Investor Field Notes: Distribution and Conversion Models for Consumer Startups

Investor Field Notes: Distribution and Conversion Models for Consumer Startups

"Investor field notes: distribution and conversion models for consumer startups". What powers the tectonic shifts that create these earthquakes? Distribution and conversion. Success or failure for internet businesses is dependent on these two metrics. Distribution is how businesses acquire new customers. Conversion measures how successful a business is at optimizing the user experience to achieve specific goals. Every few years within the consumer ecosystem, new waves of distribution open. Businesses experiment with and exploit these emerging distribution channels, and then these avenues of growth become crowded and far less attractive for new entrants.

Google, Facebook, and Amazon serve as a triopoly that dominates online advertising. The three accounted for 90% of US digital advertising in 2020, up from 80% in 2019. Most companies that have reached mass scale without substantial paid acquisition are messaging companies that are inherently viral, such as Whatsapp, Snap, Discord. Distribution alone is not enough. Distribution without conversion is like being eight feet-tall on the basketball court but missing every layup. Monetization is the end result, whereas conversion is a business’ never-ending art and process of deepening and optimizing engagement. Startup founders often fetishize monetization, when really, the focus should be conversion.

1. Virality via social proof
   Social proof is a well-observed consumer behavior where people mirror the actions of others in an attempt to reflect correct behavior for a given situation. We trust in groups of people and friends and want to emulate behavior that we feel is validated by others.

2. The Etsy Effect
   Driving discovery is one of the hardest parts of building an audience of engaged consumers, as consumers are often tempted to only engage with the original seller that referred them. If users understand that they can be discovered on the platform, it drives loyalty to the platform and creates brand equity.

3. Influencers enable disintermediation of the social media superpowers
   By tapping into the audiences of influencers, which serve as a highly fragmented distribution channel with more opportunity for exploitation. It is not trivial to scale influencer marketing, but the upside of low-cost customer acquisition is usually worth the hard work. Gymshark became the brand for those interested in working out like those influencers. Celebrity influence + social proof = one of the fastest-growing fitness brands in history. The less mature a platform, the more opportunity for low-cost distribution hacks. We encourage companies to constantly experiment with newer less crowded platforms.

4. New platforms
   New platforms = new opportunities. There are two different flavors of new platforms: 1) mega platform shifts, and 2) breakout individual platforms that aggregate consumer eyeballs and become new distribution channels. For the past 10 years, we’ve been in the Internet broadband paradigm, with no new mega platform shifts. It is possible we are on the cusp of experiencing another mega shift. It isn’t yet clear, but new platforms could include IOT or voice devices like Amazon Alexa, autonomous or connected vehicles, and blockchain technology. These mega platform shifts give rise to new distribution opportunities as well as net new business opportunities. Analogous to consumer earthquakes, these shifts are few and far in between and less predictable. Just as Zynga piggybacked on Facebook, startups should exploit emerging platforms’ features for distribution.

Distribution tactics:

5. Group purchasing
   GPOs (group purchasing organizations) allow organizations to pool their purchasing volume to negotiate discounts. Users are incentivized to share deals with their networks to secure discounts, while merchants benefit from streamlined supply chains and aggregated deliveries.

6. Niche markets unlock massive markets
   By building for a niche, often underserved communities, startups can create world-class experiences that "wow" a specific vertical and spur liquidity and organic growth (word of mouth is free!) There is a growing belief among investors that most Reddit communities with at least tens of thousands of members have the potential to be turned into a discrete product. We tend to agree.

7. Standing on the shoulder of giants
   Some startups can find opportunities to exploit a wide variety of large incumbent platforms for cheaper distribution. Often, this strategy works best when there is some sort of privileged relationship with the giant platform. There is a risk of platform dependency. However, in many cases, if the company is able to grow quickly enough, that platform dependency becomes irrelevant; as the company generates cash flows, it can dedicate resources to other customer acquisition engines.

