When founders are laying off staff and cutting costs to face the downturn, it may seem like odd timing to tell startups to take their product as seriously as ever. In a recession, do users really care about product experience? Yes, says Mighty Capital, whose portfolio includes companies such as Airbnb and Amplitude.
The San Francisco-based VC firm has a core thesis: The best product wins. And changed macro conditions don’t invalidate it. On the contrary, Mighty Capital’s founding managing partner, SC Moatti, told TechCrunch that it is “perhaps more relevant now than ever.”
SC Moatti is a former Facebook executive with a passion for all things product. In addition to her role at Mighty Capital, she is also the founder and CEO of Products That Count, a vast network of product managers that touts the benefits of product-led growth.
Product-led growth makes all the sense in a downturn: If it’s the product itself that does the heavy lifting, it means potentially spending a lot less on sales and marketing. This makes it more likely for successful product-led companies to both grow fast and be profitable, something that investors currently love to hear.
There’s a catch, though: You can’t be product-led without a great product. However, entrepreneurs are understandably nervous about making the type of investment that this would require when their burn rate already keeps them up at night.
To understand how SC Moatti thinks about the product-versus-spending conundrum, we asked her a series of questions that founders might have if they are thinking about taking the product-led leap. Her answers follow below, edited for length and clarity.
You have been advising early-stage companies to invest more into their product than they intuitively might. Why is that?
Any company that is building a product today is a digital native, which means they are embedding technology from day one. So the bar for what’s acceptable from a product is much higher than it was when I started my career two decades ago.
In addition, digital products are not just tools, they are also channels. Push notifications, App Store marketing and emails are part of the product, and they are also a channel that helps startups acquire and engage customers.
Lastly, companies that build great products are able to attract better talent, especially since the pandemic, because the best employees now want meaningful work that goes beyond a paycheck. They want to be part of something that makes the world better and they want to build great products.
There’s a misconception that a good product is something that can be manufactured or analyzed into existence. But it’s not a logical decision where someone says “This thing is cheaper than that” or “This works better than that.” It’s a deeper, almost emotional response, where I feel that this product works like my brain works, that this product makes me feel in control or more productive, or that it gives me a greater understanding of something I struggle to grasp. The power of good products is that users feel something when they use it.
What are some examples of your thesis that “the best product wins”?
Zoom is probably the most popular example that the best product wins. Despite free and unlimited offerings from Google (Meet) and Microsoft (Teams), Zoom has been able to win more than 40% market share simply because people like using it more. This is a clear-cut case of why people shouldn’t underestimate the power of great products.
In our portfolio, Amplitude has been able to gain significant market share against incumbents like Google Analytics by focusing on meeting customers’ needs end to end. As for Canela, it goes head to head against Netflix, Viacom and Univision by putting its core audience, Latinx, at the forefront of its innovation — in a field where other players have consistently treated them as an afterthought.
There are many others like Datadog, Slack, Atlassian and in our portfolio, SignalWire, Accern, DigitalOcean and Aikon.
The callout here is that, contrary to the belief that there’s some magic that determines why one product beats out another, it’s actually shockingly simple: Users just like it better.
In your opinion, what are the main actions an early-stage startup should take to have the best product?
The short answer is: Listen to customers! One of the mistakes I see early-stage founders make is that they fall in love with their vision and/or technology and don’t pay enough attention or give enough priority to what their customers want and need.
With my investor hat on, I want to see products drive business value. We use a framework that we call the Product Equation. It’s pretty simple:
Revenue = #Customers * #Transactions/Customer * #Revenue/Transaction
Early-stage startups need to articulate how they’re going to:
- Increase the number of customers for their product, i.e., develop an acquisition strategy.
- Get customers to come back more often and increase transactions, i.e., create an engagement strategy.
- Increase revenue per transaction for their product, i.e., have a monetization strategy.
With my customer hat on, I view technology as an extension of ourselves. So great products need to make us better people. We talk about the Product Formula to accomplish that. It’s the mind-body-spirit of great products:
- Body = Beauty. We all want to look good and expect our products to be beautiful, too. It goes way beyond pretty pictures; it’s about efficiency and wow effect.
