👀 Heartcore Consumer Insights
Welcome to the 94th edition of Heartcore Consumer Insights. Curated with 🖤 every two weeks by the Heartcore Team.
If you missed the past newsletters, you can catch up here. Now, let’s dive in!
In a bull market, high growth and high burn are fine because if you need to spend a lot of money to get there, whether through paid marketing or partnerships, you do it… after all, you can just raise more money, right? But in a bear market, the answer changes. This means the strategy for user growth just went from “as much as possible” to “efficient, profitable, productive” in just a few quarters.
What are some ways you should be rethinking your growth strategy?
Embrace the new normal: although there is a floor for how fast a product has to grow to be interesting, there’s now a much bigger emphasis on efficiency. One metric that’s been recently popularized is the Burn Multiple = Net Burn / Net New ARR. In other words, how much is the startup burning in order to generate each incremental dollar of ARR?
Cut your marketing spend: in particular (a) keep the high ROI channels, cut the low ROI ones, even if they provide volume, (b) focus on accountable spending, and reduce ones that have a long/fluffy payback, (c) rethink brand marketing spend. On the first point, every growth effort is built from layers of channels built on top of each other. Usually, these layers are built over time by growth teams who keep arbitraging 10:1 LTV/CAC ratios down to 3:1, then 1.5:1, before they slow down. It’s time to unwind that. Instead, go back to the core.
Laser focus on your engaged, high LTV users: at Uber, it was often noted that it was much faster to get drivers to spend 10% more time on the platform than to acquire 10% more drivers in a market. The latter would require a big marketing push and might take weeks for the drivers to ramp up to the same level of engagement. The reason why this dynamic exists is that there’s often a central segment of where the product is really working, and then an “Adjacent User” where it only kind of works. This can become a tradeoff between Marketing versus Product-Led Growth, where the former drives CAC, whereas the latter is built on product development costs. The advantage of growth driven within the product is that it impacts a wide swath of users within the product. You can invest once and get benefits over a long period of time, and amortize costs across a large segment of users. Lean towards product when possible.
Live to fight another day: you now need much more revenue to justify the same valuation - what used to be a 15x multiple is now 7x. This is causing a domino effect in the industry. When you see a $2B public company cut down to $1B, then a $500M privately held startup is cut down to $250M, and so on. The tricky part is that for a public company you have a real-time stock quote to see these valuation changes. For a tech startup, you raise new funding rounds every year or two. That means for much of the industry, the next round of a startup just became much, much harder, but we potentially won’t know for a year+ how much the bar has moved. For startups who have recently raised, they’ll need to “catch up” on their most recent valuation, and additionally progress to justify the customary 2-3x jump in valuation between rounds. That’s the new bar.
Most of the world’s leading consumer marketplaces looked like completely different businesses at their inception. Amazon was famously an online bookseller, while Uber started as a black car service.
This type of focused launch makes sense - it allows a marketplace to start building network density and find PMF. But as things start to work, most marketplace companies feel pressure to grow. Marketplace operators have to make choices about how to use their limited resources: do they further penetrate their existing market or try to expand into something new?
When, where, and how to expand into new geographies and verticals?
A) When to expand?
Competitive pressures: are competitors launching into markets you plan to play in? Is there a significant 1st-mover advantage? This might encourage you to expand more quickly in order to avoid getting left behind.
Funding: do you have the capital you need to fund expansion? Expansion often requires spending money on marketing, especially if you’re entering a space with strong existing competitors.
Product-market fit: do you have PMF in your first market? You want to have a truly “sticky” product to justify moving into a new category or geography. TaskRabbit co-founder has spoken about the dangers of expanding before finding PMF. TaskRabbit was consistently churning through users and had to redesign and relaunch its product when it was already live in 20 markets. This was not only a waste of resources but eventually required retraining the entire supply base.
Impact on existing supply and demand: how will existing suppliers & consumers be affected by the expansion?
Scalability: are you concerned that something about your initial market is unique, and that your current model won’t scale elsewhere?
B) Where to expand?
Proactive growth means you’re actively seeking opportunities for expansion, often to serve a mission of fueling growth. This typically involves brainstorming potential new markets, verticals, or product lines, and then evaluating them using the following matrix.
Reactive growth means you react to expansion opportunities presented by competitors, partners, or even customers. Keeping an eye on what your competitors are doing may be obvious, but it’s also critical to watch for signs from your customers. Are they “hacking” the platform to transact in categories that you don’t currently support? eBay Motors was created when the then-VP of U.S. Operations was searching for collectible cars and found that people were using eBay to trade real ones.
C) Prioritizing opportunities:
Customer leverage: do your existing customers benefit from your expansion? Ideally, the expansion will make your marketplace more valuable to existing customers, increasing retention, transaction frequency, and LTV.
Supply-side leverage: does your existing supply benefit from your expansion?
Competitive dynamics: what is the competitive landscape in the new category, geography, or product offering? If local density matters are there existing local competitors with a meaningful advantage?
Unit economics: is there anything about the new market that might meaningfully impact your unit economics?
Comparable market characteristics: is the new market similar to the one where you currently have PMF? Many marketplace operators develop an “archetype” of their core customer and assess whether there are enough consumers who meet this profile in a prospective new market.
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🇪🇺 Notable European early-stage Consumer rounds
🇺🇸 Notable US early-stage Consumer rounds
🔭 Notable later-stage Consumer rounds
🍭 Notable Consumer Exits
Heartcore Consumer Insights is a weekly newsletter covering notable consumer rounds and exits and top content in the B2C space.