PLG” or “Product Led Growth.” If you’re smarter than I, you’ve probably heard of it already, but I hadn’t.

As far as I can tell, “Product Led Growth” boils down to building enterprise SaaS products that emphasize end-user experience over all else, which the user can immediately test via some form of freemium user experience, and where they can easily and virally share the product with others. Examples given to support this model are Slack, Dropbox, and Calendly, which I find strange considering Salesforce bought Slack because it had no future as an independent company; Dropbox has been standing still in the commoditized cloud storage wars for years; and who knows about Calendly, as it remains private, but it sure looks a whole lot more like a feature than a product to me. (BTW> Pentagram, what on earth is with that horrendous stylized C symbol thingy? It looks like it came straight from a medical pamphlet for bowel cancer.)

Anyway, while the PLG concept is fine as far as it goes, I’ve done enough work in the enterprise software space to be able to spot more than a few issues.

Let’s walk through a few of the biggest and most obvious blindspots:

1/ Freemium pricing models permanently reduce the profit potential of not just your business but the entire category. And if you give too much utility away for free - looking at you Evernote - you crush your future prospects. Worse, it can be very inefficient and expensive to maintain, which reduces your ability to build a sustainable business, potentially forcing you to seek more outside capital earlier than you might otherwise want to (This is why it’s no surprise to see VCs peddling this approach) So, if you’re going down this path, be aware of what “free” pricing does to your business and operating model and whether the trade-off is worth it.

2/ Free is a lazy proposition. Everyone likes free stuff; it’s getting them to pay for it that’s hard. And just because they use something for free doesn’t mean they’ll ever pay for it, which risks presenting you with false validation of your product via free-riding users you then have to support. As well as hard costs, this creates an opportunity cost; you may have been better off expending that same energy and resources figuring out something people are willing to pay for, perhaps pay a lot for, instead of growing and supporting something many are using for free and never intend to buy.

3/ Instantly usable products that you can give away for free are, by definition, not going to be deeply embedded into corporate systems and flows of data, which means you’ll be limited to picking low hanging fruit that’s just as easy to eliminate as it is to trial, which also places you at risk of featurization by others - looking at you Slack. And since free SaaS products have such low barriers to entry, any success you have risks being quickly followed by copycats funded by VC deal flow FOMO, placing further pressure on your growth and your pricing potential. Again, beware.

4/ There’s a huge assumption inherent to the thesis that a superior end-user experience isn’t commoditizable. I’d argue the opposite - the sheer volume of corporate resources currently being applied to building “consumerized” value propositions and user experiences for enterprise software means user experience advantages are being competed away. Instead, in much the same way it happened in the consumer sphere, an excellent user experience, and end-user focus is rapidly becoming a minimum requirement.

5/ It’s supremely arrogant and naive to declare CIO and executive decision-makers dead, having been replaced solely by the end-user. Yes, the end-user is critical in the software and services buying choice in a way it hasn’t been previously, but it represents a single input among many. By pretending critical stakeholders no longer matter, it puts you at huge risk of creating enemies you’ll never win over. There’s nothing IT buyers and executives hate more than small teams going rogue and introducing hidden security and compliance risks and potentially putting the corporation in legal jeopardy. If you think they’re going to embrace you with open arms after that, think again. And if you’ve built a product they can’t even buy because it doesn’t have strong enough security or basic features like single sign-on, good luck to you.

6/ It’s unclear at which point the PLG model taps out and requires a transition to a more mature approach to market. One of the reasons Slack became attractive to Salesforce was that growth had stalled, and it didn’t have a plan B to profitability. Without a credible enterprise sales and service capability, it was a perfect fit for Salesforce’s vastly more mature enterprise-grade capabilities. This begs the question as to whether Slack might have been independently viable for longer if it had embraced a more mature enterprise model sooner.

And finally, as with so much startup advice, the whole thing reeks of survivor bias. By cherrypicking two or three companies and then saying this is why they’re successful, we have no sense of all the other companies that tried the same exact thing and failed. Which means we have no sense of the relative probability of success, just that three companies grew successfully while giving their enterprise SaaS product away for free, so you should too. I mean, who knows, perhaps their growth was despite taking a PLG approach rather than because of it?

Anyway, like all of the best lies, there is a truth that sits at the heart of “PLG” that makes it feel compelling at first glance. And that truth is that yes, people are increasingly demanding user-focused software solutions that improve their ability to do their day-to-day work. And yes, certain types of SaaS products do lend themselves to virality and community-based word of mouth. (Although I’d also take this with a big pinch of salt, organic virality is vastly overestimated as a viable growth strategy) And yes, some companies have successfully leaned into this to drive their own sales growth. But, no, this doesn’t have to dictate how your business does business. Instead, think more broadly about the overall opportunity, business strategy and operating implications, and marketing model before following any “strategy” that isn’t really a strategy.

2. If they wrote this down, what else did they write down?

tl;dr: An anti-trust case worth paying attention to.

