2024-02-27 00:00:38
(Above: No, it doesn’t really look like this — and yes it’s mostly office parks and tech billboards. But I like to pretend)
You’ll never regret spending time in SF
If you work in tech, you’ll never regret spending 3-5 years in the Bay Area. This is advice I’ve been giving to people for years, and it’s shaped by my own experience — after all, I moved to the Bay Area in 2007 and it completely changed my life.
How?
In particular:
Getting started by asking for intros
I first moved to the Bay Area as a 25 year old nerd with a light resume and big tech dreams. I knew exactly 2 people, and that was it. But very intentionally, I wanted to build a strong professional network and to learn from people. The first thing I did was to be intentional and methodical about it, by asking the two people I knew to please sit down and suggest 5 to 10 people for me to meet — an they did a number of email intros for me. The amazing thing about SF tech culture was that this worked! Although the intros were very light on context, people were willing to grab coffee and share what they were working on, and what they’ve learned over the last couple years.
After each meeting, I would follow up with a few bullet points on what I learned from the conversation, and then ask for two or three more people to meet. This was like building my own personal viral loop, where every chat turned into a few more chats. For my first six months in the Bay Area, I ended up meeting 3 to 5 new people every day. I learned an incredible amount. I can confirm this is still possible, as others I know have done it in recent years.
How to add to each convo
You might ask, what do you end up talking about? What value can you add as someone who’s just moved to the area and is starting in tech? The answer is, you simply ask for advice. People move to the Bay Area from all over the world because they’re incredibly passionate about what they’re building. They love talking about that. and if you have something that you’re passionate about too, and ask for advice, you were sure to get a lot of it. The culture in the SF tech community is very open and the intro culture makes it easy to chat with a variety of new people.
For me, I was coming from Seattle, and I asked people about various mysteries of the tech industry I didn’t understand as an outsider. Why were there so many consumer successes in the Bay Area but not elsewhere? How does angel investing and VC work? Why don’t they build more houses/offices in the Peninsula? And so on.
Having a “thing”
That said, the conversations are more productive when you have “a thing.” What I mean by that is that all of these conversations and networking are more useful when you are starting a company, creating a new podcast, are working on a new project or book, or something else. When you have a directed goal in mind, then the conversations often are more valuable for all parties involved, because you were making yourself an expert in a particular area and your questions are more relevant. Otherwise you will surely encounter very busy people who simply refuse to “grab coffee” to “catch up” because it’s a poor use of time. I encourage you to be on a quest of your own, and even better a particularly interesting quest, so that your conversations with people can be as productive as possible.
In my case, I was very interested in the state of the art on growing users, metrics, network effects, and marketing. I asked everyone about this topic, and began to develop my own ideas that I would share freely. Eventually, it became clear that a few small communities orienting the PayPal mafia were the furthest along in their thinking. And that’s how I ended up being exposed first to concepts like retention curves, DAU/MAU, viral loops, and so on.
These ideas were interest to me, because my professional experience leading up to that point was actually an adtech. I had previously worked in online ads, with customers from WSJ, CBS, MySpace, etc, and had even gotten a patent filed on ad targeting (yes, US7747676B1). I had a superpower in my domain knowledge of CAC, A/B testing, funnel optimization, lead gen, etc, and began to merge all of this thinking with consumer products. In 2007 this was cutting edge at a time when product success was often measured by vanity metrics such as the total registrations for a product. This bit of specialized knowledge was what I brought to the table, and I talked about some of those learnings and ideas, and how they might apply to products. Sometimes I’d get intros to interesting people simply because of this expertise, which I appreciated.
Find your cult
I sometimes joke that the Bay Area is ruled by cults. Back in 2007, there was a cult surrounding quantified self, which intersected with lots of folks kicking off Crossfit, keto, Soylent, and other health trends. There were people building robots and hardware. The PayPal mafia was a thing, but look a little closer, and there was a huge network of Stanford CS people and even Canadian mafias. And Burning Man people. In 2007, YCombinator was just getting off the ground, and I was lucky to meet many of the early folks back when they were living in North Beach on strictly ramen diets. Today, those cults have evolved but they still exist — there is a huge advantage in finding one that suits you, or even better, starting one. Years later I joined Uber and had the idea one day there would be an ex-Uber cult. I think that’s happened, and there’s been countless founders, investors, and builders from that network.
