Before Seeking VC, Founders Must First Demonstrate Retention

Retention is the core of a successful growth strategy.

Posted on
April 20, 2022
by
Laura Gaviria Halaby

Before seeking VC, founders must first demonstrate retention

Retention is the core of a successfulgrowth strategy

 

Do you remember the thrill of finding long-lost friends when you first joinedFacebook? The social network helped you invite friends and connect with thosealready on the platform, allowing you to see their pictures and stories. By theend of that first week, if you had more than 10 Facebook friends, you werehooked. The secret: retention.

Entrepreneurswho have a clear growth strategy and make retention their top priority are morelikely to turn their companies into category leaders. Here is how they do it.

Start with culture

As Rappi Founder and CEO Carlos Mejia shares, the “culture in startups is the gluethat keeps them running.” A focus on customer retention must be embedded within your team’s culture at every stage, whether you’re a new founder or anestablished CEO. All team members must align and work toward the same NorthStar, regardless of their independent roles.

A data-driven mindset is also an important part of a startup’s culture. Your teamshould agree on the key performance indicators (KPIs) that will determine yoursuccess and continuously measure your progress. This will make it easier tohave fact-based conversations that lead to meaningful business decisions.

Get the definition right

Having a great product is paramount, but that alone will not guarantee success; agrowth strategy is required.

Founders must obsess over defining their retention metrics properly from the earlystages of the company. Carlos Upegui, head of growth at Frubana, a wholesalemarketplace serving the restaurant industry in Latin America, recommends thatfounders spend a lot of time understanding the natural frequency of theirproducts and the core action that properly signals their usage; these twothings will allow for proper retention tracking.

Defining the core action is especially tricky, but if you ask yourself what problem yourproduct is supposed to be solving and then figure out which action users aretaking that signals whether the product is adequately addressing that problem,then you have identified that key metric. For Frubana, for example, it is acustomer placing and finalizing an order of a minimum amount.

Invest in retention

“It costs me money to achieve market share,” says Claudia Woods, CEO of WeWorkLatAm, noting how the acquisition of customers is often a costly first step,but worth the investment. And the ability to scale only comes when you can besure that retention continues when acquisition efforts stop. So you must getusers to discover the full value add of your product as quickly as possible.

Retention involves the following steps: activation, engagement, and reactivation (in thatorder). Activating and engaging users means creating a new habit and makingsure they deepen that habit. Reactivation is the last retention effort as itinvolves luring back users who once used your product. Never waste time with“window shoppers;” if they were never really engaged, move on. But for thosewho were once activated customers (i.e., had developed a habit of using yourproduct), it can be useful to remind them of the value they once enjoyed withyour product. Spotify, for example, already has me paying a monthly fee, and Ilisten to an hour a day. If I increase the amount of time I spend on theplatform, it signals to Spotify that I am an engaged user – and that I’m worthreactivating if I ever stop paying.

Know when to raise funds

Think of retention as an output that indicates when it’s time to scale. AustonBunsen, the co-founder of blockchain developer platform QuickNode, suggestsspecific KPIs for early-stage companies with less than $1 million in annualrevenue. For a healthy growth rate, he says companies should look to acquirenew customers at a rate of 5 percent week over week (or 20 percent month overmonth, not cumulative). So if 100 customers signed up this week, by next weekthere should be 205 customers. As for the activation or conversation rateshowing how engaged users are, Bunsen suggests aiming for 60 percent or higher.“If you can get this, you’re in great shape,” he says.

Founders need a solid retention rate before they start raising funds. “Don’t raiseSeries A or try to grow your company when you haven’t cracked retention,”Upegui advises. When companies fail to understand retention, they tend to expand before they are ready. “It’s called premature scaling, and it killsmany, many companies every month,” he warns.

From my experience, it’s best to obsessively define your growth metrics and secure ahealthy retention rate before looking for investors. Your KPIs will tell youwhether your brand is delivering on its promise and whether you’re ready toexpand.

Laura Gaviria Halaby
Head of Knowledge, Strategic Partnerships and Crypto Value Creation, SoftBank Latin America Fund