Before Seeking Venture Capital, Founders Must First Demonstrate Retention

Retention is the core of a successful growth strategy

The Formula for Startups to Grow Must Include: Retention.
February 04, 2022 | 10:00 AM

Bloomberg Línea Ideas — Do you remember that thrill of finding long-lost friends when you first joined Facebook (FB)? The social network helped you invite friends and connect with those already on the platform, allowing you to see their pictures and stories. By the end of that first week, if you had more than 10 Facebook friends, you were hooked. The secret? Retention.

Entrepreneurs who have a clear growth strategy and make retention their top priority are more likely to turn their companies into category leaders. Here is how they do it.

Start with culture

As Rappi’s co-founder and CEO Sebastián Mejía shares: “Culture in startups is the glue that keeps them running.” A focus on customer retention must be embedded within your team’s culture at every stage, whether you’re a new founder or an established CEO. All team members must align and work toward the same North Star, regardless of their independent roles.

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A data-driven mindset is also an important part of a startup’s culture. Your team should agree on the key performance indicators (KPIs) that will determine your success and continuously measure your progress. This will make it easier to have fact-based conversations that lead to meaningful business decisions.

Get the definition right

Having a great product is paramount, but that alone will not guarantee success; a growth strategy is required.

Founders must obsess over defining their retention metrics properly from the early stages of the company. Carlos Upegui, head of growth at Frubana, a wholesale marketplace serving the restaurant industry in Latin America, recommends that founders spend a lot of time understanding the natural frequency of their products and the core action that properly signals their usage; these two things will allow for proper retention tracking.

Culture in startups is the glue that keeps them running

Carlos Mejía, Rappi's founder and CEO

Defining the core action is especially tricky, but if you ask yourself what problem your product is supposed to be solving and then figure out which action users are taking that signals whether the product is adequately addressing that problem, then you have identified that key metric. For Frubana, for example, it is a customer placing and finalizing an order of a minimum amount.

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Invest in retention

“It costs me money to achieve market share,” says Claudia Woods, CEO of WeWork LatAm, noting how the acquisition of customers is often a costly first step, but worth the investment. And the ability to scale only comes when you can be sure that retention continues when acquisition efforts stop. So you must get users to discover the full value add of your product as quickly as possible.

Retention involves the following steps: activation, engagement, and reactivation (in that order). Activating and engaging users means creating a new habit and making sure they deepen that habit. Reactivation is the last retention effort as it involves luring back users who once used your product. Never waste time with “window shoppers;” if they were never really engaged, move on. But for those who were once activated customers (i.e., had developed a habit of using your product), it can be useful to remind them of the value they once enjoyed with your product. Spotify, for example, already has me paying a monthly fee, and I listen to an hour a day. If I increase the amount of time I spend on the platform, it signals to Spotify that I am an engaged user – and that I’m worth reactivating if I ever stop paying.

Know when to raise funds

Think of retention as an output that indicates when it’s time to scale. Auston Bunsen, the co-founder of blockchain developer platform QuickNode, suggests specific KPIs for early-stage companies with less than $1 million in annual revenue. For a healthy growth rate, he says companies should look to acquire new customers at a rate of 5 percent week over week (or 20 percent month over month, not cumulative). So if 100 customers signed up this week, by next week there should be 205 customers. As for the activation or conversation rate showing how engaged users are, Bunsen suggests aiming for 60 percent or higher. “If you can get this, you’re in great shape,” he says.

Founders need a solid retention rate before they start raising funds. “Don’t raise Series A or try to grow your company when you haven’t cracked retention,” Upegui advises. When companies fail to understand retention, they tend to expand before they are ready. “It’s called premature scaling, and it kills many, many companies every month,” he warns.

From my experience, it’s best to obsessively define your growth metrics and secure a healthy retention rate before looking for investors. Your KPIs will tell you whether your brand is delivering on its promise and whether you’re ready to expand.

--This article was edited to reflect the correct name of Rappi’s co-founder and CEO

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