Y Combinator

deep dives</a> on the problems and what they did to fix them.As Monzo has scaled to become the leading neobank in the UK, it has continued to mindfully launch features with an emphasis on treating customers fairly and having a positive social impact. Our five favorite examples are outlined below:(1) Gambling block: One of the features that best highlights Monzo’s commitment to better money management is <a href=https://www.ycombinator.com/"https://monzo.com/i/gambling-block/">Gambling Block</a>, a feature where customers can disable transactions tagged as gambling. This feature might seem counterintuitive for banks traditionally incentivized to maximize monthly spend and revenue. But Monzo’s employees enthusiastically believed Gambling Block advanced the company’s customer-centric vision by encouraging better spending habits. The feature was actually devised by a small team of Monzonauts during “Monzo Time,” a monthly event during which employees can work on anything important to them. As of February 2021, Gambling Block was being used by 275,000 customers and was blocking nearly 600,000 transactions per month.(2) Tone of voice guide: In 2017, Monzo published a <a href=https://www.ycombinator.com/"https://monzo.com/tone-of-voice//">Tone of Voice</a> guide to maintain its clear, concise, positive voice as it scaled. This includes everything from Monzo’s terms and conditions, which have the required <a href=https://www.ycombinator.com/"https://monzo.com/blog/2018/07/02/the-monzo-mission/">reading age of 11</a>, to the way customer support agents communicate with customers.(3) Proactive transparency: Like all banks, Monzo has visibility into customer spending. Unlike all banks, Monzo uses this visibility to go above and beyond in proactively supporting users. In 2018, Monzo’s financial crime and security team noticed a concentrated number of fraudulent Ticketmaster transactions and immediately updated its systems to block suspicious transactions, alerted relevant parties, and <a href=https://www.ycombinator.com/"https://twitter.com/dan_graf/status/986979971905310720/">proactively replaced</a> customers’ cards. Two months after receiving information from Monzo, <a href=https://www.ycombinator.com/"https://monzo.com/blog/2018/06/28/ticketmaster-breach/">Ticketmaster announced the breach</a> that compromised card details.(4) Fair-use fees and customer-friendly lending: In 2020, Monzo introduced <a href=https://www.ycombinator.com/"https://monzo.com/blog/withdrawal-and-card-delivery-fees/">fair-use fees</a> for customers who used certain features above normal levels and created higher levels of free allowances for customers who used Monzo as their main account. The new fees impacted fewer than 30% of Monzo customers and were well-received by the community. Another example of Monzo’s customer-centric approach is <a href=https://www.ycombinator.com/"https://monzo.com/flex//">Monzo Flex</a>, which is a better way to pay later. Instead of just launching another BNPL product, Monzo asked customers what they liked and disliked about existing lending products. Customers told them they didn’t want to have to reapply every purchase, they wanted flexible payment terms, and they wanted ubiquitous acceptance. Monzo Flex solves these problems by checking for affordability and letting users spread the cost across any purchase with flexible payment terms.(5) Internal inclusion goals: Monzo’s company operating system was also designed with transparency, fairness, and authenticity. The company publishes <a href=https://www.ycombinator.com/"https://monzo.com/blog/our-2020-diversity-and-inclusion-report/">an annual report</a> of its progress on diversity and is on track to reach a <a href=https://www.ycombinator.com/"https://monzo.com/blog/gender-pay-gap-update-april-2020-and-april-2021/">0% gender pay gap</a>. Women make up 40% of their executive team and board. This focus on building an inclusive company operating system is one of the many reasons why Monzo is consistently rated the <a href=https://www.ycombinator.com/"https://www.linkedin.com/pulse/linkedin-top-startups-2021-15-uk-companies-rise-linkedin-news-uk//">number one UK startup</a> on LinkedIn.In 2019, Monzo was recognized by <a href=https://www.ycombinator.com/"https://monzo.com/blog/monzo-is-the-uks-most-recommended-brand/">YouGov as not just the most-recommended bank but consumer brand, and in 2020 it was rated the number-one bank for service quality per the <a href=https://www.ycombinator.com/"https://monzo.com/blog/2020/08/17/were-the-best-bank-for-overall-service-quality-and-online-and-mobile-banking/">Competition and Markets Authority</a>. Monzo’s efforts to build a customer centric brand and their focus on building a best-in-class consumer product helped the company scale from 500 to 500,000 users less than 24 months after initial Alpha launch and less than 6 months after launching full bank accounts.