As of November 2021, there are more than 800 unicorns worldwide, that is, startups with a valuation of more than $1 billion. But, many of these unicorns are not profitable. A Crunchbase analysis in early 2021 showed a large percentage of the most highly valued unicorns that went public in the latter half of 2020 were posting losses in excess of $100 million.
For some time, private investors and Wall Street have been betting on unprofitable startups who spend heavily on growth to scale (i.e. growth at all costs!) If you’ve been paying attention though, you’re likely seeing a major shift back to investors prioritizing growing fast on the top line while remaining capital efficient.
A strategy gaining in popularity to achieve responsible scale is product-led growth (PLG)—think Slack, Calendly, Expensify, and Dropbox—companies that have shifted power from the buyer to the end-user. If you want to rise to meet the demands of today’s market while growing sustainably, PLG is the secret. Here’s how.
The key to long-term profitability
Minimizing the amount of time between developing a product and providing it to customers while maximizing the number of customers that come in contact with the product allows for fast and sustainable growth. When products solve a real problem for end-users, freemiums can lead to SaaS growth with an average of 7% free to paid conversion rate. Zoom, a leader in video conferencing, is a household name today. But it started small, launching in a crowded space with bigger names like Cisco Webex and GoToMeeting. It did this by centering on customer needs and offering its key features for free. In contrast, its competition took a top-down approach selling to the enterprise, requiring budget approvals, with a lack of focus on its users.
Can you think of a time when a product solved a real problem in your day-to-day life? Maybe it was when you first used Slack instead of sending four emails back and forth, then you told your coworker about it, then they told someone else. That picks up grassroots momentum until your organization realizes its mission-critical for its workforce and purchases it enterprise-wide. This is the heart of a PLG approach: a go-to-market model that quickly places a world-class product in the hands of an end-user.
From an investor standpoint, growing the size of a company’s total addressable market is the ultimate goal. How can you make your company’s customer base larger for unicorn-sized growth? It’s simple: a maniacal product focus that understands and optimizes for the user. This became even more popular in 2020 during COVID-19 lockdowns, as companies began introducing product-led tactics like free products or free trials. That hasn’t gone away in 2021, with 49% of high-growth SaaS companies still having a free offering, unchanged from last year.
Build the culture and vision
If the first step to building a business that’s worth a billion dollars is developing a product that solves a meaningful problem for the customer, step two is telling the world. To do that, you need people who will advance the mission. As a company scales, articulating the company culture and vision becomes more important. When other people begin hiring instead of founders, the foundation of the company can get lost. Avoid this by hiring with intentionality around core company values. Your team members should all know and be able to list the company values at any moment, and understand how these values give the company a strong path for growth.
The team—from employees to investors—should also be able to speak fluently about the product and have the skills to support the company’s future growth. Our recent report found 34% more SaaS companies are using PLG models in 2021 compared to 2020. As a result, there are close to 1,000 job openings citing product-led growth expertise. Finding people who have experience in areas you need can be hard, but it is important to continue broadening the way you think about the product and take the company to the next phase of unicorn growth.
Listen to the customer
The most successful, high-growth companies listen to their customers and value their opinions. Prioritizing customer relationships starts by building and launching products that solve their problems; but also includes continued listening. Having the trust and loyalty of your customers continues to benefit an organization as it grows. Take Calendly, a company that started solving the scheduling problem for individuals. As it found what worked and better understood their individual users’ needs, they were able to expand into team scheduling – retaining happy customers while providing massive growth opportunities along the way.
In a PLG model, users are close to the products, and that helps dictate company direction. Some people interpret the “p” in PLG to mean that the product organization is in charge. In reality, it means that the customer is in charge.
Only 0.0006 percent of all companies will become unicorns, and it takes an average of seven years to get there (it’s not easy!) Many companies aim for this distinction but it should be a byproduct, not a goal.
In a recent SaaStr panel, I interviewed unicorn CEOs from Contentful, Algolia, and Calendly who spoke about this topic. When asked about the top traits of unicorn companies, the answers focused on things you can control as a founder—disrupting a marketplace, obsessing over your customers, expanding the size of your total addressable market—and having a strong belief it will pay out over a long period of time.
Through strategies like PLG, high-growth companies can put their customers first to grow quickly and profitably and reach the distinction many strive for but few achieve.
Casey Renner is a partner at OpenView.