/ business model

A Couple Of Things Learnt From Andrew Chen

On Startup Cost and Startup Growth...


Who is Andrew Chen?

Andrew Chen leads the Rider Growth teams at Uber. For the past decade, he has written about mobile, metrics, and growth at andrewchen.co. He is an advisor/investor for tech startups including AngelList, Barkbox, Boba Guys, Dropbox, Front, Marco Polo, Gusto, Kiva, Product Hunt, Tinder, Workato and others.

Introduction

Time to First Byte is a fellow reader of Andrew Chen's writings, and in this article we quoted bits of "Startups are cheaper to build, but more expensive to grow", with some Southeast Asian companies as illustrations.

First things first, startups have been mushrooming in Southeast Asia with more capital flowing in, access to talents in plentiful, and larger companies have made it easier to start-up, e.g. Amazon's AWS. In Singapore, access to capital has been dubbed as being relatively easy to get, possibly leading to many 'zombie startups', term coined in a research study by NUS Enterprise, amounting to about 56.8% of the analysed sample size.

Let us look at the four points on customer acquisition as part of startup growth by Andrew Chen, bearing in mind that we will provide a polarized viewpoint:

Paid Referral

Paid referral programs also help build user engagement and get companies to faster network effects because on top of bringing in more users, they bring in more users who are already connected to each other.
Dropbox’s give/get disk space was one famous early example of referral, but these days, the largest companies from Uber to Airbnb all utilize referral programs.

Companies such as Honestbee (Read on its business model, Obike and Grab have used paid referral heavily to grow in their respective markets. One distinct advantage of paid referral is that it will often bring in new customers who might share similar needs/wants to the referee.

The downside is costly. As mentioned in a previous article on subscription business model, customer lifetime value is an important metrics, and poor lifetime value can negatively affect a business. Not all paid referral programme are thus created equal, implying each programme would have a different results.

In addition, the companies mentioned in this article, being mindful of both their cost of acquisition and a cost of retention to cater for, with the latter being the highest (i.e. based on the assumption that more money is spent to bring a customer back & to keep him/her engaged).

Monetization Opens Up Channels

All acquisition channels are an efficient market at some point, and this means that companies that monetize better than their competitors (either with higher LTVs or because they enjoy shorter payback periods) will be able to afford a higher CAC and subsequently out-invest those competitors. In short, better monetization is a competitive advantage for growth.

Some of the largest Southeast Asian based companies have been able to generate revenue from Day 1. While such revenue itself is not enough to break-even, re-investment into marketing and operations has been a principal rule to drive growth.

Albeit not a Southeast Asian company, Amazon is the most famous example of re-investing revenue into the company itself to generate massive growth. They have been able to branch out into new businesses, have expanded by e-commerce marketshare by opening up new channels, and maximizing (continuously evolving) channels (Innovation and being customer-centric made a difference too).

More Money, More Traction

More focus on paid acquisition means startups need to raise more money to raise money only once they can prove out their traction. We’re seeing more companies raising more money to get more traction before they raise, and when they do take the new round, it’s often to fund bigger and more expensive paid acquisition efforts.

Companies like Grab, Lazada and Go-Jek have raised millions of dollars to spend on paid acquisition. In the short-term, the strategy to synergistically build brand awareness and gain market share is extremely expensive. Inherently, this strategy guarantees growth through new user acquisition but not necessarily user retention.

Raising more money is also a necessity to assemble larger, more capable teams who will, in turn, build a better product. Few companies have been abled to raise mega rounds, some of them (not exhaustive) compiled by CB Insights are Grab, Tokopedia, SEA (formerly known as Garena) among others. Our future posts will likely cover SEA which is building an entire ecosystem with roots in online gaming.

Using Paid Marketing Earlier

The good news about more companies trying paid acquisition is that it’s easier than ever to experiment with paid marketing early. Self-serve ad systems are now the norm, which we can see from recent self-serve ad launches from newer platforms like Snap and Quora. Companies can test and master paid spend much earlier and run meaningful experiments with budget as low as $50. This allows an earlier and better understanding of unit economics and how to optimize the other steps in the funnel.

Paid Marketing is an amazing opportunity since Facebook started generated revenue from its platform. It became much more easier to run Facebook Ads as a result, and companies are able to test ideas rather quickly through paid ads rather than having to necessarily hit the ground with surveys and focus groups.

It is hard to tell whether Paid Marketing is reaching saturation in Southeast Asia, there has been no known formal research on the matter (to our knowledge). Facebook, for instance, does dominate the most of Southeast Asia (for social networks) while Google dominates (for search). LINE (messenger app) is pretty famous in Thailand (claiming about 41 million users!). These stated examples would in our opinion by obvious channels for Paid Marketing. The question is how well can a startup tap into this opportunity?

Conclusion

We believe that distribution strategy is still broadly an open field in Southeast Asia. True enough that companies with a huge warchest are able to grow faster (maybe, better too). Those with revenue, are better off. There are still plenty of areas left to be grabbed channel-wise, product-wise and market-wise, and this would require a combination of significant funding, strategic monetization capability and above all, a good enough product.