- Spirit = Meaning. We all want meaningful lives and expect our products to be meaningful as well. It’s about personalization and at the same time protecting privacy.
- Mind = Learning. We all want to learn and grow and expect our products to evolve, too. It’s both strategic and tactical (e.g., growth hacking and blitz scaling).
Convincing startups to make key product hires and decisions might be more difficult in a downturn. How do you make that case? For instance, when it comes to hiring a chief product officer, what would you tell a founder who is concerned about adding overhead?
Constraints help drive focus, so a downturn can actually be a great opportunity for early-stage startups to prioritize.
Businesses have two levers: People and money. There’s often a misconception that bringing on more people will cost money, as if this were a zero-sum game. We encourage founders to think about it differently, by seeing an investment in their people as a profit center instead of a cost center.
When it comes to the product function, this is really the core of the company so it’s important to continually invest in bringing in the best product people. At first, the founder is the product team, then they typically bring in a product manager and as the company grows, it eventually makes sense to bring in a chief product officer.
And perhaps more relevant now than ever as we see some companies tightening their budgets, is the thesis that the best product wins. What’s going to keep your customers paying even when they have plenty of other options? The strength of your product. No amount of salespeople or engineers can save you in the long run if your customers don’t love your product.
Can you share some ways to elevate the importance of product within a startup that don’t require additional expenses?
This is really key! Because for early-stage companies, it’s not just about building the best product, it’s about helping B2B customers build their own great products, too. Most Fortune 1000 companies are going through digital transformation. In fact, this has been accelerated by seven years with the pandemic, according to McKinsey. So more companies than ever need help building products and the tools and services that that entails.
As a result, B2B startups have a great opportunity ahead of them if they can find ways to help customers execute their transformation. When surveying our platform of more than 300,000 product managers, we see three key trends of startups that help their customers:
- Drive revenue by providing product-led growth solutions.
- Reduce cost with no code/low-code products.
- Increase productivity with asynchronous collaboration services.
With product-led growth, it can be hard to know which levers to pull to boost revenue. Do you have any tips on figuring that out?
Product-led growth requires built-in network effect and stickiness in order to make sense. Take Dropbox as an example: The network effect is built-in because it’s a file-sharing system, and the stickiness comes from the fact that people want to have ongoing access to their files.
If your product has this combination, then the network effect takes care of your acquisition and the stickiness works for engagement, and this eventually leads to conversion to a paid version of the product.
I suggest surveying customers to understand what features they would be willing to pay for. In the case of Dropbox, one of the keys to boosting revenue was to unlock enterprise IT with features like security, encryption, etc.
If a startup hasn’t implemented usage-based pricing yet, would you recommend switching? Why or why not?
Usage-based pricing is one of the hardest business models because it’s very hard for customers to fit this in their budget. Amazon Web Services is a great example. It has been widely adopted; however, many of its customers are concerned because the usage-based pricing makes it really hard for them to predict how much they will spend in a given month/quarter/year. Some startups see this as an opportunity and offer ways to cap usage in order to control budget, but in a way, it defeats the purpose. My advice to startups is to proceed with caution if you want to implement usage-based pricing.
Some high-profile product-led startups have remained bootstrapped for a long time. Why should a product-led startup consider raising venture capital?
Raising venture capital doesn’t always make sense. You need to be in a winner-takes-all market, where capital is required in order to blitz-scale, or building a hypergrowth company that requires capital to keep up with the growth, or defining a new category, where you need capital to educate customers. Short of that, it might be better to continue bootstrapping.
What is your favorite unconventional quality in an entrepreneur?
Most entrepreneurs are by definition unconventional and sometimes even rebellious. What I admire most in entrepreneurs is the right balance of confidence and humility, which we call having a growth mindset.
Are you open to cold emails? If so, would you like to share an email address that founders can use to send you a pitch?
Absolutely! I’d love to hear from CEOs who have business generating $50,000-$100,000/month and/or have raised a seed round. My email is sc@mighty.capital.