 So it's my pleasure to introduce you to this topic on customer success for long-term growth in the context of customer experience, tech, monetization when evaluating companies future success. Peter Weed is the global co-head of McKinsey's growth tech practice. Since its launch three years ago, they've served 130 growth stage venture backed companies and their respective VCPE investors. Kent Bennett is a partner in Bessemer's Cambridge office focusing on investments in big data, infrastructure sexers and consumer service models. Some of the examples of their companies are andeca, vertica, blue apron, and gold.com. This chair, that chair, okay. Your chair is bigger than mine. Great. Hello. Good afternoon. So in a non McKinsey style, we decided not to have any slides back there. I hope this does not like ruin any expectations. I do have a laptop over there if you want to be assaulted with words on pages. We can do lots of that. So look, we're here today. Kent has been an investor for quite a while now doing some pretty amazing things. We were talking about what might be some interesting topics to dig into. And the kind of interesting thing with Kent and I is we both kind of come out this industry from a slightly different perspective. Kent, well, he started on the B2B side, has been doing some pretty amazing stuff on the B2C end. My background before McKinsey, I was a software entrepreneur on the enterprise side. I worked in Microsoft on the enterprise side. And since I've been at McKinsey, I've been spending years working with software companies. And most recently, as they mentioned, working with a lot of growth stage, B2B, mostly SaaS companies, right? And so we thought this could be a really interesting way to actually play off of our experiences and ask around one of these topics, let's take consumer, right? Because this is a little bit of the precious snowflake type phenomenon where people are like, you can't predict what's going to be a winner. And I think based on Kent's experience, and then let's bounce up against that some of the things we've been observing in B2B and, unfortunately, with your nice background as well, and ask, are there some things that actually are more predictable? And are there some interesting learnings that kind of come across? But I don't know if you want to introduce yourself a little bit, Kent? Yeah, so the intro hit it a little bit, but I've been at Bestmer for eight years. Bestmer is the largest venture capital fund in Boston, 1.6 billion, every stage of venture, as well as pretty much every sector. Certainly a B2B SaaS is probably where we've been externally the most noisy, but internally we focus on all aspects of consumer health care, etc. And my journey at Bestmer was from, I mean, I heard that bio and I kind of laugh because, you know, big data, well, that's six years ago, man. I'm all consumer now, babe. So, but at Bestmer, the approach is sort of general athlete investors, not necessarily, you know, deep sector background, who can dive in and out of various roadmaps is the phrase we use and apply, you know, a lot of forward thinking, much sort of Mackenzie Bain style, I'm from Bain originally, but Mackenzie Bain style forward thinking to these sectors so that when we see the incredible deals in the sectors, we sort of recognize it. And what's interesting, we've known each other for a while, but what's been interesting in our conversations. And as I've transitioned from more B2B to B2C investing is exactly what you said. In the B2C world, I think there's this impression that these B2C unicorns kind of emerge from a volcano where they're born and there's just no predicting them and you can't see them coming and you just got to fire and invest in a bunch of these things and hope you get lucky. And coming from the B2B world, where Bestmer has had a lot of sort of metric driven sort of formulas for predicting B2B success, we've begun to apply some of the same to B2C and seen some real success there. And so I think it's really interesting to think about how B2C and B2B compare in what success criteria sort of are shared among the two. Well, you know, just to kind of dig in on that, I really liked as we were kind of talking before, you know, you feel like there are actually some threads that you look for in B2C businesses. Well, they all feel like precious snowflakes, they're all made out of ice, right? You know, like what are those common themes that kind of help pull together those that are successful? And so, you know, the number one, and I think it sort of gets to the biggest myth in B2C investing is you simply cannot buy your way to a big successful consumer product. And what I mean by that is, you know, every B2C, many B2C investors and certainly entrepreneurs are very focused on this concept of customer acquisition cost and the idea of how quickly do I get paid back there? And it's no surprise because, you know, a bunch of investors are staring at their Excel spreadsheets and your CAC, your customer acquisition costs and your payback timing, those are numbers that we can manipulate, build models based off of and feel, you know, sleep warmly at night thinking, gosh, my CAC and my payback is great. And the reality is, as we've looked at it, no great consumer business. And another part of the problem is there aren't that many great consumer businesses founded. We're talking about two, three, four businesses a year, period domestically, that would have sort of a huge consumer impact. But no great consumer business has been built that