The Startup Chat with Steli and Hiten

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Steli: Hello everybody. This is Steli Efti.

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Hiten: And this is Hiten Shah.

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Steli: And today on this [hollow chat 00:00:05], we’re going to talk about buying and cross-promoting apps in SAS, or products in SAS. So here’s the deal. As the world of SAS products has matured and grown and scaled and exploded, and there is a ton of different SAS products out there. There’s SAS extensions, mobile apps, web apps, whatever, desktop apps. Now we’re getting to the stage where we don’t just see kind of one type of company or startup that is building a SAS product, to be kind of a venture funded Silicon Valley based company or something like that. But you have single founders, you have people that build these SAS apps as side projects. Some of them are big. Some of them are small. And so now we’re starting to see kind of this trend of more acquisition happening in the space where companies buy smaller products to promote them, or to use them as lead gen for their main product. And I thought it’d be fun to unpack this a little bit for somebody that’s already a founder running a startup, or a SAS product, is it a viable strategy to buy other apps that have maybe similar customer base and cross promote? You’ve done this a good amount, you’re probably one of the more experienced people in SAS in buying apps or launching different products and doing the cross promotion. And so I wanted to unpack the strategy and kind of maybe highlight some of the unintuitive truths to this. Here’s the shit that everybody thinks would work easily, but it doesn’t. Or here’s the stuff that you think would be profitable, but most people don’t do X, Y, and Z when they do the math. So let me ask you, with kind of all the experience that you’ve had trying this, first of all, just throwing out there the big question in my mind which is, what’s not simple about the strategy of saying let’s buy an app or a SAS product that has a similar customer base that then we’ll be able to promote our main product to, and kind of do cross selling or cross promotion? What about that basic idea is what people miss? Because if it was that simple, everybody would do it and would do it incredibly successfully, and I’m not sure that that’s really the case. So what’s some stuff that we don’t know about this strategy or this idea?

[0:02:44]

Hiten: What you probably don’t know is it typically fails. And it’s not that you don’t know that, it’s just that when you’re in it and you see an opportunity, you’re thinking about all the things that could go right. And I think that that ends up getting people to be very optimistic about something that they should actually be very conservative about. So when you’re acquiring these things, my advice would be, be conservative in your thinking of what you can do with that thing. And the way you’re conservative, the way to do that is actually go model it out. What’s going to happen when we buy this thing. And that already starts kicking up a lot of dust, so to speak in terms of like, “Oh, well, why are we buying it? What is our goal with it? What do we expect this to do for us?” And it has to do something related to your existing metrics or your existing business, or it doesn’t really work. Even if that means we want to extend into this new product line and we want to do this new thing, we want to extend the capability of our product in this direction. Then there’s things like, do you keep the product? Do you merge it in? Do you rebrand it? Is your strategy to create what they call a family of brands? Best example’s Facebook, they have a family of brands. Or are you like Google? Even Google does, but really Google’s been much better at you buy it and you rebrand it to Google. And over time, most companies rebrand. The only reason I mentioned Facebook is their ability to rebrand these things, even though they’ve made some branding moves more recently is, pretty low because of the consumer market and consumers getting really attached to a brand. When it comes to B2B, one of the things that you see often is that someone buys something and then rebrands it, or adds their logo to it, much like Facebook has done recently with WhatsApp and Instagram and even Oculus. So you’re talking about something where most people are optimistic going in, and that’s why these initiatives fail. And the way to be conservative and appropriately assess it is get very clear about what you expect to happen after the purchase. And that’s based on things like, well, how many sign ups do they get? How much revenue does it make? How does it fit into our business? Is it something where we expect to introduce this to our customers and improve our retention, for example? Or is it something we plan on introducing to our customers through our sales team and get an upsell, because of whatever reason? So the devil’s really in the details, and I see teams have a lot of alignment issues when it comes to this. And what I mean by that is, the team itself internally, and this is why I suggest this approach of being conservative, the team itself internally is not aligned on the reasons. And you kind of make them up and different people in the company have different reasons for why this acquisition or purchasing this product or business is a good idea. When, if you start putting it on paper and do the math, I think a lot of things become clear. Even the idea of the company itself doing it itself instead of building versus buying, ends up being a more deliberate math, kind of cost based conversation. And the funny thing is, most of the time you’re not buying something like Facebook did with WhatsApp, where they spent $19 billion. You’re closer to buying something like they did with Instagram, where they spend a billion or you’re buying something like they did with some of the companies they’ve done historically, where they bought it for the technology and then shut it down. And all this just points out the fact that be very clear about the one reason you’re buying the thing. There can only be one reason, because you can only do math on one reason. If you have multiple reasons, then you’re really not thinking hard enough of what does this purchase mean to us?

[0:06:51]

Steli: I love that. That makes so much sense. And I think that this, just like many other examples that we’ve discussed as pitfalls for founders, is one of those things where it looks so appealing and so sexy and there’s a fantasy in our minds that can run away with it, of this could be this really exciting thing and it’s already there so it’s easy and fast. It’s kind of like a fast way to whatever, expand or grow, do something or launch something new or whatever it is. And the devil is in the detail as you said, especially if there’s maybe not enough time to slow down a little bit and think about the opportunity costs. If we spend all this time integrating this, rebranding this, promoting this, whatever, what are we are going to stop doing? Where are we going to take the time away from? Does that make sense? What does success even look like for this? What would this have to do for it to be a big success? And what would it have to do to be a big failure? Even not being clear on that could mean you buy something, you work at it for a year and you’re sort of in this fog where you don’t realize it’s been a failure and should move on from it, and you’re just kind of stuck in it.

