Finding Product Market Fit 5/6 — Growth Loops

Thanks for reading this series on Finding PMF! If you missed earlier articles, here is the start of the series.

In previous articles, we discussed the need to find your magic, the thing that blows your new user’s mind, because it fits so precisely with what they need. We discussed habit, how to intentionally create weekly engagement. And we discussed discovery, how to help user’s see your magic as quickly as possible. If you have executed well on those, you have a solid product. Now you need to figure out a growth loop. It’s true that sometimes you can just find a great channel that puts a ton of users into the top of your funnel, but a growth loop is much better, because it keeps on giving.

The Goal to Exit This Phase — 80/20 80% of your converted leads need to come from unpaid sources, and you need to grow at 20% month over month for 6–12 months.

Get Ready — Team!

Joe is still chief problem solver and experimenter, but now that he has raised a seed round, he is going to need a small team, so he also becomes chief hirer, manager, and motivator. The better Joe is about knowing his strengths and weaknesses, the better he can build his team. In general, making sure that you have a good small team of engineers is job one. In areas like Silicon Valley, hiring locally is almost impossible for the quality you want, so the company will start virtualizing. If Joe is lucky enough to have some developer friends that have been waiting to join him, this is definitely the time. I’m also a big fan of getting product, growth, data analytics and design folks in at this stage. It may feel like overkill, but in the final push to get to 80% organic, every point of friction needs to be eliminated and the quantitative experimental focus needs to increase. I would max the team size at 8 folks in this stage. Any larger, and you lose nimbleness, which is key to experimenting and adapting.

Get Ready — Attribution

As discussed in the habit section, you have to have a measurement system that gives you good metrics on things like your acquisition funnel, retention/engagement, and provides attribution of new users. In the growth loop stage, attribution is crucial, because you have to figure out why people are coming to the site to understand which experiments are working.

Caution

Note that one of the biggest challenges I see is that a founder in an interesting space will raise a ‘seed’ round before doing the pre-growth work in the previous stages. It is incredibly easy to imagine that this hard work is no longer necessary, but if you skip it, you end up never focusing on magic-retention-discovery, and jumping right to growth, but the math doesn’t work because your product isn’t good enough yet. Growth is easy to fake through spend on ads, PR, etc. but none of these things scale. Being MySpace or Yikyak had to suck.

Creating Growth Loops

Stop thinking about acquisition as a one time event, and think about it as a loop. Growth loops create sustainability, because your users make new users. You need to run dozens of experiments to figure out the most natural way for your users to generate new users. Make it easy for users who love your product to tell others. The most common ways I have seen to have your current users generate new users:

• in person or direct online word of mouth (lambda school)
• users share their experience on social media (Instagram pic of you acing your math test)
• users generate content and that content is SEO’d on Google/Youtube (Yelp or Quora)
• users refer other users to you directly, either with or without an incentive (Facebook or Warby Parker)
• New users discover your product based on the actions of current users on your product (docusign/surveymonkey/slack/zoom)
• You write content that users find useful related to your niche and apply SEO (hubspot)
• Influencers in your area get excited about your product and spread the word (Every social network ever)

The good news is that guys like Lenny and schools like Reforge are really good at helping you with this, if you have Magic/Habit/Discovery nailed.

The Math

The reality of consumer startups is that they are equal parts love and math. Your users have to love your product deeply, so deeply that they stick with you forever and tell all of their friends. That love has to convert into math that works.

Specifically, the math that works is when you can grow your company 20% month over month (MoM) with 80% of new leads coming organically. You want 20% MoM because that’s 7x year over year and that’s what makes big companies. You want 80% organic because that is a flywheel. Your current users make new users. That scales.

This math ends up being pretty simple to relate to conversion to paid users. On a 20% MoM growth rate company, by definition, 20% of your users are new each month. And you want (and it’s usually true) that those new users are also responsible for the majority of your organic leads (they are new, they are excited, etc). So to grow 20% month over month, you need every new user to yield at least one brand new paid user. In fact, you need a little more than that — 1.2 users for every new user, but your existing users can usually make up the difference and you can sprinkle in a little paid acquisition if you need to.

There are two components to getting that one new prospect for every new user. First is that your new users have to be really psyched and tell as many people as possible. Second, the people they tell have to actually go to your site, see your magic, pay, and develop a habit so that they retain. That is why the work you did in the previous stages is so crucial — new users have to see the magic immediately and it has to resonate deeply.

Let’s do some example math. In scenario 1, people are really psyched and tell on average three friends. 80% of them see the magic, 80% of those convert, and 65% retain at day 30. This results in about 33% converting, so about one new signup for every new user. In scenario 2, people share this widely and tell 8 friends, 50% of those see the magic, 50% of those convert, and 50% of those retain at day 30. So you are still netting one new user for every new user. In both cases you can drive 20% MoM growth with 80%+ organic leads, so you are above the exit criteria for this stage.

Here are some more ideas. For education companies specifically, the reason you need such high organic traffic, is that people consider education solutions important, and they need high trust to try them out. That trust does not come from an ad, it comes from people they know and trust. What’s great about education is that people have a large desire to raise themselves up through education, and they will often persist with your product much longer than other consumer products, but the trust hurdle is significant. The best solution is to build a product that users love and need to tell their friends about and make that evangelism as easy as possible for them.

Again, the math is pretty straight forward if you hit the metrics in the stages above. 80% of new users experience the magic, 80% pay, 65% retain d30, new users refer three new users. This causes you to get to 20% MoM growth and 80% organics. Play with these values in the spreadsheet to see how sensitive growth is to each of these variables.

Back to Joe

Joe spent longer than he wanted in the previous stages, a full year, but in the process he learned a ton about his users and what they were really looking for. They didn’t really want to go to math school, but they were really interested in math, especially when it was taught by someone enthusiastic like him. He focused a lot on making that first lesson incredible and then getting them back into the classroom at least once in the first week. He has 1000 users now, who deeply love his product, spending about about $50 per user per month on average.

Joe tried a ton of things to get word of mouth to work. Ultimately he developed a combination of things which drove organic growth. First, he recorded his help sessions, tagged them against the topics discussed and SEO’d them. Second, he got a bunch of math teacher bloggers at high schools around the country excited about his methods and several featured him often in their communities. Third, he made it easy for students to share their help sessions with friends, solving their frustrations as well and generating new users. This combination got Joe over the top to 80/20.

Funding

If you hit the organic growth milestones, you are likely ready to raise Series A, but take a look at the last section of this series to make sure you don’t have any major holes in your story.

Click here for the sixth piece and final piece in the series on Getting Ready for Series A!