What Companies Do You Want To Build

Hey all- happy to be back. Thing is, I don’t know exactly what I want to write about week to week.

So, each time you get an email I will highlight up top everything that I will be talking about, this way if you don’t care about a topic, you can just skip it. Brought to you by ChatGPT.

Today’s Issue: This essay compares building low-cost, high-volume businesses like Netflix, driven by product and growth, to high-cost, low-volume ones like ERP, requiring expertise and strong sales, ultimately favoring the former for its scalability.

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What types of companies to build

I’ve been lucky enough to make some great friends who love the idea of building companies. This leads to interesting ideas all around, but it also leads to some interesting texts. Here is one that I got this week:

It’s a fun thought experiment, and a lot of ways you could go about answering this (of course I sent about 7 different paragraphs). I’m going to make the case for both and include what is needed to build each one successfully.

First: Low Cost High Volume

Our example case here is a business like Netflix or any other company that has a low cost with a large user base. The dynamics around this type of company really revolves around product, marketing, and growth. Your users here are numbers, and you are working to push and pull on levers that make these numbers go in the right direction. A few key factors for this business:

• Product is one of the most important parts of the company. Your main metrics here are going to be retention (keeping users on) and adoption (adding new users). A good product accomplishes both of these things.

• Your growth strategies and marketing play a key part in building this business. Flywheels, word of mouth, and shareable content can all move people toward your product, from there, the product should do most of the work.

• One customer churning isn’t a problem once you’re at scale, but early on you need to understand why they are churning so you can patch holes that could make you sink later down the road.

Starting a company like this is easy compared to something like an ERP. You build the core product, price it wisely, then start to market the shit out of it. The product is extremely important here and you are heavily analyzing all the metrics and numbers that you can.

I like to imagine these companies like an airplane cockpit. Every metric and important number is visible right in front of you. If you move the flaps or a lever, the numbers change, either for the better or for the worse. The key is knowing when and how to adjust the flaps.

If it wasn’t obvious, this is the option I prefer.

Second: High Cost Low Volume

Our example case here is an ERP (enterprise resource planning). This type of software is a massive undertaking and requires months of development before it is even can be put in front of customers. This type of company also usually requires a pretty decent cap raise to start the business.

The way you grow is also different. For most companies of this nature, there is an entire sales process and team that is needed in order to execute the vision. This isn’t saying that product development falls on the wayside, product is as important here as it above. A few more keys:

• Every user matters. This isn’t the case for all of these companies, but it is likely they have customer success managers that help retain these high-paying customers. Remember, these deals are likely averaging in the thousands, and are important to keep around.

• It isn’t only important to keep them around, but it is also important to keep selling. Net revenue retention is a key metric that all these businesses follow. Great companies NRR is usually above 120%. Snowflow for example has an NRR of 128%. That stock is up 51% in a month since reporting good earnings.

• Building a great product still matters due to high switching costs. Unless you are building a completely new solution, it is most likely that the people you’re selling to already have an high-cost solution in place. They are not switching unless it feels like they would be dumb not to. This is where a great product comes in.

One of the last things I’ll add is the people who create these companies are usually industry experts. They have spent years experiencing the same problems that their customers have. They are the right types of founders that you want to back in order to solve the problem.

Thanks for reading today, and let me know if you have any thoughts.

See you soon.

Tom