Why blogging/writing is so helpful
In the first year, I learned the importance of writing things down. The other thing I started to do right away was to write down everything that I was learning. I started a real/professional blog at the beginning of 2007 on the Blogger platform and initially, I got writers block because I was trying to come up with amazing and grandiose ideas that I would share with the world. My first month, I had 20 email subscribers, from friends and family I forcibly subscribed.
But eventually, I created a more successful strategy for myself, where I would simply document what I was learning. It turned out that if one person told you a unique idea I would treat it like it was a secret (or at least, I would ask permission). It was often the case that a dozen people would talk about the same idea, and there was simply consensus memes floating around in the ether, and I focused on writing those down. I find that a lot of my blogging has been less about inventing brand new ideas, but instead simply collecting and expanding on the current tech zeitgeist. A few months in, Robert Scoble linked to my blog from his, and that helped a ton. (Thank you!)
It was with this attitude that I began to write about viral loops, growth, hacking, measuring retention, and product/market fit, and all the other concepts that came to defined my writing.
There is a virtuous cycle in talking to interesting people, writing down expanded versions of ideas that come up, thus being exposed, to more interesting people, and rinsing and repeating. This core loop helped power the growth of my professional network over the first few years. In later years, I added a dash of advising and investing.
15+ years later it’s weird to think that accidentally developing a habit of writing and blocking would still be with me today. In fact, this habit is so powerful that I recommend doing it above and beyond almost any other professional “networking” activity. Of course today you might be making videos or podcasts instead of writing. Or if you’re an engineer, publishing your code on GitHub. It’s all the same concept. Putting your work into the world, whether it’s text or video or code, and letting that engage the world.
In this way, you are building your network while you sleep. People find you and your work and your ideas, so that you don’t have to put in time for 1 million coffee meetings.
Why I avoid conferences
And in particular, I find writing to be much more powerful than going to conferences. One thing you’ll notice about the SF tech industry is that there are endless events and conferences. Whereas a secondary startup hub might have a major tech event once every month or two, SF has them every day. There’s office warmings, product launches, new AI meetups, hangouts at Dolores, big splashy conferences, hackathons, and so on. There are endless varieties.
Build a network while you sleep
However over time, I’ve found them to be less scalable than writing. They are fun, and it’s much easier to have a one on one conversation than it is to create a content. When you really think through how much time you spend getting to a conference, all the time between sessions, and when you speak how few people are actually in the audience listening. Contrast to any kind of digital platform where you can write a blurb and 1000s of people see your ideas.
Going back to my original assertion, I think it is hard to regret 3-5 years working in SF. Many people say it’s not a great place to live — and sometimes that seems true. Other folks hate the monoculture. However you can always move home, and when you do, you’ll always be the person with Silicon Valley tech experience. And furthermore, the learning curve is so strong, particularly for startup founders, as is the network of capital and peers. It’s a one of a kind place, and I highly recommend founders spend a few years even if they don’t intend to stay in the long run.
2024-02-13 01:00:57
The “Dinner Party Jerk” test is a solution to a common problem:
Startups often struggle at pitching their team, even though for the earliest stage companies, it’s incredibly important to do it well to raise capital — as I’ve described it below:
Pre-seed- Bet on the team
Seed- Bet on the product
Series A- Bet on the traction
Series B- Bet on the revenue
Series C- Bet on the unit economics
To figure out if you are properly pitching yourself in your team, run the thought experiment of describing yourselves at a dinner party. If you are pitching yourself hard, then if you are a kind human, you will turn red and blush with wild embarrassment. The reason is that a proper pitch includes many of your credentials, your achievements, the ways in which you and your team are highly unique, and we simply don’t talk like this at dinner parties. And yet this is exactly what you should do when you talk to investors, partners, customers, and potential employees.
Don’t hold back
Be the dinner party jerk, pitch yourself hard. Don’t hold back. Your shyness and cordiality is not helping.