<h2 id=\"scaling-monzo-growing-to-5m-users-and-100k-businesses-in-5-years\">Scaling Monzo: Growing to 5M+ users and 100K businesses in 5 years</h2>Monzo’s second chapter has been even more impressive. Since launching in the UK five years ago, Monzo has scaled to 5.3 million users, or more than 10% of the adult population. In an incredibly short amount of time, Monzo has managed to turn a good product into a highly competitive platform with a significant market share. And they did it by spending only £20M on marketing in one year, or <£20 per customer. In the years since, they’ve spent £0 on marketing.Scaling the customer base efficiently and effectively Monzo used its early enthusiastic community to drive new customer growth. In designing its cards, Monzo chose an eye-catching hot coral color. The card became a conversation piece, as curious bystanders asked Monzo customers about it, which would naturally result in new signups. Monzo then built social features to supercharge word-of-mouth growth. It launched <a href=https://www.ycombinator.com/"https://monzo.com/blog/2016/10/17/wonderful-surprises/">Golden Tickets</a> that customers could give to their friends to skip the waitlist, peer-to-peer payments, and contact list sharing between friends. These social features accelerated user growth to 5% week-over-week and helped Monzo scale to over one million users with effectively zero marketing spend in a sector where customers typically cost <a href=https://www.ycombinator.com/"https://www.which.co.uk/news/2021/08/nationwide-launches-125-switching-bonus-is-it-worth-it//">£100–150 to acquire. Today, the average user has 30 friends on Monzo and 83% of active customers enable P2P payments within their first year. Like “Venmo me” in the US, “Monzo me” has become a fixture in the UK vernacular.<figure class=\"kg-card kg-image-card\"><img src=https://www.ycombinator.com/"https://blog.ycombinator.com/wp-content/uploads/2021/12/monzo-04-p2p.jpg/" class=\"kg-image\" alt loading=\"lazy\"></figure>Monzo also expanded its product from a spending account to full-fledged bank account and financial control center. In its first few years, Monzo added basic banking features such as overdrafts, cash deposits, and direct debits to reach feature parity with traditional banking. In the past 18 months, Monzo revamped personal loans and launched premium subscription accounts with software features and perks such as third-party spend and savings tracking, virtual cards, custom categories, credit tracking, exclusive merchant discounts, and insurance. Today, Monzo isn’t just a complete bank replacement; it’s the best consumer banking experience in the world.<figure class=\"kg-card kg-image-card\"><img src=https://www.ycombinator.com/"https://blog.ycombinator.com/wp-content/uploads/2021/12/monzo-05-consumer-banking.jpg/" class=\"kg-image\" alt loading=\"lazy\"></figure>Monzo has successfully scaled its customer support and banking infrastructure alongside its user base. There is an entire product team dedicated to building software for customer support agents to surface customer information in seconds and maintain a consistent customer voice across every interaction. This is an enduring advantage over peers that rely on third-party software or automated support systems.Monzo has also scaled its internal banking infrastructure. When it first launched, Monzo partnered with third-party payment processors to get to market quickly. Over time, Monzo migrated to internal systems and now has the lowest downtime in the entire banking industry (incumbents and startups). With these backend improvements, Monzo has been able to grow from a tiny startup to a major banking platform while maintaining a 70 NPS. In 2021, over 40% of active customers were using Monzo as their main account, up more than 10 percentage points from 2020.<figure class=\"kg-card kg-image-card\"><img src=https://www.ycombinator.com/"https://blog.ycombinator.com/wp-content/uploads/2021/12/monzo-06-account-usage.jpg/" class=\"kg-image\" alt loading=\"lazy\"></figure>A natural transition to business banking As Monzo’s consumer brand scaled, the team saw an opportunity to launch a banking product for small and medium businesses (SMBs) in the UK. The average business has 6x more deposits than the average consumer customer and Monzo already had more than 250,000 customers that owned a small business. Legacy banks were not meeting SMB needs, with the average business using 10 to 15 different financial products because SMB accounts were designed solely as transaction accounts. To solve this, Monzo launched business banking as a spending account with added software features such as invoicing, tax budgets, multi-user access, and accounting integrations. Since their SMB launch in April 2020, Monzo has organically scaled to over 100,000 businesses, outpacing every competitor. It took their closest competitor two years and significant marketing spend to reach the same scale.Looking ahead, the company has an opportunity to serve larger businesses as well, by building financial operations tooling such as payables/receivables software and international payment capabilities. At scale, Monzo will be also uniquely positioned to enable seamless interactions between business customers and personal customers, similar to how Square does in the US.