The future will be people-focused and product-led: an investment thesis
Investment thesis in product-led companies
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Over the past six months, I have been immersing myself in the venture capital world. First, by reading books like Venture Deals & The Power Law and taking courses such as Venture Deals by Kauffman Fellows, then by participating in VC Fellowships — Included VC, Laconia’s Venture Cooperative, and Republic VFA, and most recently by acting as a venture scout for several VC firms.
To summarize many of my musings, I have decided to publish the first version of my investment thesis. It helps me to refine my thinking about the market fundamentals and better define my investment niche. If you have any feedback, questions, or ideas how to make it even better, please comment here or reach out on LinkedIn. Thank you!
Investment Thesis
Investing in early-stage B2B product-led (PLG) companies in the US and Canada disrupting traditionally sales-led markets with gated access to products, low pricing transparency, and old-fashioned approaches to customer acquisition, retention, and engagement.
What is PLG
“For those new to the term, product-led growth (often abbreviated as PLG) is a company mindset in a broad sense and a go-to-market strategy that defines a product as the main vehicle for business growth. Unlike the traditional, sales-led approach where the goal is to “close the deal” (get the customer to buy/upgrade the product by taking them through different stages of the sales cycle), PLG involves giving customers the ability to solve their problems and get as much value as possible, at every interaction with the product. They get so much value that upgrading to a higher tier becomes a no-brainer.”
Source: Venture in Security
Market & Behavioral Shifts
In the past decade, more and more individual contributors have gained the ability to evaluate, select and buy products that solve problems within their area of ownership. Software developers are now empowered to choose an identity provider while marketing teams can pick their own project management tools instead of having to use the same old Microsoft Project adopted by their engineering team many years ago and with no ability to accommodate their unique workflows.
The rise of remote workplaces has been accelerating the ability for people to choose where they work when they work, and what tools they use to do their work in a way that suits the task at hand best.
Decreased cost of cloud infrastructure and democratization of technology it caused has led small and medium-sized businesses to start using tools and technology that were previously only accessible to large enterprises. This has enabled the creation of new market segments and categories targeting the SMBs as their primary market instead of having to prioritize enterprise sales with their long and complex purchasing processes.
Product-led companies such as Uber, Dropbox, and Canva have changed the expectations of users across different markets and geographies. There is much less tolerance for lack of transparency (hidden pricing, gated API documentation, etc.), inability to try before you buy, and poor user experience. People in B2B are increasingly looking for B2C experiences (intuitive, simple, and easy to navigate).
Selling up market has become incredibly expensive with startups being forced to look for alternative ways to acquire customers. With marketing and advertising costs also going up continuously, user growth must happen in new ways. Users’ ability to become evangelists of the products that solve their problems well combined with the design of growth loops have enabled virality and exponential growth for many PLG companies.
Principles of Product-Led Growth
Focus on value creation, not value extraction
Using product as a growth channel
Full transparency & openness (pricing, product, APIs, etc.)
Self-serve onboarding & product experience
Enable users to experience product value as quickly as possible
Leverage product-led sales to augment pure PLG
Architect growth loops and leverage network effects for virality
Put the customer and their experience front and center of the product focus
Opportunities Enabled by PLG
People no longer want to go through several sales demos or talk to the implementation consultant to try a new solution. They don’t want to chase sales teams to understand pricing, sign long-term contracts, or pre-pay a year of their usage ahead. The ability for people to get the capabilities they need, for however long they need them, and pay only for what they use has truly changed the customer expectations, and, subsequently, the B2B SaaS market.
The PLG approach enables companies to expand by intentionally designing growth loops, expand across borders without establishing a physical presence in new markets, and enable users to experience product value sooner thereby increasing customer satisfaction and, subsequently, product adoption.
For customers, PLG democratizes access to tools and technologies that were previously accessible exclusively to large enterprises with deep pockets. When vendors put the needs of their users front and center, people benefit from a better user experience, better pricing, and tools that solve their problems more effectively.
Most importantly, PLG aligns incentives between software providers and customers which, in turn, promotes excellence. To retain a customer, a company needs to continuously improve and innovate — something that wasn’t needed when multi-year contracts and customer lock-ins dominated the market. In turn, high customer retention leads to increased revenues allowing companies to capture value in return for the value they offer.
PLG Market Map
Most recently, I have been deeply focused on cybersecurity. Here is the cybersecurity PLG market map I’ve published on TechCrunch.
Funding & Investment Performance
Many multi-billion dollar companies such as Segment, Shopify, Twilio, Stripe, and Canva have been built on the foundations of a bottom-up product-led growth strategy. PLG companies have been dominating The Cloud 100 2021 list with Stripe, Canva, and Databricks on top of the list. Most importantly, the cumulative market capitalization of PLG companies has increased more than 100x over the past six years along with the VC investments in PLG businesses.
Product-led companies have been continuously outperforming their sales-led counterparts. The PLG index by OpenView Partners is a great illustration of this.
Opportunity
Despite the sustained interest and growing investment from established venture funds such as OpenView Ventures and Bessemer Partners in PLG startups, the overall funding trend has been characterized by less capital going to early-stage founders. Therefore, there is an opportunity to support more PLG-minded, customer-obsessed founders at the earlier stages of their journeys.
Product Leader to a Product-Led Investor
Having built a career and the expertise around go-to-market and product strategy, B2B product-led growth, strategic positioning, product-market fit expansion, and growth, focusing on PLG while wearing my investment hat allows me to pull all this together to make better investment decisions. Additionally, a deep understanding of the PLG mechanics, challenges, and opportunities enable me to provide more value to the portfolio companies post-investment.
The only thing more exciting than building products customers love is supporting multiple founders each building products customers love. Working with visionary founders able to communicate their product vision, and thinking about ways to grow, achieve and expand the product-market fit, while also being able to zoom in on the product roadmap is incredibly fulfilling.
Ross, loved reading the article. Got more clarity on PLG and how it's shaping the future of next generation companies. Keep sharing your thoughts :)