The following is one of the 4 types of scalable Internet startups, we have identified based on the complexity of their customer relationship. You can find the other types here.
If you have feedback, send us an email at feedback@startupcompass.co
Startup Type 1 – The Automater

Automaters are product centric with a self service customer acquisition strategy. Customers have very little to no human interaction with the startup while using their product. Most Type 1 startups have the benefit of low overhead, which gives them a longer runway to figure out product market fit. Having low overhead allows them to progress in more discrete stages, giving them the freedom to optimize aspects of the product and customer acquisition strategy before scaling by stepping on the gas pedal. They typically are consumer focused, execute faster than other startups and automate a manual process.

Example Automater Companies:
Google, Dropbox, Eventbrite, Slideshare, Mint, Groupon, Pandora, Kickstarter, Zynga, Playdom, Modcloth, Chegg, Powerset, Box.net, Basecamp, Hipmunk, OpenTable, Amazon etc.

Subtypes:

Type 1 Users with Payer Wings
Some Type 1 startups monetize their users indirectly. In this case their users are not the same as their payers and the customer acquisition strategy used is described by Type 2 and Type 3. We call the secondary customer acquisition strategy a “wing”. There are many Type 1 startups with Type 2 and Type 3 wings. Startups with wings should read both their core “personality type” based on their user and their wing “personality type” based on their payer.

Examples:
Groupon – Type 1 with a Type 2 Wing
OpenTable – Type 1 with a 3 Wing
Google – Type 1 with Type 2 and Type 3 Wing

Key Partners that Require Enterprise Sales
A small number of Type 1 Startups need to create deals with enterprise partners in order to deliver their value proposition. This creates higher up front costs and these startups often raise a much larger amount of money at the outset.

Examples:
Pandora – Music Licenses from the Labels
Gilt Groupe – Unique Deals with Fashion Labels
Spotify –

Music Licenses from the Labels

E-Commerce
While E-commerce startups’ customer facing activities, such as customer development and customer acquisition strategy, are the same as other Type 1 startups, their behind the scenes activities and economics are very different due to their need to store and deliver physical inventory.

Examples:
Amazon
Glit Groupe

Summary:

Avg. # of Months to Reach Scale Stage

Primary Service Providers Hired Type of Founding Team that is Most Successful Market size Estimation (Efficiency & Scale Stages)
21 User Experience, Backend Development Technical Heavy Team $11B
Primary Motivation Market Type Avg. Team Size (Scale Stage) Avg. Funds Raised (Scale Stage) Avg. User Growth in Last Month Percentage of User Base is Paid
Change the World Existing Market (Better or Cheaper) 20 $600,000 14% 8%

Markets: Search, Payments, Games, Filestorage, Mobile, Media, Travel, E-Commerce

Automaters tackle markets that are twice as big as Integrators (Type 2’s) on average and are more likely to tackle existing markets.

 
Common Revenue Streams: Advertising, Subscription, Ownership, Lead Generation, Virtual Goods, Rental, Transaction Fee
 

Potential:  
Successful Type 1s usually have products that are limited in scope but if they pick a big enough market they have potential for massive scale. Once they achieve scale they are often acquired by a larger company, or attempt to evolve into a platform in order to increase growth and create higher barriers to entry.

Key Risk & Challenges:
The key risk in the early phase is building a product that delivers a strong enough value proposition and the right user experience. Since there is no human interaction during the customer acquisition process users have to convince themselves that this product is the best among the alternatives. If the product is not head and shoulders above the rest user growth will be hard to sustain.


 
Market Entrance:
It is relatively easy for Type 1 startups to enter the market, especially if there are no key partners needed to get started, such as when a license agreement is needed for music or video. Conversely, it’s also very easy for competitors to enter the market, which creates a lot of competition and low switching costs. Type 1’s rely mostly on data as they grow to shape the product according to market demand.

 
Competitive advantage:
Automaters obtain a competitive advantage by building the best product through superior technology or design. Once they’ve amassed a large user base they have the potential to learn much faster than their competition due to higher quality data and analytics. While they don’t have network effects they can often sustain their advantage by utilizing economies of scale that newcomers can’t.
 

Value Proposition:
The value proposition must be simplistic and appeal to millions of users.

Founding Team Expertise:
The founding team is typically engineering or design driven. Few teams whose primary strength is marketing or sales succeed as a pure type 1 startup (with no wings).


 
Founding Team Motivations:
 
Support Network:

Customer Development Process:
The customer development process starts out qualitatively, with founders finding potential users in their social circle, but quickly becomes more quantitative as the product finds some initial traction. Automaters should spend a lot of energy developing great analytics for their product and marketing campaigns, because it can greatly enhance their understanding of what’s working. Speed in decision making is crucial for Automaters.

Customer Acquisition Strategy:
There should be little focus on customer acquisition until product market fit. After product market fit Automaters should focus on searching for profitable customer acquisition channels and then drive as much growth as possible through the channel. Since product/market fit for Automaters connotes a great product, referral through word of mouth and viral growth is often a strong option.