<figure class=\"kg-card kg-image-card\"><img src=https://www.ycombinator.com/"https://blog.ycombinator.com/wp-content/uploads/2021/12/monzo-07-business-banking.jpg/" class=\"kg-image\" alt loading=\"lazy\"></figure><h2 id=\"monzo%E2%80%99s-opportunity-a-leading-consumer-and-business-finance-platform\">Monzo’s opportunity: A leading consumer and business finance platform</h2>The success of Monzo’s first five years will naturally lead to continued expansion within and outside of the UK. We think these are the most exciting opportunities for Monzo to disrupt the global banking landscape:(1) Using great software to drive deep value for customers: Monzo is able to maintain customer-friendly fee structures and policies simply by cutting significant infrastructure operating costs. Their subscription banking product, which offers virtual cards, third-party account connections, and advanced budgeting features in exchange for a flat fee is fundamentally disruptive to incumbents. Today, Monzo’s long-term retention of premium customers outperforms incumbent financial services and is more inline with best-in-class consumer subscription companies like Calm, Netflix, and Spotify. Incumbents do not have the engineering talent or infrastructure to compete.(2) Leveraging its two-sided network to build unique customer experiences: Because of its single-country focus, Monzo has been able to achieve deep reach among both consumer and SMB banking customers in the UK. The company now serves 10% of UK consumers, has 50%+ of UK neobank market share, and has 100,000 SMB customers. The company is in a unique position to build a consumer-to-business payment network in the UK, and has started to lay the foundation with products to <a href=https://www.ycombinator.com/"https://monzo.com/blog/2021/10/12/getting-paid-with-monzo-business/">help businesses get paid</a> and <a href=https://www.ycombinator.com/"https://monzo.com/flex//">Monzo Flex</a>.With Monzo’s business payments product, SMBs can collect payments via credit card and bank transfers, historically a huge pain point. Instead of sending invoices via email, businesses can send a Monzo payment link to customers. Early data shows high repeat usage, with the experience being meaningfully better when both the SMB and customer are Monzo users. As its two-sided network scales, more money will stay entirely within the Monzo ecosystem, resulting in better economics and experiences for both the company and its customers.<figure class=\"kg-card kg-image-card\"><img src=https://www.ycombinator.com/"https://blog.ycombinator.com/wp-content/uploads/2021/12/monzo-08-business-payment-tools.jpg/" class=\"kg-image\" alt loading=\"lazy\"></figure><a href=https://www.ycombinator.com/"https://monzo.com/flex//">Monzo Flex</a> is another product that benefits both consumers and businesses. Flex lets users finance purchases over £30 across multiple installments. Monzo’s natural visibility into users’ spending and financial health enables it to create a product that is better for consumers than traditional BNPL options. First, Monzo finances any transaction (offline or online) regardless of merchant partnership. Second, Monzo leverages its banking relationship to run affordability checks on users. This means Monzo will not approve Flex purchases for customers likely to end up in an endless cycle of debt. Traditional BNPL players can’t do this because it threatens their business model of prioritizing spend and merchant conversion. Over time, Monzo can even leverage its scale in the UK to sign partnerships with merchants to reduce costs for consumers. Flex could also disrupt the credit card market, as users use their virtual Flex cards instead of credit cards to finance payments. While early, the company has seen incredible demand for Flex only a few months after launch.<figure class=\"kg-card kg-image-card\"><img src=https://www.ycombinator.com/"https://blog.ycombinator.com/wp-content/uploads/2021/12/monzo-09-flex.jpg/" class=\"kg-image\" alt loading=\"lazy\"></figure>(3) Launching new financial tools: The UK banking market remains fairly disaggregated. A customer might use Monzo for banking, eToro for crypto, Freetrade for equities, and Atom for a mortgage. Monzo will continue to expand its offerings through both its own products and third-party partnerships (where Monzo acts as the front end or distribution engine). As one example, Monzo launched a savings marketplace for customers to earn additional returns two years ago. This product scaled to ~£1.5B in deposits and ~15% penetration of its customer base during a period of near-0% interest rates, creating value for both customers (by offering them higher returns) and deposit partners (who would otherwise have to pay large acquisition costs). Over time, Monzo will have increased opportunities to create new experiences for users in investing, crypto (e.g., staking, buying/selling), savings, and lending.(4) Expanding internationally: The company has spent the last 12 months laying the foundation for its US launch. Rather than copy-pasting its home features to new geographies, Monzo is taking the same user-first design and community approach that won it the dominant position in the UK market. Monzo is running US-based community events, publishing a <a href=https://www.ycombinator.com/"https://app.productstash.io/monzo-usa-public-roadmap/">public product roadmap</a>, and consistently adding new features. Monzo has already scaled the US product to 6,000 beta users and has 38,000 users on its waitlist. But unlike when it launched in the UK, Monzo now has five years of history and product work to leverage. This has enabled Monzo to launch features much faster in the US. Because of its strong foundation and country-specific product approach, Monzo is positioned to become a global financial platform and a major banking institution in every market it enters.