How to find out about startup's retention
Last week I listened in on a VC’s pitch meeting with prospective founder.
During the call, the founder had a lot to say about his customer acquisition success. In just a few months he had acquired hundreds of customers and earned thousands of dollars in revenue.
It all sounded great… until the VC asked the founder about his retention rate.
Silence on the other end of the phone.
I won’t keep you in suspense. This startup was not having luck retaining customers. But their acquisition efforts were going well and he was planning to use the funding he raised to dig deeper into the retention issues.
Why am I telling you this?
Early-stage investors are bound to see a lot of startups that don’t have any / many customers.
So when one comes around that can prove they are able to acquire users, we tend to get excited.
But there’s more to being able to sell a product. A team that can retain its users will have a far easier time in the long run than those with high churn rates.
For starters, companies with high retention early on will have less need to raise capital.
This is because they’ll have a steady stream of revenue coming in. If they can stay lean AND earn revenue, they’ll be able to hold off on raising… or at a minimum they’ll be able to raise under less dire circumstances, which will result in better terms for them.
Also: it’s easier to grow when you’re not constantly replacing old / churning customers with new ones.
Also: It’s easier to get acquired if retention rate is super high. This is because the acquirer doesn't need get new customers in order to keep the business running.
They'll make money on that business, even if they biz doesn't grow.
Also: It’s easier to sell additional products to existing customers compared to new ones.
So if a startup with high retention launches a new sku, they can sell it to customers who already know and love them (rather than converting customers who don’t know them, or have already churned).
Also: if the company has to go through layoffs, losing team members doesn’t also mean cutting off revenue.
Cash will still come in from existing customers, even if the top-of-funnel has slowed down.
How to find out about retention
When you’re on a pitch call with a prospective founder, ask them how they’re tracking retention.
The founder’s response will tell you many things:
- is retention a priority?
- do they have any processes in place to track retention?
- is this metric important enough that they know the number off the top of their head?
If they hmmm and ummm about it, you know they probably aren’t prioritizing / tracking retention.
This doesn’t necessarily mean you should immediately pass on this company. But if you follow up with some suggestions around retention, that will also give you important insights into the founder’s persona.
For example, if you make suggestions about retention and the founder:
- gets defensive
- shuts down your ideas right away
- doesn’t seem interested in discussing it further
Those are red flags.
Great founders want to learn from experienced operators. They’re coachable and recognize that they don’t have it all figured out yet.
Definitely still figuring it out,
Kera from Hustle Fund
PS: you know who had an incredible retention strategy for their startup? One of the speakers at Camp Hustle, whose company sold for $1 billion.