February 23, 2017 – As Airbnb, Uber and Snap gear up for potential, and actual, IPOs, public investors are asking a key question: Can these former startups build more than one breakout product?
It’s easy to see why. While building just one successful consumer product is hugely valuable — evidenced by Twitter ($12 billion market cap), Pinterest ($11 billion), Dropbox ($10 billion) and Square ($5 billion) — when a company creates two or more breakout hits, the rewards are staggering. Consider the market caps of the few companies that have released more than one successful consumer product at scale: Google ($550 billion+), Apple ($626 billion+), Amazon ($367 billion) and even Facebook ($342 billion), albeit largely through M&A.
Uber, Snap and Airbnb fall, interestingly, into an unusually valuable middle category, valued between $30 billion and $70 billion. These companies have created massively delightful first products, but in far larger markets and with stronger strategic advantages than the aforementioned single-product companies. Furthermore, each has experimented with new products in the hopes of achieving Google-level greatness.
What will determine whether Uber, Airbnb and Snap truly become long-term franchises versus single-product companies? The answer lies in how they handle certain key operational challenges as they scale.
Pitfalls of the second act
When consumer companies like Dropbox, Airbnb and others set out to make their next hit, new challenges present themselves, many of which I’ve witnessed firsthand:
- The Safe Bets Fallacy: Initial success with one product generates a natural instinct to protect or extend that product versus inventing something new. With larger and growing organizations come competing agendas amidst limited resources, and it gets easier to greenlight something safer.
- The Magic Touch Fallacy: After one big hit, founders begin to believe they possess unusually strong product invention skills (which they often do). However, the unfortunate result often is that they’re less likely to evaluate whether a new product really stands on its own merits because they assume they know what consumers will like.
- The Golden Channel Fallacy: The fallacy of believing that because you have hit Safe Bets your brand will carry the day in bringing new users to the Magic Touch. Using your existing product as a channel is almost never adequate in today’s mobile app world, because switching costs are so low and substitution is rampant (few SF dwellers these days only have Uber or Lyft on their phone).
- The Adjacency Fallacy: It’s easy to make the case on a slide that executional synergies exist between an existing and new product (for example, cross-sell existing users on new products, or driving meaningful business model advantages from existing infrastructure); in practice, for most companies, that’s much harder to achieve.
Do note that we’re talking about consumer products here, not enterprise products, where providing a “whole product solution” and capitalizing on existing sales channels often makes building product extensions an excellent strategy.
Delightful versus strategic: A framework for the second product
An overly simple but useful way to characterize how great second products are made is to think about them along these two axes: Delightful and Strategic.
The Delightful axis captures all the things that attract tens of millions of users to a great consumer product: The sense of magic on first use; the careful and systematic re-evaluation of the entire user experience that enables that magic; the attention to design and detail that supports the feeling that the user can do something previously never possible.
The Strategic axis includes all the business stuff: Network effects that underlie unusually low customer acquisition costs and winner-take-all dynamics; the ability of a product to monetize via sales, subscription and advertising, among other means; the leveraging of an existing brand to win new users, or the logic behind extending a product portfolio to maintain a longer-term customer relationship.
Let’s explore the four quadrants:
- Fail (Not delightful and no strategic value): The product fails. Usually the lack of strategic value and opportunity to truly delight the customer is obvious only in retrospect. These projects are often powerful executive one-offs or represent an ill-conceived competitive response (Facebook Poke).
- Trivial (Delightful to users but little strategic value): These products could be popular with users, but drive little real enterprise value or lasting impact. The Apple Watch, for example, has many advocates, but it’s hardly become the image of rekindled innovation and platform expansion Apple hoped it would.
- Valley of Meh (Good strategic value but not delightful): Most sophomore efforts end here for the aforementioned reasons. These products may be developed thoughtfully but lack the creative spark and high customer experience bar that leads to a second breakout success.
- Success (Both strategic and delightful): A rare quadrant that drives extraordinary value, populated today by the most respected tech companies. We’re currently witnessing unusually strong product innovation by the likes of Amazon and Google, and they’re enjoying unprecedented market power as a result.
A clean sheet of paper
How do founders in the growth stage avoid the Valley of Meh? One of the best methods is to approach new products with a clean sheet of paper. Ideas will come from everywhere (especially once initial success and growth attracts tons of smart young employees who want to make their mark). When evaluating new ideas, leaders should aim to achieve both delightfulness and strategic value. Some questions to ask:
- Imagine you didn’t have your first hit. Would the new product be 10X better for the user than what they currently have?
- If you’re in a commercial or transactional business, does the new product feel like something surprising or magical has been done (i.e., remember the first time you used Lyft or Square)?
- What do you now know about what users find truly compelling about your first product that can help you evaluate whether the second one has legs? For example, if your real value proposition is about helping a small business grow, does your new product achieve the same level of impact on those lines, or is it really addressing a different need?
- Would you want to start this company as a standalone? Would you invest in it?
- Can the product be more impactful than your first product? This is a great way to ensure a second product is truly worth pursuing — and someone should be able to make the case that it’s possible. Bellweather companies have a way of building (or acquiring) products that dwarf their original hits in terms of their impact on consumers.
- Would you have a shot at winning in that space if you didn’t have your existing brand, people or capital?
- Could you raise money for this idea on its own merits?
- Does the product generate useful network effects (versus merely being a single-use tool)?
- Is monetization possible on its own with the new product, or only because it extends reach of the initial product?
- Can the product generate viral adoption on its own, or will it rely solely on traffic generated by the first product?
- How in a success case will the new product enhance the overall strategic positioning of the existing product: marginally or dramatically? If it’s the first, the new product may be just an extension.
There’s nothing wrong with adding great features to help a product better serve customers, or trying out interesting standalone ideas. But product extensions rarely catapult a great consumer business into the valuation stratosphere. Only capturing value on both dimensions achieves this level of success.
Expanding the mission
Sometimes this process shows that the mission of the startup was too narrow. Note how well-stated, aspirational company missions such as “Connect the World” or “Organize the world’s information” have inspired a wide array of projects that can fit under a pithy umbrella.
At Square, Jack Dorsey expanded the mission of the company from a payments focus to “Make Commerce Easy,” a move that allowed for such delightful/strategic products as Square Cash and Square Capital, both of which are now taking off and could generate multiples of the current valuation.
True franchises or just great companies?
Leadership at the emerging crop of consumer IPOs shows that they take these realities seriously. Airbnb’s Trips and Uber Eats are both ideas that on their own could create standalone businesses at scale, and could have such potential. However, because they rely on existing capabilities, without a clean-sheet-of-paper approach to ongoing product innovation, there’s a danger that they’ll achieve only add-on status.
Snap’s Spectacles, on the other hand, is more of a fundamental consumer product innovation in its own right, and the creative rollout and move into hardware suggests that leadership seeks to make every new consumer product sing for its own supper. Spectacles is, in fact, a prime example of a second-generation consumer product that is both delightful and strategic. No one would mistake it for a mere extension, and it’s quickly set a new standard for how startups with one hit swing mightily for a second.
This post originally appeared on TechCrunch.