<h2 id=\"conclusion-spend-save-and-manage-your-money-in-one-place\">Conclusion: Spend, save, and manage your money in one place</h2>Five years in, Monzo is just starting its second act. Monzo’s first act was to build the UK’s best consumer and SMB banking product. Their second act will be to make money work for truly everyone by scaling to a global audience. Over the next decade, the global market share of financial services will increasingly shift towards financial technology companies. We are already seeing signs of this shift within YC. Companies like Brex, Groww, Jeeves, Parker, and Point are capturing share from incumbents in their respective markets. Monzo will be one of the main beneficiaries of this shift, as it continues to compound its lead in the UK and drive growth in new markets.Thank you to Max Winston, the entire Monzo team, Mia Mabanta, and Chloe Gordon for reading multiple drafts of this essay, and to Zain Ali for designing the graphics.<hr>1 Financial Conduct Authority – Strategic Review of Retail Banking Business Models <a href=https://www.ycombinator.com/"https://blog.ycombinator.com/monzo-makes-money-work-for-everyone/#footnoteid1\">↩</a> 2 YC UK Survey on Consumer Banking – 2018 <a href=https://www.ycombinator.com/"https://blog.ycombinator.com/monzo-makes-money-work-for-everyone/#footnoteid2\">↩</a> 3 Data from Monzo <a href=https://www.ycombinator.com/"https://blog.ycombinator.com/monzo-makes-money-work-for-everyone/#footnoteid3\">↩</a> 4 Public Filings and FCA’s Retail Banking Market Investigation <a href=https://www.ycombinator.com/"https://blog.ycombinator.com/monzo-makes-money-work-for-everyone/#footnoteid4\">↩</a>","comment_id":"61ba442d495e820001cd7ac6","feature_image":"/blog/content/images/2021/12/monzo-01.jpg","featured":false,"visibility":"public","email_recipient_filter":"none","created_at":"2021-12-15T11:38:21.000-08:00","updated_at":"2022-01-29T19:00:42.000-08:00","published_at":"2021-12-08T11:39:00.000-08:00","custom_excerpt":"Scaling a startup is hard. Scaling a startup bank is even harder. Scaling a consumer-focused financial platform—that is also now the primary bank account for millions of UK consumers—in the midst of a once in a century pandemic is close to impossible.","codeinjection_head":null,"codeinjection_foot":null,"custom_template":null,"canonical_url":null,"authors":[{"id":"61fe29e3c7139e0001a710b2","name":"Nic Dardenne","slug":"nic-dardenne","profile_image":"/blog/content/images/2022/02/Nic.jpg","cover_image":null,"bio":"Nic is a principal at YC Continuity. Nic has helped support the teams at Brex, Convoy, Faire, Groww, Monzo, Rappi, Segment, Snapdocs, and Vouch. Before YC, Nic worked as an analyst at Morgan Stanley.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/nic-dardenne/"},{"id":"61fe29e3c7139e0001a7107b","name":"Anu Hariharan","slug":"anu-hariharan","profile_image":"/blog/content/images/2022/02/Anu.png","cover_image":null,"bio":"Anu is a Managing Director & Partner at YC Continuity. Previously, Anu was a Partner at a16z, where she worked actively with the management teams of companies including Airbnb, Instacart, and Medium.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/anu-hariharan/"}],"tags":[{"id":"61fe29efc7139e0001a7116d","name":"Essay","slug":"essay","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/essay/"},{"id":"61fe29efc7139e0001a71170","name":"Startups","slug":"startups","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/startups/"},{"id":"61fe29efc7139e0001a71182","name":"#ycc","slug":"hash-ycc","description":null,"feature_image":null,"visibility":"internal","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/404/"},{"id":"61fe29efc7139e0001a71181","name":"YC Continuity","slug":"yc-continuity","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/yc-continuity/"},{"id":"61fe29efc7139e0001a711b6","name":"#4787","slug":"hash-4787","description":null,"feature_image":null,"visibility":"internal","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/404/"}],"primary_author":{"id":"61fe29e3c7139e0001a710b2","name":"Nic Dardenne","slug":"nic-dardenne","profile_image":"https://ghost.prod.ycinside.com/content/images/2022/02/Nic.jpg","cover_image":null,"bio":"Nic is a principal at YC Continuity. Nic has helped support the teams at Brex, Convoy, Faire, Groww, Monzo, Rappi, Segment, Snapdocs, and Vouch. Before YC, Nic worked as an analyst at Morgan Stanley.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/nic-dardenne/"},"primary_tag":{"id":"61fe29efc7139e0001a7116d","name":"Essay","slug":"essay","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/essay/"},"url":"https://ghost.prod.ycinside.com/monzo-makes-money-work-for-everyone/","excerpt":"Scaling a startup is hard. Scaling a startup bank is even harder. Scaling a consumer-focused financial platform—that is also now the primary bank account for millions of UK consumers—in the midst of a once in a century pandemic is close to impossible.","reading_time":15,"access":true,"og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"email_subject":null,"frontmatter":null,"feature_image_alt":null,"feature_image_caption":null},{"id":"61fe29f1c7139e0001a71bf6","uuid":"a8119b6d-b3a3-482e-9263-f7b8c0865cea","title":"Gusto: The People Platform for SMBs","slug":"gusto-the-people-platform-for-smbs","html":"Historically, there has been an undeniable gap in business services in the US. There are nearly six million small and medium businesses (SMBs) in the country, employing 43 million people.