I find that most founders tend to focus, primarily on describing their idea to the exclusion of everything else. I’ve heard thousands of “elevator pitches” and they generally focus on the idea and not the team, the market, differentiation, or anything else. And they downplay their achievements or omit them.
Of course what you emphasize depends on your background. It’s often described that there are repeat founders and first time founders, but furthermore, there’s another axis, which is about obvious credentialing versus not. For first time founders that are starting a gaming company, for instance, but have already spent years at a top company in the field, a quick modification to the elevator pitch, mentioning that, is both beneficial and quite obvious. But what do you do, you’re an uncredentialed first time founder?
Then the question becomes, what is your “earned secret“ behind the idea? Having a pithy story about how you were a Shopify seller, and that’s how you got to building any commerce product, is incredibly helpful. And if you have some metrics or an observation about the market that’s non-obvious, showing your expertise in the field, is even more valuable. If you have various credentials either professional, or academic or open source, achievements, it might be worth working those in even if not directly related.
The other very awkward thing is to use facts and figures to describe yourself. If in your previous work, you worked on an app that served millions of people, or for your current company, you recently launched and got your first 10,000 users, you should save these numbers. Any traction and any validation is incredibly helpful proving your case. And of course, this is another thing that would make you a dinner party jerk.
Why don’t we do a better job of this? The dangers of conformity
You might be going through a moment of introspection now and asking why am I like this? Why do I downplay achievements when I should be amping them up?
My answer to this, is conformity. In real life, we often subconsciously conform to the people around us. If you go off at a friendly gathering about all the cool stuff you’ve done, and why you’re going to be great, there’s a fear that you’re exaggerating the differences between yourself and others. There’s a fun theory from evolutionary psychology that shyness is an evolved trait to keep us safe in a world where we grew up and tribes of a few hundred people, and a few wrong words might follow us around for our lifetimes.
This is also my theory for why people are reluctant to engage on social media and share their knowledge, when it’s obvious that it might be very helpful to them professionally.
TLDR; there’s pitch mode and dinner party mode. Learn to turn the former mode on!
Be an optimist
You have to be an optimist about your own product, your own startup, and yourself. That’s why when you pitch — whether to investors, to prospective employees, or partners, it’s important to talk about what might happen, not what you are doing today.
There’s a whole style to this type of pitch, and it’s a futuristic point of view that leans into optimism:
I previously referenced the idea that international founders often describe this as the “American” way of pitching — the funny thing about this is that this isn’t the “American” way of pitching, it’s actually specific to the Bay Area tech ecosystem. It’s incredibly optimistic and futuristic that founders choose to describe their startups in this way, and furthermore, the people who hear these pitches choose to believe them.
Why this is the only way to pitch to investors, employees, and partners
Let me also make the argument that this is the only logical way to convince people to join you on your journey.
1. Investors
First, let’s talk about startup investors. a portfolio of startup investments is inherently risky, and the physics of venture math means that the winners have to be really big. It’s commonly said that out of a portfolio of ten companies, generally about half the investments will go to zero, three will return a little bit of money, and that the top one or two will return 10x plus and make the fund work. As a result, professional venture investors are trying to understand if you have what it takes to be one of those top two, and if you don’t if you’ll die trying. A lot of this assessment focused on the market or your numbers, but sometimes the real question is about your ambition.
So they are trying to answer a simple question: Do you WANT to create one of the leading companies in the industry?
Focusing on the future and on the upside shows your will to power. It allows investors to gain a sense of that signal. If you’re focused too early on profitability, rather than growth, or retaining your piece of the pie, as opposed to growing the pie as large as possible, that’s an important signal. The point of this isn’t to mislead investors into thinking that you’re trying to do something that you’re not, but rather, if you are shooting for something big, you have to really express that in the clearest way possible.