way. Instead, every great consumer business we've ever been seen has been built in a much simpler way. Okay, today, you have some amount of revenue from all your customers. Tomorrow, you will have less revenue from those customers because human beings, unfortunately, all churn in the end, right? And we move and we have children and we, you know, we have life changes. So in general, every consumer cohort shows some declining spend over time. So you have a gap. And the question is, how do you fill that hole in the bucket? And every great consumer business fills it the same way. Their existing customers love their product so much that because the product market fit is sort of radical in some way, that they go out and tell their friends and they tweet about it and they share it on Facebook and drive the growth thusly. And so you get some resting, we call it internally the resting growth rate of these consumer businesses is positive, which is a good thing. But another way, if you stopped spending on paid marketing entirely, you would still grow. Now, of course, you can spend on paid marketing and grow faster. But when that resting growth rate is positive, we think it's a pretty rare, unique thing in the consumer world. And that's what we look for. And I think there are some comparables in B2B. I don't know if you sort of have the impression. But yeah, you know, it's it's interesting because, you know, certainly in B2B, when you get out of the small business, I mean, small business B2B looks a lot like consumer, right? When you get into the enterprise, things tend to get stickier, right? It's harder to change. There's there's a lot of benefits. But it is interesting. You know, the the same complaints come up with enterprise buyers as I think consumer, which is there's all this just structural churn. The company goes out of business, you know, I lost my sponsor, whatever it is, is that same type of thing. And so your real question you need to be asking yourself is, are you just throwing up your hand at that type of activity? And by the way, as you get smaller and smaller businesses, the more likely some of that's going to occur, are there some practical things that you can do about it? And I wonder if it's some of the same things that you've observed on the consumer side. But you know, the types of things that you do on the enterprise side to solve that. Okay, well, what let's say your problem is the business is going to go defund. What you're really trying to do is build a relationship with whoever the buyer was in the first place, because they're going to go work someplace else. And you want to want to get them to go bring you someplace else. In fact, there was a really fantastic small business software company who when you actually looked at the real churn that they were achieving, it was very small because while they were doing retail storefront software and retailers churn fast, right? But the cash flow should stay there. But the same person who was doing that, what did they go do? They go build another one, maybe even in the same space. Yeah, they want bankrupt on that one, but they essentially continue to get their revenue streams. Or if you take the other side, which is you take a look at the, hey, I lost my sponsor type issue, right? Well, this is actually more of a, am I proving to this person's broader ecosystem in the enterprise side? What do we do? We give metrics, we help them tell their boss why it's being successful. So if that person goes away, the boss is asking for that same report. Well, where's the larger community around that person that you're convincing? It's great. So if they are looking to churn, all of a sudden, it's actually sticky for a broader reason. Yeah, and it's not rocket science. And it's the, and it's, we've seen the same thing. And we're investors locally in a business called Toast, which sells to the restaurant industry. And everybody knows that the restaurant industry is the worst industry on the planet, as they all told me when I invested. And the churn would be massive. Well, it turns out, you churn the restaurant, but the stove is still there, and the new restaurant opens in its place. And if the product is fundamentally fantastic, then the new owner, maybe a different owner, will want to turn on the same technology in the same spot. In B2C, I think you see this more starkly, more dramatically. Consumers just don't care at all about firing the products they don't like. And so give them two seconds of an excuse, their credit card expires. And if the product is crappy, they're gone. I mean, you'll never hear from them again. If the product is fantastic, they will climb through the desert to sort of get to you, and you want to make that as easy as possible for them. But so this, I mean, we hear people say product market fit a lot, but I think this fundamental force of radical product market fit is still not emphasized as much as it should be, especially in businesses where you do have the ability to pull levers and drive some growth for the short term. I think that can be intoxicating and can mask the long term sort of rot of a product that's not fantastic. How do you look at metric these businesses to both figure out the product market fit and then whether or not they've got the health across the rest of the operations? Yeah. Well, so, and again, B2C, B2B, very similar. I mean, I think fundamentally we're looking at resting growth rate. So does the product just grow? And then we start to look at can you efficiently grow beyond that with