<a href=https://www.ycombinator.com/"#footnote1\">1</a> But unlike their larger counterparts, SMBs have been ignored by service providers, who have deemed the cost of reaching and serving them too high to warrant the effort. As a result, SMBs have been forced to cobble together off-the-shelf products, spreadsheets, and manual work to run their operations.\nThis gap is most visible in the payroll and benefits sectors. Even though companies like ADP and Paychex have existed for more than 50 years, about 30% of SMBs still manage payroll without the help of a third-party service.<a href=https://www.ycombinator.com/"#footnote2\">2</a>\nThere are three reasons why existing providers haven’t cracked small business payroll and benefits. First, SMBs are fragmented and hard to reach. Relative to the value they bring in, the cost of reaching and serving them has traditionally been too high to warrant the effort unless you can sell multiple products to them. Second, there is significant signup friction for benefits and payroll products. Lastly, benefits products can be costly for SMBs to offer to employees, which results in many just forgoing benefits altogether. The lack of access to simple payroll and benefits tools has had a significant impact on the operational efficiency of SMBs and the well-being of their employees. But where there is a gap, there is an opportunity.\nGusto launched in 2012 to tackle this opportunity, and more. Josh Reeves, Tomer London, and Eddie Kim saw an opportunity to build a people-centered software platform for SMBs that would do three things: (1) bring peace of mind to the employer and employee around complex actions like payroll, benefits, setting up software, and more; (2) help build better places to work by focusing more on the employer-employee partnership; and (3) create personal prosperity for employees by helping supercharge the paycheck and providing access to better benefits. Gusto initially focused on building payroll because it was the most acute pain point, and it was a natural system of record for employee data and transactions. Payroll was the foundation for Gusto to achieve its vision of being a comprehensive “people platform.” Far beyond just paying employees and maintaining compliance, Gusto’s goal is to help employers build great places to work and run successful teams. And for employees, Gusto’s goal is to help put the individual in the driver’s seat of their financial health and their career. The name “Gusto” embodies the company’s mission to create a world where work empowers a better life—where work can be done “with Gusto.”\nThe emergence of SaaS business models has further set the stage for companies like Gusto to transform SMB operations. With cloud-based software and automation, customers are cheaper to serve and simpler to onboard. In the long run, software platforms have the potential to be much larger than traditional incumbents. For customers, this will likely mean a significant bend in the cost curve for products and services. For SMBs specifically, this will lead to a meaningful boost financially and emotionally, and perhaps even higher degrees of company output. In this post, we will walk through Gusto’s journey from digital payroll provider to integrated people platform.\n<h1>Act 1: Payroll: The Perfect Starting Point</h1>\nWhen Gusto founders Josh, Tomer, and Eddie came together in 2011, they saw an unmet need in small business payroll. Despite the major players in the payroll space, 46% of SMBs in the US were spending more than three hours per month managing payroll logistics.<a href=https://www.ycombinator.com/"#footnote3\">3</a> On top of that, 40% were paying a penalty each year for incorrect payroll filings.<a href=https://www.ycombinator.com/"#footnote4\">4</a>\nThis was both an emotional and logistical pain point for SMB owners, with many becoming visibly upset as they talked to Josh, Tomer, and Eddie about it. Upon digging deeper, the founders realized that incumbent providers were overly complex, and more manual than necessary. For example, to become a customer of ADP or Paychex, SMBs had to go through a lengthy process of filling out paper forms and talking with sales reps. Once using the product, they had to rely on the provider’s human specialists to input information and manage the payroll process rather than doing it independently. For SMBs that had neither the hours nor resources to initiate these processes, this approach was untenable. In addition, the employee experience was an afterthought. Incumbent providers treated payroll as a transactional activity, often forcing people to log in using ID numbers and providing limited functionality once they did log in. This made for an impersonal experience for employers and employees alike, and created even more manual work and overhead for employers.