The perspective is often directly reflected (and not) in the slide decks I review at a16z. Does the product slide describe the features of what the app has today, or does it talk about the product roadmap of what’s going to be built in the future? Do they user projections or financial forecasts simply show the last year’s performance, or does it tell a story about how the business is about to inflect? Oftentimes when founders are too conservative about their story it’s hard for investors to understand what they’re trying to do in the long run. Instead, I love it when founders tell the big story. Of course I’m going to discount it and round down, and assume that many features are never shipped. But I love to see it.
2. Employees
Second, let’s talk about employees. typically when you’re hiring your first few employees, you might be able to give out a few percentage points each, particularly for key people (like engineers or designers). but within a few hires, you end up needing to convince people to work for below pay, and for a fraction of a percent of the company. Why would they do this? Why would they work for you instead of either starting their own company or getting a cushy gig somewhere else where they might be paid much more?
The asymmetric advantage of startups compared to many other opportunities, is that they are adventurous and fun. The startup might fail, but the work is generally a lot more interesting than what you can do elsewhere. The responsibility and scope that a junior employee might have might go way beyond what makes sense at any other company.
And of course financially there is upside. For founders to convince high-quality employees to join their outfit, it’s often important to lean into a sense of adventure. What’s more adventurous than tackling a big huge goal, that might not work, but if it works, it’s going to be amazing? For founders to communicate the sense of adventure, they need to be able to weave a narrative. Maybe it’s us versus them, or David and Goliath. Perhaps it’s exploring the unknown, and going to the frontier when no one else is there. If you can’t tell the stories, how can you expect people to follow you? Thus I find it important to tell the futuristic narrative that’s ambitious, full of surprises and upside, and has a possibility of failure too. It makes the work meaningful and makes the potential economic upside worth something.
3. Journalists, partners, and more
We’ve talked about investors and employees, but there’s actually a long tail of many other constituents that benefit from a futuristic outlook. if you’re talking to journalists and pundits, you have to compete with thousands of other companies that they’re going to meet this year, and you have to catch their attention. If you’re marketing, an event at a conference adjacent to dozens of other events, you have to catch the eye of attendees. An optimistic, futuristic perspective gives you room to tell the story about the problem you’re trying to solve, and why your startup will be incredibly important once you get there.
You might say that the world is full of cynics. Perhaps you are from a region or an industry where most people nitpick all the reasons why fail. Maybe they want you to focus on minimizing downside risks, or acknowledging your potential problems, and won’t treat you as credible unless you do. If that’s your industry network or your social network, I urge to you to escape. Seek out those who share your optimism, and the same values and beliefs about the future. it’s one of the reasons why the Bay Area has been such a powerhouse over the last few decades. Yes, there’s knowledge and investors here, but more important is the culture.
The last point I make is about yourself. You should talk about what you’re working on in an optimistic way to help create meaning for yourself. For those of us who grew up in a generation that adored Steve Jobs, there’s always been the goal to put a dent in the universe rather than to sell sugar water. Thinking about the future, and the upside of what you might be able to create, is a great way to give meaning to the nights and blood and tears that we put into our work. If you’re simply working on a new product only because it’s a good money-making opportunity, I guarantee that your sense of meaning will fade when times get tough. You’ll ask yourself, why am I doing this? If you don’t have a Northstar to guide you on an inevitably rocky, entrepreneurial journey, you’ll inevitably get lost. That’s when the FAANG job will seem really appealing.
Obviously, don’t drink your own Kool-Aid
This is all about the pitch. Of course it’s important to simultaneously hold in your mind all the truths about what you’re working on. Maybe you don’t actually have product market fit yet, or your marketing strategy. Perhaps your unit economics don’t yet work, or your team has major gaps. If you’re working on a new startup, likely, everything feels constantly broken, and everyone’s maybe going to quit.
You have to go and tackle all of those challenges with a clear mind — while simultaneously keeping a futuristic spirit that motivated people to join you on your journey.
2024-02-07 01:29:04
It’s hard to be a product without a strong theory of distribution
Here’s a common startup situation. A team busts their ass for months building the first version of their product. It’s almost done. Now a big question emerges — how do you get the first people to use your product? Hmm…
If you find yourself at this moment, then you are already in a bad place.