paid marketing? So can you get efficient payback on paid acquisition? You know, details, but we like products that have positive margins. There are some negative margin products that have come and gone and been popular at times, but we think that fundamentally if a product starts off with negative margins and there isn't just a dead obvious plan to get it to positive margins, that unfortunately if you find radical product market fit and you're growing as many of these consumer businesses do not a hundred percent a year, but like five, six, seven, eight hundred percent a year for three years, your margins aren't going to improve while that's happening, right? That is you're just flying off of a cliff trying to try and improve your margins and it's not going to happen when you're having to open, you know, triple the capacity next year that you have this year. So if we don't have positive margins on day one, we're very nervous and often we'll hear somebody say something like, well, as soon as our machine learning kicks in, like our margin margins will be positive and we're like, okay, well, let's talk that because until then we're terrified. But I think that's it. So resting growth rate, efficient paid acquisition, if you've got that option is great. Some products are going to have such a low lifetime value that they can only rely on their organic resting growth rate and then, you know, positive margins that lead to a positive lifetime value. So let me tell you how I look at it B2B because I think there's a lot of similarities here and maybe what we're saying is there's some fundamental ways that you want to look at any business. And by the way, one of the interesting things that we were debating and you can go look at this yourself is like even go to NRF. NRF publishes their Fast 100 or whatever every year. They just did it here in January and take a look. Where have they gotten funding? How much money have they taken? I was shocked when we were looking at this list and a very significant portion of this list, much more than you would see on the B2B side have taken little to no funding. And it actually I think emphasizes what you're getting at, which is there's too many consumer businesses that have had an old mantra, which is about attracting as many users as possible and not having something that is really valuable and people will pay you for on day one. Whereas if you actually find something that people are willing to pay you for very early on, you might actually, if you can do all the rest of the consumer business really well, you may be able to take very limited amounts of capital because the cash that you're throwing off from the core business and the viral growth that you're getting from everywhere else actually allows you to take off. Now, will that work everywhere? Probably not. There are certain consumer businesses that look like you're building a hyperloop system where you've got to have a tremendous amount of capital expenditure. But the question is, should that be the case for all these businesses? And certainly the evidence would suggest way more than B2B that it's not the case. On the B2B side, it's interesting, right? I've done this big piece of work that took a look at what are successful B2B businesses look like. And what you observe is that let's say that there's a few times in your lifespan of a business, right? You're founding it, you get product market fit, and then what are you trying to get? You're trying to get through the growth phase to hopefully get to an exit. Well, once you enter that growth phase, which is you've proven the product, right? When you're getting up to say 50 million ARR, what you observe, and if you look back at the history of software businesses is that if you want to grow 10 times more from that point, you have to have built a business by that point that can achieve and sustain at least for the forward kind of two to three years, 50% or higher growth rates, which by the way, once you get to 50 million, it starts to be challenging. And what I say it's important to do that. In the last 35 years for software businesses, more than half of software businesses by the time they made 50 to 100 million, they were growing through that path there at 50% or more grew 10 times more. Almost none of all the remaining software businesses grew 10 times more. Well, then you layer on top of that the fact that valuations today more than they were three years ago, if you want three years ago, and you correlated valuations, it was purely growth. Today, about 25% of the correlation goes to the efficiency of that growth. And so if you say I am in an environment where I'm going to be burning cash potentially to do this, you have this, it's something that we call zero burn growth rate, but it's this concept of the resting heartbeat of the business, right? You have an existing subscription business off the cash that it generates, how much growth can you get at a baseline, right? So you're starting to break this this business down into its pieces between the resting heartbeat and the efficiency of that growth engine. And if you look at the underlying, you know, things that are driving that for those businesses on the enterprise side, most of them have a reasonably good, you know, cash generation. There are some that are, you know, humanated for some reasons or have really high, you know, serving costs. So but for most of them, they're going to throw off a bunch of cash from their existing business. So the real question becomes how efficient are you on the