Mastering Feedback Loops in Startups
Feedback loops are essential components of every person’s role within a startup. The most recent and celebrated feedback loop is the viral coefficient or k-factor which Facebook applications optimize to grow their user bases. The [k-factor](http://en.wikipedia.org/wiki/K-factor_(marketing), a borrowed concept from the study of biological viruses, measures the rate at which an application spreads through the network.
But feedback loops don’t solely exist within marketing. For product teams, there is consumer feedback and user engagement metrics. For engineering teams, there’s technical performance. For sales teams, there are quotas, lifetime customer value and productivity per rep metrics. For marketing, there’s k-factor, paid marketing payback period, net promoter score and others.
When we measure startups and businesses, we’re trying to detect when a sustainable positive feedback loop has been established and then pour as much gasoline into the growth engine as possible. At some k-factor, a Facebook app can achieve exponential growth results. Such growth is created when a large number of people invite friends to an app and a big-enough percentage of invitees convert to active users.
The same principle holds true for a sales team. If a salesperson sells 10 times more in software than their monthly salary, a startup should hire as many salespeople as quickly as possible. If a product can catalyze an evangelical user base to drive more customers, then a startup should reinvest in the product and champion their evangelists. At a certain efficiency, feedback loops are powerful engines of growth.
It stands to reason then that examining and optimizing each of these feedback loops is the keys to successful growth. When evaluating loops, consider three main characteristics: (i) the feedback latency or the time it takes to receive feedback (ii) the feedback potency or strength of the feedback loop and (iii) the feedback efficiency or amplification.
Obviously, the best feedback loops, exhibit the shortest latencies, the highest potencies at the best efficiences; i.e. grow the business quickly in a very short period of time without much investment. But there aren’t very many of those!
Viral loops tend to be have short latences. So do paid customer acquisition channels. Because of the relatively instant feedback afforded by these channels, we tend to invest more frequently in these loops.
On the other hand, internal culture building, content marketing, community building and brand building have very long feedback latencies. It can take years for the dividends these investments to outstrip costs. But that doesn’t mean investing in long feedback loops isn’t worth the effort. Branding, culture and word of mouth are some of the most valuable assets a company can build and investment in these long latency initiatives requires dedication and perseverance.
Over the course of several years, the goal of a startup’s management team is to forge repeatable processes to grow the business. The best processes create and feed positive feedback loops. Take the time to enumerate the most important feedback loops in your business. Prioritize them, measure their latencies, potencies and efficiencies, fine tune them and repeat. Above all, don’t be afraid if some of those loops are longer latency than others.
For some great reading creating, fostering and examining feedback loops, check out Thinking in Systems from MIT’s Donella Meadows.