99% of startups are not differentiated on their underlying technology, and there is very little engineering risk involved. (I’m ignoring deep tech and foundational AI research companies, for the sake of this conversation). Because technology differentiation is no longer a real factor today start ups, it turns out that most products are succeeding or failing due to core product/market fit followed by the distribution strategy. There are over 9 million mobile apps. There are a billion websites. Figuring out distribution is key.
Dual insights needed
This is why I think startups end up needing both:
1) an insight about customers that gives them product/market fit
2) an insight about distribution that creates traction
People building products often have an easier time product/market fit because they are building for themselves, or a customer that they already know well. But the latter, about distribution, is often super difficult because once you onboard your friends and family, and look to expand the next set of hundreds of customers, you then dive into the world of growth marketing strategies and tactics which are its own very particular learned skill set.
The role of disruptive platforms
Sometimes when there’s a new breakthrough technology, as with what is happening in AI, or the Apple vision Pro, or Web3, it’s simply enough that the product has a “it works” feature. By simply being there on the scene when adoption of a new platform is happening, distribution happens automatically. I think that’s why we see that so many new great startups are launched right at the beginning of the platform.
But what happens when you are trying to launch the 9,000,001th mobile app? The first thing you do, naturally, is to try to read what’s out there. The other counterintuitive thing, is that although most of the knowledge in writing out there pertains to channels like SEO or paid marketing or influencer campaigns, many of these tactics best fit already successful products that have money and aim to accelerate growth. Many of these tactics simply won’t apply to you because they’ll be too expensive, or they will use mature marketing channels that just won’t be that effective. I often joke that by the time there’s a case study about a new marketing tactic or channel, the advantage has already been arbitrage away, and probably no longer works.
So what should you do instead?
Examples of products with natural distribution
Ideally the product and the distribution hypotheses happen at the same time, and reinforce each other. The Dropbox founders describe to me at the inception of their product, that sharing folders was part of the vision and was built in quite quickly. And later years this drove a significant amount of growth. Uber has natural virality because you often ride in a car with other people, or you ride a car to see somebody, and naturally you’ll mention the service. A product for creators, like Substack, will naturally encourage people on the platform to write and share content, attracting an audience who ultimately may also be writers themselves. Zoom, and other apps that help collaboration in the workplace, have natural features that cause you to bring in your coworkers as you use the product experience.
These are all examples of the best form of distribution, which are baked in to the product idea itself, rather than bolted on at the end.
The first set of users
Even once you have a basic theory for how your product will naturally distribute itself, you’ll still need to identify the first generation of users to help iron out all the issues, and give you feedback on whether your hypotheses were correct. In my years of studying new product launches, I can confidently say that the early years are often very idiosyncratic, and constantly changing. The reason for this of course is that marketing channels change all the time, but subscale ones that help you get your first couple thousand users, change even more so.
A few years ago you saw a trend were products would launch a huge conferences like SXSW. These days you see more effort on getting influencers involved early. Or “building in public” which makes yourself into an influencer. Several years ago many consumer products (like dating sites, new photo apps, etc) would launch on college campuses via the Greek system, because they were organized ways to reach thousands of undergraduate students. These days the organizations are often inundated with start up requests, and it’s become less effective. As a result all of these initial channels change all the time, and it’s up to the founders to figure out how to take advantage of what might work today.
The problem with these initial channels is that they eventually tap out.
The journey from channel to channel
Thus starts the journey of startups to grow and expand their portfolio of distribution channels, beginning with small and highly relevant ones, into the biggest channels.
I sometimes imagine a X Y axis, where X is volume of the channel, and Y is responsiveness. Early channels are often very low volume. But you want that. The reason is that they are highly relevant and they are small enough that larger companies do not focus on them. As I mentioned influencers are often an example of this, but so are niche newsletters, or or event marketing. However if you find this channel to be successful, you’ll also eventually one more scale. This involves you jumping onto the next set of channels, which will provide more volume but be much more competitive as a result.