Product Validation:
Validation does not always come through a direct exchange of money between the startup and user. In the early phases the currency of time and attention are more important. Automaters should heavily consider making their product free before product market fit, because the additional data points obtained through minimized sign up friction are usually well worth it as Automaters primary objective should be minimizing time to product market fit. The early revenue is inconsequential compared to the monetization potential that comes from stepping on the gas pedal once product market fit is achieved. That should be very doable for Automaters that have raised money though is a riskier decision for entrepreneurs who have decided to bootstrap.

Investment:   
The discrete stages and low burn rates of Type 1 startups allow them to survive on small seeds rounds in the early phase of the startup with little dilution. Of all the types of startups Automaters need the least amount of capital, (excluding some of its sub-types such as e-commerce).

When To Scale:
Once they’ve reached product market fit and prove they have a viable business model they often require large amounts of capital to scale the company and outgrow competition.

Common Pitfalls:
Even though type 1 startups are the easiest to validate with data, technology driven teams often ignore whether there is actual market demand for the product they’re building. To compensate for lack of traction they add more and more features, which only moves them farther away from building something people want. On the other hand Automaters without a strong technology team are in danger of building shallow product that can be easily copied. They try to bolster their user acquisition by creating additional buzz. The press logos may look great on the web site but the traffic won’t convert to active users.

Developmental Stages:

The developmental stages outline the key milestones that startups move through. Our initial data and observations show that how fast startups move through these stages is a good indicator of their success. However, startups that jump over stages typically suffer a slow death or a confined to becoming a small business with limited growth.

1. Discovery

This is the first stage of the startup. Many startups either spend too much time in this stage writing lengthy business plans and too little time getting feedback on their vision and testing their product with customers.

If you work full time you typically need about 2 weeks to 2 months to move through Discovery, excluding pivots. Including pivots startups need on average about 5-7 months to complete the Discovery stage. Pivots occur when a startup decides to make a significant change to their vision or business model. When a pivot occurs a startup effectively loops back to the beginning of customer discovery and starts again. On average, a startup will pivot 3-4 times before exiting customer discovery.

If a startup is still in customer discovery and it’s been more than 2-3 months since a pivot occurred they are probably moving too slow. To increase their speed of learning they need to get more feedback by getting out of the building and talking with prospective customers.

Customer Development Goals:
a) Outline product idea
b) State Hypotheses about core areas of the business (using the business model canvas for example)
c) Find Problem/Solution Fit using structured qualitative customer feedback
d) Gain substantial insights about the players in your market and how it operates.
   
What to validate:
– Validate customer segments & personas
– Validate minimum feature set with surveys, landing page conversion rates or paying customers.
– Validate the user experience with early adopters using mockups

Time Spent in Stage: 5-7 months

Optimal Team Size: 2-3 people
   
Team composition: At this stage you set the core DNA of the company. The founding teams of successful Automater startups generally have a strong focus on technology and design.

Typical Financials:
Capital Raised: 25k -100k (Early seed round)
Burn Rate: 5-25k/Month (Mostly living costs for team members)

2. Validation

The key milestone after building the MVP is finding a few users who are passionate about your product, see it’s potential, and can help steer the direction of product development. However, you should investigate whether these initial passionate users represent an early adopter segment for a large market and confirm that their needs aren’t so specific that they would box you into a developing for a niche. Once you’ve validated this, through both qualitative and quantitative testing, the next major developmental milestone is product/market fit. Most startups never make it that far. This is where most pivots are likely to occur and you must be flexible, and open to the feedback you receive while testing your vision against reality. Getting to product market fit requires obsession with building a killer product, yet going heads down and cranking out feature after feature won’t get you there. Automaters must focus on perfecting just the few features that are most important. Simplicity and usability win.

Time in this stage: 3-5 months

Customer Development Goals:
a) Must Have Status with 3 Users
b) Product Market Fit

Team:
Team Size: 2-10 People

Financials:
Capital Raised: 100k-1.5M
Burn Rate: 25k -100k / Month

3. Efficiency

If you reach product market fit, congratulations. It’s almost time to attempt to scale to millions of users, but first the focus needs to be on getting efficient so that you’re not pouring water into a leaky bucket. Efficiency comes from creating messaging that resonates with why users love your product, streamlining your conversion funnel, and finding profitable customer acquisition channels that support high volume. Once this is completed the next stage is to step on the gas pedal and get big, fast. But be sure to maintain balance between learning and execution. Product/Market fit is a dynamic point, and if you don’t continue to delight your users they will find someone else who can.

Customer Development Goals:
a) Refined Promise of Why Users Love Your Product
b) Improve Conversion Efficiency & Avg Revenue per User
c) Find Repeatable/Scalable Customer Acquisition Channels
d) Saturate Customer Acquisition Channels
   
Team:
Team Size: 8-40 People

Financials:
Capital Raised: (No additional capital is typically raised in the Efficiency Stage)
Burn Rate: 25k -100k / Month
 
Time in this stage: 5-6 months

4. Scale

Time in this stage: 7-9 months

Financials:
Capital Raised: 1.5M-7M
Burn Rate: 100k-750k /Month