other side, which is essentially my logo acquisition efficiency, and my retention or, you know, churn and upsell, cross-sell efficiency, right? And it's interesting when you, at least the the businesses that I spend a lot of time with, they emphasize that first piece, the logo portion of it. But it's very interesting, this whole concept of how much should I invest on the other side. And part of the reason we decided for the topic of this conversation was around, you know, this whole retention, churn management, this type of thing. It seems to be low on Maslow's hierarchy. Is that the same that you see in the consumer side, or is that just something that we're observing on the enterprise? Well, I would say by number, absolutely. The vast majority of consumer businesses we see are much more focused on paid acquisition and sort of that piece. And that's because if they haven't fundamentally got a great product or they haven't focused on the core retention, then they're suffering because of that. And they've gotten themselves stuck in this. I have to spend a choir to stay above water and maybe grow. And the problem that you see with the 50 million ARR, SaaS businesses that many consumer businesses see, and it tends to be unfortunately often, you know, around the time some of them begin to think about going public or exiting, is that at the margins, they just don't have more opportunities for efficient acquisition. You can't hire more salespeople to call more of your prospect businesses. You've got it covered. And so when you've sort of maxed out on these sort of marginally efficient acquisition opportunities, what's left? Now, if you've got instead an incredible retention at your core, well, first of all, you've got a smaller gap to fill every month to grow because you've got less churn. You can get more upsell from your existing customers. And I think, importantly, those customers are out promoting you. So at some of our best, you know, SaaS and consumer businesses, the majority of the leads they get are the new customers are coming in organic ways because people are hearing directly about great products or they're reading online. And so it's I think there's a trap, though. And I know there's some prospective investors in the audience. I think investors bring this transactional mindset and often entrepreneurs to these enterprises where they think they think in Excel sheets. And it's not because they're, you know, they're not, you know, focused on great customer love. It's just you're so stressed and busy. And what is the next thing I can do to sort of affect change of my business? And so much easier to do the math on paid acquisition and payback like the investments you make in core retention and product are often fuzzier, harder ROI to sort of capture. Well, how do you even how do you even metric it? I mean, when you think of churn, I feel like there's this constant debate of like, how do we even measure it? And especially if you've got a business got got a freemium component to it and a paid component, like how do you deal with them? How do you even think about? I think churn is one of the most abused metrics, you know, in investing period. And it's really sharp how stupid of a metric it is in the consumer world. And so, you know, just to just to take a hypothetical example, let's say I'm building a dog food company. Right. And I get some new customers. In week one, you know, probably if I'm a typical consumer product, a quarter of those customers, it's just not going to work. You know, it just didn't, you know, or the new hotel concept you sold them like it's just not what they were looking for. For whatever reason, consumers are a vast and very different population. And so you lose a lot of people right away. It's because consumers, they don't like do a long investigative sales cycle where they pilot the thing. They just, they buy the one of them and they see and they're going to go away. So by definition, your fastest churning cohort, you know, group of your, of customers are going to be your most recent customers in almost every consumer business in history. And so, if you accelerate your growth, which means you get proportionally more new customers in your customer set, what will happen to your churn? It will spike, right? So churn, I've just told you, is like a positive indicator for accelerating growth in consumer businesses, right? What is much, so I find churn to be totally useless and B2C as a concept to think about, I find it much more useful to think about cohorts. And so I've got customers, they trial with me initially, they stick with me with some predictable weight. What I'm really looking for is do they flatten out and even then grow over time? So six months in, am I getting really, really sticky with those customers? On a cohort level, do I get really smooth retention and even upsell at the end? So it's interesting that you're going that way with the expansion. You know, on the enterprise side, certainly you have this big emphasis and people talk about wanting to have, I don't know if folks in the audience, they've heard terms like net churn and gross churn. On the enterprise side, essentially what that means, gross churn, you can do it on a logo or a dollar basis, but on a dollar basis would be, hey, for all the things that are up for renewal right now, how many of them came back and renewed? Whereas a net churn would also include your expansion. So if you sold more units of it, you sold another product long to your existing customers. So a net churn