Often times this is a period where you have one channel that kind of works, and you’re testing a few other channels simultaneously. Your efforts here should be experimental and iterative. You can often look at direct competitors as well as adjacent products and see what they’re doing, to inspire you on the right channel. The natural cadence of products will indicate to you the channels that are most likely to work. If you have episodic usage, you’ll probably need to do SEO/SEM, affiliate, or referral — something that helps you target high intent users. If you’re product is social or helps with workplace collaboration, then you might lean into referral programs and viral growth. Products in commerce naturally lead you towards paid ads, contact creators, etc. You can often learn a lot by talking to other people in your industry or an adjacent industries to see what works.
This is where sometimes I’ll see people working on episodic usage apps, like travel/health/etc asking the question, how do I make my product virally? I want free users! Of course the problem is, there’s a natural fit between a product and it’s distribution channels. Even though you might want free distribution, only very specific niches of networked products are able to grow freely. Generally everybody else must pay for their distribution, whether via referral or advertising.
Moving to volume-driven channels
Eventually you want to move on the XY axis towards volume. There are only about a dozen large scale distribution channels that can propel a product to scale. Advertising is on that list, SEO too, and so is viral growth. But these larger channels, by their nature, are both highly scaled but also have low responsiveness. As a result, you end up competing with some of the most famous brands in the industry as a result. Who wants to buy ads against the same audiences as major credit card or airlines? They have insanely high payback periods, and huge marketing budget, and are not that cost sensitive.
Ironically, this is where great products become to dominate. I started this discussion with the dual requirement of product/market fit, and distribution. But in the end, product/market fit actually dominates.
The reason is the following — the ability for a company to operate out in these most expensive and highly scaled channels comes from having a great product that generates a ton of word of mouth. More natural usage, the less marketing that has to be done. And the marketing costs that do exist end up being blended in with the large number of organic users.
The journey of a new product is to move, from unscaled and relevant, to highly scaled. And at the end, great products win.
2024-02-06 01:00:38
Every time you ask the user click you lose half of them.
(And this why tutorials, splash screens, and lengthy signup flows are a bad idea)
If you’ve been building apps for a long time and have seen the results of a lot of A/B tests, you quickly realize that people are a flighty bunch. Ask them to download an app and 80% will bounce right on that page. Ask them to sign up and 90% will hit the back button to avoid putting in their email and password. Ask people who’ve arrived from Google to read an article, to subscribe and get more updates, and 99% will head back to find the next article.
What happens when you ask for credit card and email
In the early days of Uber the only way to sign up was to give your email address a bunch of other fields and also your credit card number. Some of the big early winds in acquiring customers was just to make it so that you could sign up with a phone number and a password, and put in your credit card lead in the flow. If memory serves me right, these were increases on the order of +50%.
You get the drift of what I’m arguing.
So what happens when your designer has the fantastic idea of a stark and beautiful homepage for your new product that takes a few clicks to sign up, followed by a lengthy tutorial to explain all the features? Sometimes this becomes a life and death decision, because rather than signing up thousands of users into your private beta, which provides the traction to raise your next round of funding, instead only a few hundred make it through.
Streamline critical flows by minimizing steps
This is why, when I get feedback on a critical flow within a product, I always start by minimizing the number of clicks and steps. I asked whether each field in a sign-up form is really needed, or is optional. I ask the question of whether you need to user to do something now versus having them set it up in the future, when they’re more bought into the product. I ask to remove all the glitzy, visual steps that explain things and just ask the user to hit next. I move the sign-up form to the first experience, whether that’s on the homepage, or the opening screen of an app. If there’s a call action, while the user is doing something else, like reading an article, my theory is that you should be very upfront with it and make it a blocking modal, or not do it at all. No half measures.
The point of all, this, of course, is to get people into the magic of your product.
The magic is not in filling out forms or watching cute videos about your product, it’s about using your product as quickly as possible. As a result, the only acceptable forms of friction are ones that ultimately enhance the users ability to have a great experience. Thus product is much better experienced as an app, where you have a notifications channel and a richer experience, then, by all means, ask the user to download something. If a product is much better, when used with colleagues or friends, that it might make sense to take a lower conversion rate during the sign-up flow in exchange for some sharing or inviting functionality, that brings more people into the app. Ultimately, it’s all a trade-off, where every click drops off a huge number of users, so you need to spend that user intent very very well.
