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 1N – The Social Transformer

Social Transformer startups have a self service customer acquisition strategy and a product with network effects. They are a subset of Type 1. They typically have challenge gaining a critical mass of users but if they are able to overcome that initial hurdle they have the potential to have runaway user growth in markets that are often “winner take all”. Their products are characterized by creating new ways for people to interact.

Example Social Transformer Companies:
Ebay, OkCupid, Skype, Airbnb, Craigslist, Etsy, IMVU, Flickr, LinkedIn, Yelp, Aardvark, Facebook, Twitter, Foursquare, Youtube, Dailybooth, Mechanical Turk, MyYearbook, Prosper, Paypal, Quora, etc.

Subtypes

Type 1N Users with Payer Wings
Social Transformers often 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 wing.

Examples:
Yelp is a 1N with a 2 wing
Facebook is a 1N with a 3 wing
Foursquare is a 1N with a 2 wing

Summary:

Avg Months to Move Through Marmer Stages

Primary Service Providers Hired Type of Founding Team that is Most Successful Market size Estimation (Efficiency & Scale Stages)
32 User Experience, Backend Development Balanced Team $13B

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 New Market 28 $2,300,000 33% 10%

Markets:
Social Transformers frequently create new markets, and those markets usually have only a few dominant players, so it’s difficult to describe the markets they usually tackle. However, Social Transformer startups often apply certain product concepts to many different types of markets. For instance, while eBay and Facebook won the Marketplace and Social Networking wars, respectively, the product concept of social networks and marketplaces has been applied to many other markets, such as AirBnB with a marketplace for spaces, and LinkedIn with a professional social network.

Product Types:
Marketplaces, Social Networks, Social Games, Media Sharing/Hosting, Communication Platforms, User-Generated Content, Payment Processing
 

Revenue Streams:
Advertising, Transaction Fee, Listing Fee, Virtual Goods

Potential:  
Social Tranformers are one of the most challenging types of startups but also offer the greatest rewards due their “winner take all” effects.They must have a strong product focus but their greatest value lies in amassing a large number of users that create value for each other.

Key Risk & Challenges:
Their biggest challenge is gaining critical mass and most die before ever reaching that point. The network effect also breaks down the discrete stages that most Type 1s enjoy and force Social Transformers to do a lot more at once. This is primarily because network effect startups can’t wait to get their ducks in a row before starting to scale. They must do many iterations and optimizations while scaling.

 

Competitive advantage:
Social Transformers obtain a competitive advantage by reaching a critical mass of users and building a platform that creates very high switching costs.

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

Founding Team Expertise:
Business heavy and balanced founding teams perform better than technology heavy teams. The most important skills for Social Transformers are good user experience, strong insight into human behavior and creative marketing.

 

 
Founding Team Motivations:

Support Network:
 

Customer Development Process:
Social Transformers need to spend a lot of time on qualitative customer development. It’s also recommended to devote significant resources to developing great analytics for improving their understanding of users. Speed of decision making is crucial for all subtypes of Type 1.

Social Transformer startups that are two sided markets require almost double the amount of customer development because they need to understand two distinct types of users.

Customer Acquisition Strategy:
Social Transformers major customer acquisition challenge is reaching initial critical mass. In order to make the problem of getting critical mass more manageable startups have often focused on first achieving critical mass in a more tightly defined segment. Usually one type of user is the most important and startups will often subsidize this user or even acquire them at a loss. Before critical mass is reached startups often have to do very non-scalable methods of customer acquisition and sometimes the internal team will even perform the behaviors themselves that they would like their most important user to make.

Once Social Transformers do reach critical mass they typically spend very little on marketing. Instead they rely on their users to promote the service to their network, and increasing the virality of the platform.

Product validation:
Product validation does not usually come from revenue unless taking a transaction or listing fee is a natural part of the service. In the early phases the currency of time and attention are more important.

Investment:
Social Transformers require more capital than Automizer or Integrator startups. They can increase their chance of success by raising a large amount of capital upfront in order to give themselves the time to reach critical mass and have available cash to acquire users at a loss.


When to Scale:
When buying and selling are not an integral part of the product, Social Transformers are the type of startup that can wait the longest to monetize their user base.

Common Pitfalls:
Social Transformers frequently need some time to gain critical mass. Many die in the valley of death because gaining critical mass was harder than they expected and they didn’t raise enough money to allow for enough attempts. Another reason for failing to gain critical mass is because of their inability to focus the value proposition on a specific segment or niche, preferring to focus on all the potential the product has at scale.

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.

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

2. Validation

Customer Development Goals:
a) Minimum Viable Critical Mass
b) Must Have Status with Primary Persona

The key milestone for Social Transformers is gaining critical mass. Two common tactics used to achieve critical mass are narrowing focus to a particular niche and doing non-scalable customer acquisition, sometimes called “fake it until you make it”.

Niches where startups gained critical mass:
Twitter -> SXSW
Facebook -> Harvard
LinkedIn-> Silicon Valley Elite / VCs
AirBNB -> Democratic National Convention
Foursquare -> SXSW
Quora – Silicon Valley Elite
Yelp – San Francisco

Fake it until you make it:

AirBnB – Went door to door
Quora – Answered questions themselves and got their investors to answer questions
Aardvark – used a Wizard of Oz tactic to get questions answered – http://gigaom.com/2010/04/26/the-aardvark-theory-of-product-fake-it-till-you-make-it/

3. Efficiency

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) Next Level of Critical Mass

4. Scale

Social Transformer startups need 50% longer than type 1 and type 2 to reach scale stage. They are also more likely to have larger teams in the scale stage.

 

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