Growth is one of the most challenging aspects for entrepreneurs when starting a company and it is also one of the most difficult metrics to track when you want to invest in a startup. To better understand this important aspect of entrepreneurship, we listened to Carlos Upegui, Head of Growth at Frubana, a fast-paced, B2B marketplace for restaurants and retailers to buy directly from growers and manufacturers.
Our first step is to dismantle a false belief held by many that to have a successful company all that is needed is a good product and the rest will come by itself. A good product is a necessary but not a sufficient component of a startup’s success. If you really want to grow as a business, start focusing more on distribution. Distribution channels are the key factor to make a company grow. They are the foundation for a successful growth strategy and as Peter Thiel previously stated, “poor distribution—not product—is the number one cause of failure”.
To ensure a startup grows successfully, founders must destine resources, build a team, and focus on acquisition and retention. It is not easy to grow, but if we focus on the next ideas when we try to develop a growth model, we might end up with a more fruitful strategy that could help us get to the next level and if you are investing in a startup. These tips can also help you ask the right questions before electing to invest.
So, what do we need for a successful growth strategy? Carlos stressed that the three pillars of a successful growth strategy are monetization, acquisition, and retention & engagement. A major focus of Carlos’s discussion on growth strategy was on user retention, stating that “retention separates category leaders, regardless of the industry.”
It is imperative to create a model that contains these three pillars. To do so, the model must have three characteristics. First, it must be systematic, it needs to be methodical and repeatable, not just a bunch of ideas to see what sticks and what doesn’t. When a model is not systematic, we can easily tell because it will just be a list with different ideas that do not follow a similar path. Secondly, the model must be deterministic. We need to build a model that we can easily predict by knowing with high probability what outputs our inputs will give us. This will allow us to effectively plan in which channels to invest and forecast the possible results that will derive from those channels. Lastly, the model must be sustainable, this does not mean that it needs to stay rigid over time but that it needs to possess the quality of acceleration over time, we need a model where we can control the growth rate because otherwise it will end up being a disaster for the company and to do so, we need to center our attention on the retention rates.
Retention, as mentioned previously, is one of the main factors that will determine if our model is successful or not. Retention is simply how many users remain active in a determined period of time after a certain action. It is important to mention that if the retention rates are not looking good, do not proceed for investment because the company will only collapse. This metric will also help us determine where we are at in our market. If we are the market leaders, our retention rates will be close or above 50%. Retention rates between 25-50% means that we are doing good, but if we are below 25%, important actions must be taken if we want to grow. Otherwise, it might be better to start thinking of a new business idea.
In conclusion, Carlos went on to offer up 10 important tips relating to retention, acquisition, and fundraising to drive successful growth:
Tip 1 - “Make retention your priority, as it will define if you become a category leader or not. It is the only thing that will make your growth model sustainable.”
Tip 2 – “Poor retention is hard to detect and can be easily masked, especially in early stage. Obsess about retention in the early stages of your company.”
Tip 3 – “Spend time defining your retention metric correctly. Getting your core action or your natural frequency wrong is a costly mistake.” Not aligning with natural frequency can result in a misdirection of the team. For example, if frequency is too high, it can feel like spam, if it is too low, users may forget about the product. Combining actions could be confusing to the team. The team will always choose the easier action to move.
Tip 4 – “Retention is an output, not an input. To improve retention, you focus on engagement, activation, and reactivation in that order.” Activation established the habit with users, engagement maintains or reinforces the habit amongst users, and reactivation rebuilds the habit or reengages any lost habits amongst its users.
Tip 5 – To improve retention, “focus on not only breadth, but on depth. You need depth to build a big business, even if you have good retention. Depth is an extremely powerful predictor of breadth (retention / churn).”
Tip 6 – “More acquisition channels does not equal better acquisition. 2-3 channels should make up 70-80% of your acquisition.”
Tip 7 – “Develop linear channels to create “initial capital” and layer viral channels to on top to create “compounding interest.” Think, loops not funnels.”
Tip 8 – “Make the connection between acquisition and retention. All clients are not created equally.”
Tip 9 – “Don’t raise series A (funding) until you have cracked good retention.”
Tip 10 – “Watch out for unnecessarily high valuations. High doesn’t mean better for the long term. Very high valuations put tremendous stress on your growth trajectory.”
This page was written by Luis Tegho , Joshua Baer, and Jeffrey Camp. Mr. Tegho is a member of the Cane Angel Network investment team and an entrepreneur pursuing his Master of Business Administration from Miami Herbert Business School at the University of Miami, graduating in May 2023. Mr. Baer is a student Senior Investment Analyst for the Cane Angel Network, and an entrepreneur who graduated with a Master of Business Administration in May 2022 and is pursuing a Master of Science in Sustainable Business (May ‘23) from Miami Herbert Business School. Mr. Camp is the Managing Director of the Cane Angel Network.