\nGusto saw an opportunity to upend the way payroll was done. First, by making payroll about people, not simply a transaction. And second, by bringing the strengths of modern software to this problem, using cloud, paperless, and mobile, to create a dramatically easier-to-use product. If the enrollment process were digitized and companies could access all aspects of payroll on their own time, barriers to getting set up and using the product would be removed. So Gusto began building a cloud-based engine that would allow SMBs to manage payroll with the click of a few buttons, and also make the employee an equally important user of the product instead of an afterthought.\nBuilding payroll architecture is complicated. It involves managing multiple systems (taxes, withholdings, filings, payments) in a reliable and compliant way. To run payroll correctly, a business must identify which taxes are applicable to which employee (there are thousands of options, usually determined by where an employee lives and works). The business must calculate and withhold the right tax amount, at the local, state, and federal levels. Then the business must determine how the taxes get paid, which is an equally complicated process. Some states want checks, others ACH debit/credit, and states and counties often require different payment timing. And then there are filings. Every destination for tax requires a separate filing—some printed, some faxed, some electronic. There are thousands of these filings, and the forms are each very different. Finally, the business needs to send the payment to the employee via ACH typically 1–2 days after running payroll, or write them a check by hand.\n<img loading=\"lazy\" src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/1-Gusto-Overview.png/" alt=\"Gusto Payroll Overview\" width=\"1950\" height=\"1070\" class=\"aligncenter size-full wp-image-1104909\" srcset=\"https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/1-Gusto-Overview.png 1950w, https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/1-Gusto-Overview-300x165.png 300w, https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/1-Gusto-Overview-1024x562.png 1024w, https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/1-Gusto-Overview-768x421.png 768w, https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/1-Gusto-Overview-1536x843.png 1536w\" sizes=\"(max-width: 1950px) 100vw, 1950px\" />\nGusto knew that payroll was a product which had to work, because people depended on it. So some of the normal Silicon Valley approaches to building quickly, and fixing later, wouldn’t work. Gusto’s product needed to provide reliable, timely, and precise tax calculations, filings, and payments to earn the trust of customers. The team initially focused on a narrow segment: businesses in California (1) that did not offer benefits or other deductions, (2) whose employees did not mind getting paid four business days after the company ran payroll and, (3) only had salaried employees. The goal was to solve the basics of payroll first and then to expand to more segments. This focus proved to be very beneficial, since it helped the company build a more solid foundation, and validate that its product was indeed much easier to use, and loved by customers.\nThe founders were their own first customers, only paying themselves after they were able to run their paychecks seamlessly through their software. It took a year to get to a public beta. One year after public launch, Gusto reached 1,500 customers. Today, Gusto is available nationwide and customers can onboard employees and run payroll in a matter of minutes. The company serves over 200,000 businesses, and they’ve made payroll much more efficient: 72% of customers spend five minutes or less to run payroll.\n<img loading=\"lazy\" src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/2-gusto-img-payroll-portal.png/" alt=\"Gusto's Payroll Portal\" width=\"2199\" height=\"1558\" class=\"aligncenter size-full wp-image-1104910\" srcset=\"https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/2-gusto-img-payroll-portal.png 2199w, https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/2-gusto-img-payroll-portal-300x213.png 300w, https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/2-gusto-img-payroll-portal-1024x726.png 1024w, https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/2-gusto-img-payroll-portal-768x544.png 768w, https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/2-gusto-img-payroll-portal-1536x1088.png 1536w, https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/2-gusto-img-payroll-portal-2048x1451.png 2048w\" sizes=\"(max-width: 2199px) 100vw, 2199px\" />\nWith its software up and running, Gusto needed to figure out its go-to-market strategy. SMBs had historically been hard to reach. Incumbents relied primarily on sales teams, which Gusto suspected actually limited their reach among SMBs. Cloud software had the potential to transform this process. For the first time, businesses could reach and serve customers with an entirely online strategy. And on top of that, the Gusto team knew that time was precious for SMB owners. What they needed was a product that worked, which was accurate, powerful, and also simple and easy to use. Gusto believed this is what modern software should be all about: a product that made life easier for its users, not more stressful. Gusto leaned into an online referral and brand-based go-to-market strategy rather than building out a direct outbound sales force. If the product was truly great, the company believed customer love and word-of-mouth would power growth. In fact, it would need to: Given the lower annual contract values of SMBs, they needed a strong inbound engine to make the economics work. This was a risky bet, but it worked. Within the first three years of launching, Gusto was serving more than 20,000 SMBs, with growth largely coming from referrals and word-of-mouth. Customers loved the product and wanted to tell other business owners about it.