number essentially is, it tells you the whole business of your existing base, how much more is that? And folks are saying, hey, I'd love to get 110, 115. It would be amazing if I could get that type of expansion regularly. But I think frequently here when I go into consumer conversations, you know, they're only going to buy this much. You know, like if I'm, you know, Dollar Shave Club, they only buy this much from me every single, you know, period, there is no expansion. But I think you've got maybe a different perspective on that. Well, I think it's, you know, for many that's the case. I think, you know, what's fun for me is to think back 10 years ago, right? When MapQuest was the top map product in the world and, you know, the world was very, very different. There aren't saying that that I'm supposed to use something. Yeah, I've got a new one. Okay. But, you know, these consumer businesses do not last. I mean, you know, it is the hardest thing in the world that I in the investing world I've seen is to build a consumer business that's going to be alive 10 years from now. And I think by definition, the ones that will be will have significantly expanded their product roadmap in some way along that path. Now, maybe they're just trading, you know, you know, A for B, product wise. But I think the really successful ones in Amazon is like, you know, probably the greatest example we'll ever see of this have significantly expanded their consumption. It's incredibly rare. I mean, once you get a consumer to love you, but they're in a routine with you to convince them to spend a lot more money with you over time is very, very, very hard. But some businesses do it. Some of the best consumer business in the world, we see do it. And they do it for a couple of reasons. This the customers who have stuck around after the first period are real evangelists. They really love this product and they and they often will seek to find ways to consume more of it. You know, if you expand your view to the consumer cohort of not just that consumer, but their entire family, often we can almost never do the math on this. But often if you can do that anecdotally, you know that among their group of peers and friends and family that they are consuming more of your product, if they really, really love it. And so I think, you know, product expansion is one way to think about it. Increased consumption over time for certain products. You know, Uber is an example where I think over time after they've gotten through the sort of initial churn of a one time user who's, you know, travels in from a town where they don't need Uber and then they go back home. But with stable customers, people start thinking, gosh, I could sell my car and I could consume more of this over time. And then and then for others just thinking about how this becomes a pervasive thing in your social circle and the sort of net negative family cohort churn there, I think would be an equivalent concept. So, you know, the interesting thing that comes with these cohorts then it's I feel like I get into these debates all the time. And I was like in a board meeting yesterday where it was debated yet again, which is do I look at customer lifetime value? Or do I look at something more like the magic number? And on the on the enterprise side, essentially what I mean by this is if you know that you're, you know, average lifespan of a customer is going to be seven years, you can say, well, I estimate the total value of this customer once I have them is going to be X. The other way to look at it would be, you know, there's this concept of magic number that says I'm going to ignore the long tail. I just want to know how quickly I pay back the amount of the sales and marketing that I that I had. And if that's short enough, I should feel pretty comfortable about these because all SAS businesses, unless you're pretty screwy, are not going to be churning too badly. Like, how do you think about that debate on the consumer side? Well, so again, for these incredibly rare, but the only ones I really want to invest in consumer businesses that that just grow, that have a resting growth rate that is positive. If you limit yourself to lifetime value, you're really not doing the full math because you're saying, wow, this, you know, this person I acquired for this product is worth $50 to me discounted present value of all of the future margins that are going to come in. OK, $50, that's, you know, that's not great. But if it turns out that person is going to go out and bring in two of their friends who are going to bring in four of their friends who are going to bring in eight of their friends, well, that math gets really stupid, really fast. This person is worth, you know, $5,000 for you. I was like slack, right? It's like slack. This is like I was an early customer of Blue Apron and there are, you know, several thousand customers who have descended from people have invited who have invited who have invited people, right? So so I think lifetime value for the best in class consumer products ends up being not that helpful. Whereas an enterprise, I can see it as a much more helpful concept because enterprises don't have the same sort of viral, you know, organic acquisition beyond, you know, but if you have a consumer product that is not one of these and your customers, you know, let's say you're selling acting medication and people probably aren't going to go scream from the rooftops about it, then it's critical to know what your lifetime value is, how quickly you're going to