What investors want from tech start-ups is changing significantly. They have a laser focus on customer retention and profitability. How can tech companies achieve this?

Barnik Chitran Maitra, Managing Partner, Arthur D. Little

July 11, 2023

4 Min Read
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Today’s tech winter has seen a huge number of job cuts across the sector and has put the brakes on the conveyor belt of successful tech start-ups such as those we’ve seen over the past decade. Many initial public offerings (IPOs) failed or were pulled, and venture funding dropped by over 50% year-on-year in 2022. High-profile companies such as Palantir in the US, Paytm in India, and Klarna in Europe saw their share prices and valuations slide.

Does this mean the era of the start-up is dead? At a time when disruptive new ideas are seen as vital to solving global megachallenges, does today's environment spell the end of transformative advances and fresh business models?

The short answer thankfully is no; venture capitalists (VCs) and others are still making investments. However, what they are looking for has changed dramatically. To attract funding start-ups must focus on the bottom line, maximizing efficiency rather than solely chasing first mover advantage and revenue growth.

Based on ADL's experience and discussions with VCs and start-up CEOs from across the globe, we see a new formula for creating unicorns and retaining that valuation post-IPO. It requires companies to focus on six key areas:

1. Attract customers cost-effectively, and then retain them.

Previously, start-ups spent their large marketing budgets in very visible ways such as advertising and sponsorship campaigns. They now need to be more cost-effective and targeted within marketing, looking instead at below-the-line tactics such as referrals and word of mouth. Start-ups then need to make sure they retain their customers, rather than letting them churn. Investors are focused on metrics such as monthly active users (MAUs) and time spent per session, rather than app downloads.

2. Adopt subscription pricing to drive revenue certainty.

Investors are looking for certainty and customer retention when it comes to start-up revenues. That means models based on advertising or freemium approaches are out of favor. Instead, start-ups should look at subscription-based revenue models to keep customers longer. These models need to show clear value and be flexible to meet the changing needs of customers.

3. Target under-addressed segments and markets.

Previously, there’s been a standard playbook in terms of where start-ups look for their initial customers. B2C players target Tier 1 cities with affluent consumers while B2B start-ups focus on large corporations. This means these markets are saturated with new offerings, leading to intense competition. Start-ups need to take an alternate approach, looking beyond the playbook and focusing on underserved and less competitive markets such as Tier 2 cities, small-to-medium enterprises (SMEs), or business areas such as environmental social and governance (ESG).

4. Focus on delivering “insane product-market fit”.

In competitive markets, average product-market fit doesn’t build long-term customer relationships. Instead, start-ups need to achieve “insane product-market fit,” with 95% or more of their targeted customers finding the product or service offering compelling compared to alternatives. This will reduce churn rates and dramatically increase customer lifetime value. Operationally, businesses need to cut the fat and build lean, cost-effective business models, watching their cash to ensure they can survive the tech winter.

5. Improve customer service through automation.

In the past start-ups focused on recruiting new customers more than retaining existing ones. This meant customer service was neglected in comparison to sales efforts, an approach that must change. High-quality customer service doesn’t have to be expensive. By focusing on technology, particularly digital channels, AI, and natural language processing (NLP), start-ups can automate customer service through chatbots and NLP-powered online FAQs, reducing costs while keeping satisfaction high.

6. Look further afield for tech talent.

Start-ups tend to cluster in specific hubs, such as the Bay Area in the US, Bengaluru (Bangalore) in India, or London in the UK. Normally these areas see high demand for talent and resources, meaning that expansion is costly in terms of salaries and operating costs. Yet many other cities and regions offer access to key skills, at a much lower cost. Therefore, start-ups should expand through centers in emerging hubs (such as Denver, Colorado and Austin, Texas in the US, or Hyderabad and Pune in India) or by outsourcing operations to countries such as India, Poland, or Romania.

There’s a chill wind blowing through the tech sector, impacting both start-ups and larger players. While it’s never good news for those that lose their jobs or companies that close, it does provide the opportunity for start-ups to step back and take stock of their strategies and models.

They need to transform how they operate, focusing on profitability and efficiency, while building lasting value, rather than just growing the top line. This will help build the unicorns of tomorrow, creating lasting businesses with long-term customer relationships.

About the Author(s)

Barnik Chitran Maitra

Managing Partner, Arthur D. Little, Arthur D. Little

Barnik Chitran Maitra is the Managing Partner/Managing Director of Arthur D Little, India and South Asia. At ADL, he is responsible for the company’s regional footprint by serving leading institutions and ensuring a pre-eminent position for ADL in India and South Asia. With over two decades of experience, Barnik has a proven track record of leadership ability and is also a technology expert, Silicon Valley investor, board advisor, published author and a renowned speaker.

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