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Hiten: That’s right. That’s exactly right. That’s what you’re trying to prevent. Also, you don’t want to carry those feelings over into post-purchase. It’s exactly right, that’s the big problem. If you go into it the wrong way, you might end up with something on your hands that’s going to fail because it didn’t start the right way. It started with optimism, not with the conservative lens. And this stuff has to have a conservative lens. There’s so many unknowns about this and you can never know all of them when you buy something.

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Steli: We recently had a conversation with somebody that had done this, I think he said nine or 10 times and one thing that he told me, it was really surprising, his strategy. This is somebody that had one big app, SAS product, that had a shit ton of signups every month. And then he’s been running this thing for a while, and then he started thinking, “Well, what if I bought smaller SAS products that have the same audience as mine? And then all I do is I buy this app that sells to recruiters and I have a big recruiter product. And then what I do is I just buy it for whatever it is, price X. And then I use my massive audience of customers to promote this product two, and maybe I double its customer base or triple its customer base. And then I turn around and try to sell it, because I grew it very quickly in a very short period of time, because I had one main product with lots and lots of customers and I can use this to infuse this unnatural growth for these SAS products and then flip them, basically.” That was his big strategy and idea, he told me. And then he told me that with nine different products that he acquired, it didn’t work once. And I was kind of baffled. I was like, “Really?” And he’s like, “Yeah.” And I’m like, “Why? Why do you think isn’t it working?” And his thesis, I don’t know if it’s true or not, his thesis was that he said he didn’t know. A lot of these products were very complementary, they did surveys before trying to figure out would customers also need this other thing? And he said, even for something where they would have for the main product, I don’t know, like 10,000 signups and maybe out of those 5,000 were good signups every month. Out of those five signups, they would promote this other product that would get like six to sign up for this smaller product that they were promoting. And he said, they even tried to brand it similarly to the main product that did slightly better, but also not. And then his thesis, why this wasn’t working, although he tried it so many different times, was that the main business, although he had a lot of customers, had a pretty weak brand. And he was like, maybe people just don’t trust it from this brand when we were promoting these other products. But that seemed kind of funny to me. I don’t know, I had no experience myself with any of this, but this was just such a interesting…

[0:11:09]

Hiten: So he failed not because of the brand, but because I think he failed to do the math on the conversion rates when you start trying to promote another product of any kind to a existing user base. And it’s really honestly not about promotion. It’s almost like treating it as if it’s a new feature you’re adding. And how do you ensure a feature adoption? So there’s two things. That’s one piece, and the second piece is user friction, and they kind of get related. So all the things he was telling you about, “Oh, if it was a stronger brand,” or “When we slapped the brand on it got a little better.” Those are all just optimizations on adoptions, but those aren’t necessarily like, “Hey, people are already doing X in our product. If we add a button for them to do Y, they’re going to actually click Y and a high percentage of them are going to actually go do that second thing.” It’s the same way you would treat a feature. You’d be like, “Well, if you put the button in, are people going to use it?” Or “If we put the feature in, are people going to buy it?” How do you figure all that out before you actually go and make those moves? So that’s why historically, and I’m sure a lot of people listening don’t remember any of this, but companies would basically, like Amazon and other companies that have been, historically even Google, this is like old school method, but known to directly compete with the thing that they’re about to purchase, in order to really assess what’s the viability of it, are they working. The second thing they do is if they don’t compete, they go partner and see if there is the kind of uptick that they thought there would be, and then they go buy. So the classic moves are to solve for the one problem, which is adoption basically. Will that thing be adopted through the methods we use at our company today. And that goes back to being conservative and also understanding what your real advantage is. So I think that person you talked to, he had a feeling that the brand might be an advantage or a feeling that the audience might be an advantage, but then he hit all these bottlenecks that were just points of friction. And so I’ve seen this work, for example, there’s a couple folks, who’ve done this in the Chrome extension space where they have an audience of, let’s say marketers, and they just buy up all the Chrome extensions for marketers. And then they have a pretty big audience for marketers and they’re able to do a bunch of cross selling and promotion across the tools. But you’re talking about someone installed a Chrome extension, they’re a marketer, maybe there’s another one that’ll install that does something different, but is still something for them. And there’s things like that that have worked, but they also have a channel, which is basically the Chrome notifications, that caused the upsells. So the channel’s built in, that I’ve seen over and over again, maybe four or five times people doing that. Now the Chrome marketplace is not as hot, so to speak on some of those strategies, but that’s worked. People have done that with WordPress too. So the folks at AppSumo, now sumo.com, grew their original widget business where it was popups on top of a website, by basically purchasing a lot of WordPress plugins and trying to consolidate, trying to put their technology into them. And I don’t know how successful that was from a revenue standpoint, but from a growth and adoption standpoint that was pretty good.

[0:14:27]

Steli: Nice. That makes a ton of sense. All right, we’ll wrap this episode up here. I think for any founder that is interested in potentially buying another SAS product or extension or something like that, and is maybe unsure if it is the right timing or the right approach can always send us an email at [email protected] and [email protected]. We are always happy to help if we can.  And this is it from us for this episode, we’ll hear you very soon.

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