be paid back on that, what multiple overtime you're going to get on the marketing spend upfront because that's going to be a gating factor for the return on equity in your business. Well, it almost sounds like you're making the argument that is something similar but done in a different way on the consumer side, which is that when you think of your net churn, it's really what is my viral add on that I'm getting and how healthy is a business? By the way, I will if anybody wants to come argue with me, I also do not like lifetime value on the enterprise side. We can talk about why that is at some other point, but it's very interesting because I think you're getting at this this question of so there's similarly the churn like a gross churn but also on a net churn basis. Is there a different way of looking at it, which is how viral, how much are you getting out of your existing customer base? And it's there a way to measure that so that you can actually understand the true efficiency because you know how much it costs you to capture that first customer but how much does it cost you to get all of their network as well? Yeah, and it's funny, but we talk about this in theory and in my experience, every time I'm in one of these situations, it's so good. OK, you can't believe it. And if you were to plan based on it, it would seem insane, right? It would say, oh my gosh, we can afford to spend 10 times the individual LTV of this customer to acquire a customer and we're still getting efficient payback at the margin. And so not to mention, it's just really, really hard to track like how this virality truly plays out over time, just because limitations of like graph databases and, you know, internally at the companies they can't do this really well. And so what ends up happening is they end up using maybe a lifetime value metric as just sort of a guideline for, you know, marketing spend at the margin. And and that's probably a pretty conservative way to manage a business. You could probably get much more aggressive with much fancier math. But then, you know, I think we don't have enough experience with how these products mature over time to know when that math might turn on you, what the signs of that might be and and how how far over your skis you might be at that moment of paid acquisition. So not to geek out. Yeah, well, as you're looking at these consumer businesses and you, you know, I think you're clearly convincing me and hopefully others the importance of why the retention and focusing on the success is very important. What are you looking for in these businesses in terms of the investments that they've made that give you an indication that they are going down the right path? And, you know, some of the things, some of the questions that I often get on that on the enterprise side are going to be things like, hey, what portion of my sales time should be spent hunting versus farming? You know, should I split hunters versus farmers and have customer success managers? You know, a comp model, like are these guys quoted like, you know, the other ones? Are there similar types of questions that you are looking for for the really smart consumer businesses where you like these guys get it, right? They're going to succeed versus the ones that aren't. Right. I think it's people who are just fundamentally focused on product quality. But let me break that down into a couple of dimensions. These incredible products should be time savers. They should be easier to consume than some of the products they're competing with. They should have value to them. So they should, in an ideal world, save you money relative to the alternatives. They should be better quality. Sometimes the Shake Shack burger just has to taste better or it doesn't work. Right. And then they need to have what I call like the fuzzies. Some set of it's an authentic brand. Like this is a company that really does care about their customers in the world. That they're a fun brand to be associated with. It's often a beautiful brand because they care about visual design and the aesthetics of it. The companies that are focused on anything but those aspects of just product quality before they put the marginal dollar into paid acquisition are the ones that, well, we're interested in the ones that are focused on the former first. Right. So, you know, you talk to them about their paid acquisition. They just can't be bothered. They'd much rather focus on, you know, the new thing they're putting in at the new facility or the incredible taste of the new thing that's just come off the line, et cetera. So that's the thing. And you can just see it in their eyes. Like, fundamentally, they're typically in the consumer world solving a problem that they had as this consumer. They're a big consumer of their product and they want it to be more awesome. And that's what they're spending all their time doing. Well, thank you very much. I think we've blown through our time here. Great. I'm sure could talk about this forever. And if any of you have any questions, I'm sure that our contact information is part of this. But again, Kent and the stuff he's been doing at Bessemer, pretty amazing, you know, applying a lot more rigor, I think. And actually, you see it in the performance of the businesses that you've been participating with. And there aren't a ton of folks that are doing consumer, but the folks that seem to do it, you know, they are figuring it out. And if you have any prize questions, you can always come find me later. Thanks, Peter. Thank you guys.