Add friction when it helps
Ironically, it can also be an anti-pattern to not ask users to sign up or install or do anything at all, because once they bounce, which they will inevitably, do, you have no way to get them back. That’s why it’s all a trade-off, and one of the trickiest things about the user growth discipline is knowing when to add friction, and when to take it away.
Also, interestingly enough, as you make it easier and easier to sign up to reduce friction the quality and intent of the users also decreases. If you double the number of sign-up typically, you do not get twice the number of paying customers.
Nevertheless it’s an important thing to remember: Every time you ask the user click you lose half of them. Be careful.
Above: Many small business figured out the hard way why coupon sites generate worse users
Incentive programs often don’t perform
The people you attract with referral programs, free trials, coupons, and gamification — folks who are “incentivized” as a broad umbrella category — are usually MUCH WORSE than organic ones. Worse LTVs, worse conversion, less engaged, and so on.
In a previous life, I headed up Uber’s $300m+/year referral program (“give $5 and get $5”) and learned a ton. Much of the learnings apply to the next wave of gamified consumer apps, web3 games, etc.
So why are these users worse? Let’s discuss.
When CAC/LTV spreadsheets fail
When a new product comes to market, usually the team will measure a baseline set of metrics around lifetime value, etc. if the numbers look good, they might say OK let’s roll out some incentives and get more users like this. Spreadsheets are built, budgets are planned, growth is forecasted, and the new growth project kicks off.
The problem is, all of these forms of incentives usually end up attracting a different type of marginal user that wouldn’t have signed up earlier. They are less qualified, more discount seeking, and behave differently. There is negative selection.
This is especially true when the product has been out there for a while and the core market has mostly been saturated. You also see significant amounts of fraud as users scheme to profit from the incentives. This could be a simple as creating a new account to grab an incentive or it could be something much more organized and nefarious.
This is why core metrics like LTV and engagement can often be half as good or lower, which is often enough to defeat the mathematics that justified the program in the first place. An additional user at upside down mechanics feels good from a top line basis, but in fact, fewer users would be better for the business model. And all the attention towards a complex referral program might take away attention from innovation elsewhere in the product.
One final issue that’s quite subtle, but very important: Cannibalization. You have an target market and sometimes it takes time for a product to spread through its ideal users — this is magical because word of mouth is free. And when it happens in an organic way, the intent is even higher. But if these ideal users encounter the product via an incentive program, you often “pull forward” these users, thus costing you money, when you would have gotten them anyway.
If this all sounds like I might have suffered some trauma from Uber, it’s because I did! Not only did the rider-side referral programs perform worse over time, and perform worse than other channels, in fact, the users were much worse than even users bought from paid ads. It was millions of dollars of spend that didn’t need to happen.
Why this matters — in the world of web3, gamified apps, etc
The ramifications of this are wide, especially on the world of web3, consumer apps that are gamified, etc.
First, it tells you that if you take a game or an app that does not have inherent engagement and retention, it is not enough to add gaming mechanics. If anything, the new mechanics might make things worse, not better, as they attract a group of users who respond to the mechanics, but wouldn’t otherwise use the underlying product. I think we saw a lot of this in web3, where incentivized attracted speculators early on, but struggled to find fun gameplay to attain actual users. Similarly gamified consumer apps (the trad kind) might attract and sustain a certain type of user who is happy to engage in any gamified app, and who will quickly move on because the underlying app doesn’t engage either.
Second, all of these dynamics create sort of a related dynamic to the Law of Shitty Clickthroughs. Not only do individual marketing channels degrade, but many of the new channels you add over time — because they are incentivized — perform worse than the initial channels. Thus the entire machine gets slower and harder as you go.
Final story on this from Uber, funny enough the referral program on the driver side attracted very positively selected users. Whereas the rider referral program got discount seekers, the drivers were highly money motivated. Because they were so motivated and signed up for larger referral bounties, they actually performed better after sign up. Even though referrals was 15% of sign-up they were well over 30% of first trips.
Incentives are a form of selection and you need to make sure you know what you’re selecting for.