This week, while much of our attention was on the world’s most sociopathic corporation, some very interesting anti-trust-related things were happening to its slightly less evil competitor, Google.

Before getting to Google, I want to explain why a seemingly unrelated anti-trust case (that’s actually related) might also have implications for Facebook. You see, it was interesting to note on the earnings call this week that while revenues came in not quite at analyst expectations, the internal metrics that no one independently audits came out ahead. Perhaps coincidentally, these happen to be the same kinds of metrics that Facebook has a habit of routinely lying about to its customers. Now, that wouldn’t be here nor there, except for the fact that the government just told Facebook to preserve documents dating back to 2016 as it’s now under government investigation. And that is particularly interesting because, unlike lying to your customers, knowingly lying to your investors can be a crime with the potential for orange jumpsuits (distant potential, but potential nevertheless). Not that I’m saying anyone who works at Facebook will end up doing a perp-walk, but they might.

Coming back to Google for a second, there’s a state-led anti-trust case against it for, among other things, price-fixing in the advertising market. And, well, it doesn’t look great for the Googs or Facebook, according to a series of previously redacted discovery documents that were this week un-redacted.

I’m not a lawyer in any way, shape, or form, so please take my interpretation with the largest of pinches of salt, but as far as I can tell, Google wrote a lot of things down that it probably wishes it hadn’t because the trail leaves it in a precarious legal position. Like admitting that its advertising business - which processes 11billion ads daily - is so monopolistic that it’s the equivalent of their “owning Goldman Sachs and Citibank and the New York Stock Exchange”, that it deliberately sought to slow privacy regulations, that it colluded in a price-fixing agreement with Facebook called Jedi Blue, where, among other things, they also combined to kill something called “Header Bidding,” which was good for advertisers and publishers and bad for Google.

Oops.

In reading the documents, what struck me was just how much was written down, which begs the question of what else might be written down too. Which immediately brought me back to the casual arrogance of the people who work at Google. I’ve written about that phenomenon before, but I hadn’t made the connection that when you believe yourself to be among the Masters of The Universe, there’s an excellent chance you think the rules don’t apply to you. And, when the rules don’t apply to you, you don’t think it’s a problem to write it all down for posterity, including your [allegedly] illegal collusive behavior with the company that’s supposed to be your biggest competitor.

So, what happens next? Well, as with all of these things, this case will likely drag on for years. After that, Google will probably settle for a sum of money equivalent to a couple of weeks’ worth of profits, and nobody will accept any responsibility for any wrongdoing. But this is by no means guaranteed.

There’s a groundswell of popular support for reining in the worst excesses of big tech. And, while advertisers haven’t traditionally engendered much sympathy (with very good reason), this looks the most likely of all the cases against big tech to result in a break-up of the company because it’s a textbook example of abusing monopoly power. And, with this week’s removal of redactions, we now know that it wasn’t just Google [allegedly] breaking the law and writing it down, but Facebook too. So, yeah, keep an eye on this one.

3. The business model canvas and workshop theater.

tl;dr: Interesting critiques of a commonly (mis)used tool.

The first time I came across a business model canvas was during a client workshop, which must’ve been a couple of years after Alexander Osterwalder first published the framework.

I remember thinking it a bit simplistic, didn’t flow particularly well from one section to the next, and seemed to be defined more by what it left out than kept in. But, what made it exciting was its sheer simplicity, being all on one page and without many words, which seems to have given it enduring longevity as the only business strategy tool I commonly see designers using. (I jest, I know designers love nothing more than reading tomes on business strategy. Mainly to help them sleep).

Anyway, I remember watching with interest as the tool was used very successfully in that client workshop, not successfully in the sense that a brilliant business idea came out of it, but successfully in the sense of it being a wonderful mechanism for the delivery of workshop theater.

You see, if you’re in the business of buying consulting services from any of the major innovation consulting firms, branding firms, or design thinking firms, a large part of what you’re buying isn’t a superior solution to your problem; it’s a superior experience of getting to a mediocre solution to your problem. As a consultancy, if you’re good at making things look pretty, then consistently delivering high production values workshop theater is easy. Much easier than, say, consistently delivering quality answers to what are often exceptionally tricky problems that sometimes you’re not even qualified to solve.

From first-hand experience, I can tell you that it’s vastly easier to sell a mediocre strategic output that looks amazing than it is to sell a great strategy that looks terrible. We’re visual animals, after all.

The reason the business model canvas works so well for workshop theater is that it’s excellent for getting a quick sketch of a business idea down on paper that can then, through a combination of design wizardry and photoshop templates, be made to look and feel like a real and amazing business no matter how bad it might actually be.

Anyway, I digress. I didn’t particularly mean to discuss the ins and outs of workshop theater and its delivery. Instead, I wanted to introduce two interesting critiques of the business model canvas itself. And while I’m not really into the whole inside baseball strategy thing, I do occasionally indulge. So, if you’re at all interested in the subject, and if you ever used the business model canvas for yourself, then what Adrien Book and JP Castlin have to say is worth a look.