8. First-order irrational, second-order rational (h/t Chris Paik)
   The idea that a company can disrupt a market by doing something that seems completely irrational at face value but has some second-order result that is extremely beneficial to the company and creates an exceptional business model. The key is how well and how long a company can take advantage of the "irrational" move and being one of the first to take advantage of the strategy.

9. FOMO and the Velvet Rope
   FOMO is a powerful social motivator, especially in a world where it is increasingly easy to observe the behavior of your social network on social media. Companies are successfully leveraging FOMO by limiting early usage. The invite system is a powerful use of FOMO since it implicitly leverages social proof; invite systems demonstrate to potential users that their friend is using a product.

Conversion tactics 2.0

1. A/B testing

2. Auctions
   Auctions play into the human desire to compete for scarce goods and resources. Auctions create a highly engaging experience by combining competition with the incentive for users to constantly observe the behavior of others to make buy/not buy decisions.

3. Entertainment as conversion
   Many successful livestream experiences include some element of gamification or surprise.

4. Community-driven conversion
   Users share a live, synchronous experience that they can then share with other users. This increases the motivation to start and stay highly engaged during classes. Monthly users are grouped into small cohorts that work through course materials together in a synchronous and asynchronous month-long experience, sharing updates, feedback, and support with one another.

5. Gamification
   Implementing gamification strategies in non-game settings can be powerful. Components of gamification include points and badges, leaderboards, meaningful stories/narratives, avatars, and teammates.

6. Gambling psychology
   Almost every well-known consumer social feed leverages the concept of gambling; when users refresh, they get a whole new set of content, which is the equivalent of spinning again on a slot machine.

7. Scarcity
   Scarcity is a subset of FOMO and is also a well-worn conversion strategy.

"Product Zeitgeist Fit: A Cheat Code for Spotting and Building the Next Big Thing | Andreessen Horowitz"

People need a different motivation to try something new, something that connects with them emotionally rather than functionally. It’s a seemingly simple idea that can create powerful business advantages, a concept I call product zeitgeist fit (PZF): when a product resonates with the mood of the times. Harnessing and cultivating the zeitgeist buys you the time and energy you need to gain support on your way to product-market fit. Product zeitgeist fit helps answer the age-old question—beyond tech platform shifts and other factors—of why some things, especially in consumer tech, work and others just don’t. When you have PZF, the product resonates with users not because it’s better but because it feels extremely culturally relevant at that particular moment in time for a particular group of people. Users may or may not love your product, but for some reason, they want it to win. Most startups die not because they can’t get their tech to work or because their competition out-executes them. The death of most startups is indifference. Put simply, most companies fail to launch because no one cares: not users, not employees, not investors, and certainly not the media. It’s death by a thousand shrugs. "Most companies fail to launch because no one cares." Finding PZF isn’t the end of the story; it’s the beginning of it. You still need to work your way to product market fit, a functional use case, and mainstream adoption. But finding PZF is like getting a thousand extra chances as you weave your way to product market fit. Here’s the thing about crypto: for those in the mainstream, it’s still not that easy to use. Despite that, people are still using it, building on it, investing in it, and writing about it, allowing it to hold product zeitgeist fit as it moves toward product market fit.

“Nerd Heat”: Coined by my partner Chris Dixon, this is when the most talented, hardest working, and most in-demand people—the product managers, engineers, and data scientists—are so intrigued by a product that they’re working on it, excited by it, and trying to make it a thing.

The “Despite Test”: When people are using a product despite the fact that it’s not the best thing out there, or, in some cases, that it’s straight-up terrible, it’s a great sign. It shows that the product has a line into something emotional, not solely functional. Wanted, not just needed.

The “T-shirt Test”: If people with no connection to the company are wearing their t-shirts or putting their stickers on their laptops or wearing their socks, that desire to associate with the idea indicates as much a movement as a product.

The “Eyebrow Test”: In the early days, things that have product zeitgeist fit often feel misunderstood or controversial. At first blush, the conceit may even raise a few eyebrows. But to the people who have been working on those products, they’re so clearly elegant, if temporarily imperfect, solutions to big and important problems that they seem almost obvious once they recognize it. These things tend to be generational; they’re reactionary; and