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Performance marketing is a skill every startup should hone as a core competency as quickly as possible. Performance marketing creates a process where $1 invested in the business creates greater than $1 in output - a growth machine.

Building a growth engine

The goal of performance marketing is simple: to determine, as precisely as possible, the expected value of every current and potential user. This data enables the marketing team to know exactly how much they should be willing to pay to acquire the user. Or how much to incent a current user to upgrade. Or pursue some other action like invite a friend or share a tweet.

Believe it or not, this pig has a Twitter account, @impeePiggy. Whenever someone drops change into the pig, the pig counts the change using an optical sensor, increments the savings and tweets the value of its contents using an electric imp.

This deceptively intelligent pig has a lot to do with disruption:

In a conversation with renowned Harvard Business School professor Clayton Christensen about the newspaper industry, Joshua Benton remarked, “The perception of the incoming disruptors is that they are low quality, and therefore not really worth paying attention to.”

Over lunch last week, a good friend who is an entrepreneur and I were brainstorming about the features of his optimal initial target market. His product hasn’t yet launched so he still had some decisions to make about which users and use cases to target. We wondered if there were a rule of thumb about initial target customer segments.

We took out a blank sheet of paper and came up with this:

Jeff Bezos appeared on Charlie rose two weeks ago and spoke about Amazon’s history, future and best of all, its culture.

In the interview, Bezos discussed Amazon’s core values:

1. We are willing to be misunderstood
   
2. We are obsessed with customers, not competitors.
3. We are long term thinkers

While all of them are critical to Amazon’s success, my favorite is the first because it combines three critical concepts for startups.

First, it requires knowing a secret, in the Peter Thiel sense of the word, seeing something in the market that very few others understand.

I rowed crew in college. I walked on to the team and fell in love with the sport the very first time we pushed the boat from the dock and took a stroke. Looking back on those four years, I often draw parallels between rowing and entrepreneurship.

My freshman year, Joe Holland, who had raced for the national team in the eighties had taken a sabbatical to coach the freshmen team. He was a master and he loved the philosophy of rowing as much as the sport.

When going to market, startups tend to pursue one of two sales strategies, either education sales or execution sales.These sales strategies are substantially different. They demand different sales cycles, pricing and market positioning - potentially even different team members.

The Education Sale

If your customers don’t know they need your product yet, then the sales process is an education sale. Education sales are common when creating a new market (TiVo inventing the DVR) or when bringing existing technologies to new market segments (CRM for restaurants).

In this month’s HBR, Clay Christensen and Maxwell Wessell published an article targeted to the CEOs of large companies on how to prevent disruption to their businesses.

They point to five major barriers to competition in a market listed in increasing order of difficulty to assail. Instead of reviewing the incumbent’s strategy, I’m going to flip these around to reverse engineer these defenses and build a startup’s playbook for disruption with examples from our portfolio.

Call it what you like. The Series A Crunch or Silicon Valley’s Financial Cliff, there’s a lot of talk about the challenge seed stage companies facing insurmountable odds raising Series A investment - PandoDaily’s analysis pegs the odds at 20% based on anecdotal data.

The three horsemen of the seedpocalypse

In the past 3 years, the three major trends influencing the seed market are:

1. The decreasing cost of starting a company is balanced by growing labor costs. Seed companies must still raise Series As to scale.
2. Macroeconomic factors, namely the challenging job market for young professionals, are pushing people towards entrepreneurship. Incubators have arisen to provide education and a fundraising launching pad for these young founders. Politicians and the media have stoked this trend.
3. Rising valuations at every stage and the fear of missing out led VCs to invest in the seed market - and more precisely, index the seed market by investing in 50 to 60 companies per year. VCs' relative price insensitivity (relative to angels) has skewed the pricing in the angel market. As a result, some angels have moved to other markets or moved up-market, raising larger funds to compete.

These three forces have created the impression, right or wrong, that there is a huge wave of seed companies in the market who all need to raise Series As.

Yesterday, I showed the increasing share of venture capital investments consumer companies represent. But examining the trends at a category level may mask patterns by consumer category and also by stage.

So, I’ve created two charts: the first is a bar chart of consumer investment by segment and the second is a heatmap of of sector and stage. I categorized the consumer investments by 10 leading firms over the past 18 months into six buckets of my choosing.

Department stores. Computer software. And even education. Products and services are being broken into their atomic units and optimized for price, selection, features and, most importantly, customer satisfaction. This is an inexorable trend that cannot and should not be stopped.

Roger Ehrenberg in a post called “The Great Unbundling”

This unbundling is happening. But I’m not convinced it’s every consumer’s desire to consume media or purchase clothing a la carte. Or that this is the end state of commerce. Instead, the future is a hybrid model. And it’s already in market.