\n<h1>Act 2: All-in-one People Platform</h1>\nStarting with payroll made sense for two reasons. First, every business needs it. Second, building payroll architecture requires collecting and structuring a lot of data (where employees live, name, email, start date, dependents, salary, etc.). Once in place, this structured data positioned Gusto for its second act: to leverage the payroll core, keep investing in it, but also expand around it a “people platform” that would help SMBs build great places to work.\nOne of the main drivers of this thinking was a desire to bring to SMBs all of the benefits, resources, tools, and advantages big companies have historically had. Large companies have whole departments helping with HR, IT, benefits, and more, plus a wide variety of technologies and tools at their disposal. SMBs have historically been on their own. Gusto wanted to change that. And today, Gusto has expanded to provide a wide swath of functionality: (1) employee onboarding that helps manage identity across the different tools used by the business, (2) more accessible benefits, (3) access to tax credits, (4) financial optimization tools for employees, and more. With Gusto, SMB owners are able to spend more time running their businesses and less time on back-office work, while actually making their employees happier.\n<img loading=\"lazy\" src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/3-gusto-blog-img-2.png/" alt=\"Gusto - The People Platform\" width=\"2050\" height=\"1070\" class=\"aligncenter size-full wp-image-1104911\" srcset=\"https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/3-gusto-blog-img-2.png 2050w, https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/3-gusto-blog-img-2-300x157.png 300w, https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/3-gusto-blog-img-2-1024x534.png 1024w, https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/3-gusto-blog-img-2-768x401.png 768w, https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/3-gusto-blog-img-2-1536x802.png 1536w, https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/3-gusto-blog-img-2-2048x1069.png 2048w\" sizes=\"(max-width: 2050px) 100vw, 2050px\" />\n<h3>People software for SMBs</h3>\nGusto began by making its product the central source of truth for hiring, onboarding, and employee communication. With Gusto, SMBs can create offer letters, complete onboarding checklists, and set-up software for new hires—traditionally manual and time-consuming processes. When a new employee signs on, Gusto tracks progress of offer signing, distributes forms and plans, and makes sure the employee has access to the software they need. After onboarding, Gusto enables time tracking, employee surveys, and distribution of the employee’s documents.\nBeyond massively reducing process inefficiency, Gusto has focused on customer delight permeating all aspects of its product. When a candidate receives an offer, the experience feels akin to a wedding invitation, versus the typical “check-the-box” paperwork. When a new hire joins, employees can post welcome messages on Gusto’s internal message board. On payday, employees receive a celebratory email, which the employer can add a personal message to. All of this transforms what was once a purely transactional experience to one that is more people centric, in which employees are treated as valued members of the company.\n<img loading=\"lazy\" src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/4-gusto-img-payday-email-e1630292881349.png/" alt=\"Gusto Payday Email\" width=\"750\" height=\"1074\" class=\"aligncenter size-full wp-image-1104912\" />\nOn the employer side, customer delight manifests in saved time and helpful guidance. When it is time to run payroll, Gusto sends managers a reminder to sign forms, approve expenses, and initiate payroll. Each quarter, Gusto sends an email to employers summarizing employee changes and all the background tasks that have been completed automatically by Gusto, with no action needed from the employer. Gusto also integrates with expense and accounting tools, eliminating the manual work of recording payroll entries and approving expenses. And employers are able to use Gusto as a system of record for their employees, which means employees are easily able to access benefits and other employment-related information on their own even after leaving their company, all through the Gusto mobile app. All of this results in massive time savings for employers, allowing them to focus on actually running their business.