Startups recognise that neither a good nor an exceptional product or new idea alone is enough to succeed.
They need to retain customers (as well as recruit them) and they need to retain great staff / people (not just recruit them either). And successful startups are able to do both of these – all at the same time – again and again… and again….
1. Customer recruitment (and retention)
Thanks to the work of the likes of Steve Blank and Eric Reis, it is broadly accepted amongst the startup communities and accelerators that customer (or market) development is just as important as product development.
However, this masks a key insight. That is, that it is not enough to recruit new customers but essential to also re-recruit or retain those customers too.
The key to both recruitment of customers, and their retention, is a combination of building appropriate products as well as effectively communicating with your customers. In order to do this, the startup needs to accurately identify their market or markets where a market is a collection of customers.
Those startups that identify everyone as their customer – usually stated as ‘this is a product for everyone’ usually fail.
Those startups that can be more specific and say ‘all universtity students’ are our customers or something similar have a much greater chance of success – even if, after time, the startup identifies other related markets – such as teachers at universities or parents who pay for their children to go to university or third party agencies who work with or relate to universities.
It is one thing to identify and successfully recruit customers but it is another to be able to retain those customers.
In digital startups this retention is usually is measured as a return rate to the website – how often do those customers return? Often the rate of return is a function of how well the product is re-marketed (email newsletters or facebook updates / pages are typical ways to lift the return rate) as well as the rate at which new releases are launched or new messages are communicated.
All mature businesses know it is 5 times easier (albeit it, the rate can be higher or lower in certain sectors) ot retain a customer than to recruit a new one.
Great, so, let’s say your startup has both a customer recruitment AND a customer retention strategy coupled with a product development strategy that supports and extends the effectiveness of the marketing effort.
Is that enough for success? No!
2. Staff/ team recruitment (and retention)
There is another area of business which is just as important – but is largely overlooked – at least until recently – by the startup community – and that is the recruitment and retention of partners, influencers and staff.
And, just as the effort to recruit customers is significantly greater than the effort to retain, this same rule also applies to the recruitment of the people who make the business happen.
Now, these people might be partners – usually defined as owning an equity stake and accepting a below market rate salary (or frankly, no salary at all); they might be influencers, such as non-exec directors (who may have a small stake ) or business angels (who will invest a seed fund of cash and take a larger equity stake – but rarely more than 30%); or they may be staff – ie. people paid a market rate for a full time or freelance role.
Most startup accelerators correctly emphasise the recruitment of customers – albeit, some place less emphasis on the retention of customer; but few startup accelerators place any specific emphasis on the recruitmet of the people who make the business happen.
Why is this?
Well, because building a successful startup team is hard to do – and even harder to do well!
Many startup entrepreneurs have very high expectations of future potential partners and over value their own work or the startup they have built so far. Equally, finding a way to not only recruit, but also keep, the key people in the business is crucial.
To retain great people you need to reward and motivate them appropriately. This is, of course, much easier than it sounds.
The essence of acheiving this is a balance of
- What does this person contribute (time, skill, money)
- What stage is the business at (concept, pre-revenue, early revenue, seed funding, full funding or expansion funding)
- What does this person need to grow (often, people will work for less or work harder if they sense that they are ‘getting somewhere’)
We then need a method of ensuring that where the contribution is made in one act (ie handing over the IP of an idea, a proto-type or, the handing over of a sum of cash) that this contribution is protected. Whereas, when the contribution is based on an investment of time over the next four years there needs to be a method for returning equity if the time contribution is not made.
To do this requires a balance of equity or salary share among the partners, founders and funders that reflects the relative value of each contribution.
The key here is that each person’s contribution is relative – that is, relative to what the other parties bring.
This is why a concept startup will, for a £50k investment have to give up 50% to 70% of equity, whereas an early revenue business might only give up 25% to 30% for £100k of funding).
The point here is that what each party brings needs to be clearly understood both in absolute terms (what is it that they are bringing) and relative terms (how important is that contribution to the startup) and comparative terms (how does the value of this contribution compare with the contribution of others).
This is hard to do and requires real negotiation between the parties. This negotiation also explans why building a startup team takes a long time and also, why so many startups underestimate the commitment required to get this element right.
When we took the decision to build the startup acceleator Idea Alive, we elected to build in this people recruitment, retention and negotiation into the heart of the accelerator.
You’ll also find that over half of my book – 100 Rules for Entrepreneurs – is dedicated to the recruitment, retention and incentivisation of the team and staff.
Once a startup has understood and mastered the basics of product development and customer development, the key factor that determines startup success, above all else, is the ability to recruit and retain the right people around your business.
Hence, in addition to a great product, every startup needs two things –
- the ability to recruit and retain customers and
- the ability to recruit and retain people who drive, build and influence the business.