Viral Growth

by Andrew Perlmutter

Lean startup theory makes viral growth seem like the simplest piece of building a large-scale business from scratch. At the very beginning of the process, the entrepreneur avoids wasting money while rapidly and iteratively testing hypotheses about a new venture based on customer feedback. By consistently refining the product and pivoting the business model, the entrepreneur eventually achieves product-market fit. As Marc Andreessen describes it, PMF is defined as “being in a good market with a product that can satisfy that market.” The telltale signs of PMF are always obvious to the entrepreneur: “customers are buying the product as fast as the entrepreneur can make it and the entrepreneur is hiring sales and customer support staff as fast as he can.” It is in this moment, with the business model validated, that the entrepreneur is supposed to step on the accelerator, open up the engine and scale the business as quickly as humanly possible. The result? Viral growth. To summarize, the entrepreneur reaches PMF, hits the “scale now” button (i.e. pumps in a lot of cash), and viral growth happens.

But the first five classes of LTV have complicated this version of viral growth.  In particular, each of the five entrepreneurs has followed lean startup principles, yet only Dropbox has achieved viral growth. Furthermore, many popular platform businesses such as Facebook, Twitter, and YouTube achieved remarkable viral growth despite scaling up far before the founders validated the business models.

So what does this mean? One dangerous response is to maintain an unwavering belief in lean startup theory by rationalizing the evidence from our early classes. Such an evangelist could argue that Dropbox is the only company from those close that achieved viral growth because it is the only company that reached product-market fit.  Similarly, this evangelist could also claim that Facebook / Twitter / YouTube attained PMF and validated their business models by winning the time and attention of users. Thus, Facebook/Twitter/YouTube did scale at the appropriate time pursuant to lean startup methodology. What the evangelist is really doing here is looking at whether a company has successfully scaled (through viral growth) to determine if it previously achieved PMF, and not the other way around.

This sort of logic is extremely damaging to lean startup theory because PMF is what gives the theory its predictive power. Simply put, the predictive principle is as follows; if a business hits PMF, then it can be scaled successfully. However, if we need to see viral growth before we know whether a company has hit PMF, then we have no ability to predict anything.

What’s really going on is that it is very difficult to know when to scale a business. Some businesses can/should scale before the business model is validated through monetization, but most other should not. The entrepreneur is faced with the dilemma of trying to figure out how to categorize his business. In the face of this uncertainty, lean startup theory offers the entrepreneur a set of tools that, when used correctly, improve the probability of his venture’s success. It does not present a comprehensive set of circumstances under which a business can scale successfully. It also does not ensure that the entrepreneur will achieve PMF by using the tools.  In fact, it cannot even define what PMF really is. But it does lengthen the entrepreneur’s runway and give him a scientific approach for developing a successful business.

So in my opinion, lean startup methodology is not actually a predictive theory. It is better categorized an approach to developing a startup that improves the chances of success.

Comments

Popular posts from this blog

Quiz Time 129

TCS IT Wiz 2013 Bhubaneswar Prelims

The 5 hour start-up: BrownBagBrain