Our investment thesis at MATH is centered around having an unfair advantage in customer acquisition. We believe that a repeatable method of attracting and retaining customers positions companies to beat their competition and scale. This is one of the key elements that we look for when we are evaluating the people and businesses in which we invest.
What do you mean when you say an unfair advantage in customer acquisition?
An unfair advantage in customer acquisition is an ability to attract and retain lots and lots of customers through systems, processes, or benefits of your product or service. We want to see your customers chomping at the bit to purchase your solution. In short, this is way more than early signals of customer traction.
Here are a few examples of unfair advantages in customer acquisition that we have seen with our portfolio companies that we love. This is by no means an exhaustive list.
Land and expand
This is a classic strategy that starts with a very narrow and focused sale into a customer base with low friction before expanding. After initial adoption, expansion can be achieved through growing the number of users, product line expansion, launching new markets or geographies, and/or acquiring adjacent businesses. This is an unfair advantage that we saw early with Acorns ETF portfolio. They created a simple way for people to sign up for an ETF and deposit money to grow their oak. Acorns expanded its product lines to include retirement investing, banking solutions, credit cards, and even investing for kids. This helped them gain more wallet share with their existing customers.
Leveraged distribution
This unfair advantage to customer acquisition utilizes channels, reseller, or distribution partnerships to reach many more customers than your own sales force could ever reach. The best channels are the ones that get a strategic advantage from your relationship that is far more valuable to them than the cash value of the transaction. In our experience, a channel partnership can work if it is just about the revenue share, but it is much more likely to succeed if there is other value than just revenue for the partner.
CardFlight is a company in our portfolio that uses leveraged distribution to sell payment processing solutions to retailers through channel partners. When we first met them, they had 450 retail locations using their product. Today that number is over 90,000. Instead of trying to sell directly to the highly fragmented space of retailers, they chose to work with partners who were already selling credit card processing services to retailers but needed a more differentiated solution to compete with newcomers like Square and Clover.
CardFlight developed a hardware / software solution that helped the legacy seller of merchant services compete. Their partners (companies like WorldPay, Cayan, PaySafe, TSYS, etc.) have competitive offerings and win more deals. These companies cared much more about leveraging CardFlight to get new accounts than what some small revenue share would produce.
Network effects
This customer acquisition strategy is most often seen in a two-sided marketplace where capturing one side of the market acts as an acquisition strategy for the other side of the market. The best examples of this are businesses that have a viral loop where supply from one side brings more demand from the other side and demand brings more supply from the first side. We saw this at SpotHero, a portfolio company that aggregates the supply of parking from urban parking lots, allowing consumers to reserve and book parking spots for a discount in seconds. The drivers love the experience as it takes the stress out of finding parking and ensures that they get the best price, while the parking lots love it because it is free revenue for them. . As they got more consumers on the platform, more parking lots wanted to participate and having more supply of parking led to capturing more consumers.
Product-led growth
This approach is bottoms-up where user driven adoption leads to an eventual enterprise level sale. This is an alternative to direct enterprise sales that can reduce the sales cycle time and avoid initial enterprise procurement processes. This was an unfair advantage for NoRedInk, a portfolio company that is focused on helping students improve their writing skills. They created an amazingly engaging freemium product that they marketed directly to parents, teachers, and students. Once their product took hold and there was enough density of use in a school district, the sales folks could come in and sell powerful reporting to make the teachers better and more accountable.
Community-led growth
This is an area of particular interest to me given my background in community development. This approach aggregates a community of your target audience and allows them to share insights about your product and the problem you are solving with one another. This, like content, is a longtail play, where you need to invest the time in curating the right people in the community and galvanizing the brand promoters. Peloton is an excellent example of this, where the company was able to build a community around health and fitness. They leveraged brand promoters for Peloton in these spaces to widen their reach and the rest is history.
While this list is not exhaustive, it’s a great example of how we evaluate whether companies would be a good fit for our investment thesis and if they will benefit from our collective strength as a team. Each and every investment we make has a clear unfair advantage in customer acquisition, so make sure that we understand what yours is when we meet you.
If you think you’re a company with an unfair advantage in customer acquisition, especially in community-led growth, I’d love to hear from you - my DM’s are open!