\nWhereas incumbents designed their products to be reactive to customer needs, the Gusto product experience more closely resembles a human HR advisor, something SMBs typically do not have. This support system creates a relationship built on trust, where Gusto is valued as an opinionated partner rather than just another payroll tool. SMBs want a partner they can trust, that also provides great service and great technology; Gusto has strived to be great at both.\n<h3>Improving access to health benefits</h3>\nProviding health benefits to employees is costly, complicated, and time-consuming for SMBs. Traditionally, SMBs work with benefits brokers in a largely offline process. First, they have to find a broker. Then, they have to go through the tedium of gathering the business and employee information the broker needs. The broker then shares benefit options based on their specific carrier relationships, which are often limited and result in suboptimal and expensive options for SMBs. Once a plan is chosen, employers and brokers put together an enrollment program to drive adoption within the organization. There is then continuing overhead as employers work with brokers to manage renewals, new hires, and plan changes, often in a very manual fashion. Because of this complex process, basic benefits like health insurance are often too much for a small business to manage. Data suggest that only 56% of companies with fewer than 100 employees offer health benefits (versus 90% for 500+ employee businesses).<a href=https://www.ycombinator.com/"#footnote5\">5</a>\nGusto reduces all this friction. As a licensed broker with payroll data already, Gusto makes it possible for a business to buy health insurance in a few clicks, rather than having to resubmit the information over and over again. And if the customer wants to speak with someone, Gusto has licensed benefits advisors on staff. Gusto also lowers the cost of benefits. Traditionally, pricing varies significantly because different providers have different loss ratios. Gusto applies algorithms to thousands of health plans to help customers choose the most cost-effective and appropriate plans for their situation. And for employers who cannot afford small group insurance, Gusto offers QSEHRA, a health reimbursement account built into payroll that employers can contribute pre-tax dollars to every month. Long-term, we believe Gusto may even be able to use its scale to reduce insurance costs by creating its own health plans in partnership with insurance carriers, further lowering costs for SMBs.\nGusto also enables customers to access government programs and benefits as they arise in real time. The best example of this happened during the COVID-19 lockdown. While small businesses were struggling, Gusto created a <a href=https://www.ycombinator.com/"https://covidresources.gusto.com//">COVID-19 resources</a> tool for its customers to take advantage of programs like the Payroll Protection Program (PPP). Gusto simplified complex forms and enabled customers to easily apply for PPP loans through their partners. With this program, Gusto helped generate billions of dollars in assistance for its customers.\n<img loading=\"lazy\" src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/5-gusto-img-benefits-experience.png/" alt=\"Gusto's Benefits Experience\" width=\"1832\" height=\"1954\" class=\"aligncenter size-full wp-image-1104913\" srcset=\"https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/5-gusto-img-benefits-experience.png 1832w, https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/5-gusto-img-benefits-experience-281x300.png 281w, https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/5-gusto-img-benefits-experience-960x1024.png 960w, https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/5-gusto-img-benefits-experience-768x819.png 768w, https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/5-gusto-img-benefits-experience-1440x1536.png 1440w\" sizes=\"(max-width: 1832px) 100vw, 1832px\" />\n<h3>Helping employees optimize their finances</h3>\nGusto has endeavored to treat the employee as an equal stakeholder from day one. And in the past few years, the company has been making meaningful investments to help employees with their personal finances. Payroll is the inception of one’s income. Gusto had the simple insight that, if they could make personal finance choices (like saving) much simpler and easier, then people would make these choices more often. Gusto first launched <a href=https://www.ycombinator.com/"https://gusto.com/product/cashout/">Cashout, a product to help employees avoid payday loans and high-interest credit card debt by giving them early access to paychecks at no cost. In a tight labor market, companies have turned to this type of benefit to attract and retain employees, and the number of businesses with employees enrolled in Cashout has more than doubled since January 2021. Cashout has helped 73% of users prevent bank overdrafts, and 52% of employees say having access to Cashout would impact whether they accept a job or not.\nBut Gusto’s broader goal is for employees to not need Cashout in the first place. If an individual had savings in place, then during an emergency, they would have the funds they need already. To help employees with savings, banking, and more, Gusto introduced <a href=https://www.ycombinator.com/"https://gusto.com/wallet/">Gusto Wallet</a> in 2020, a free banking app that lets employees put their paycheck, banking, savings, and emergency funds in one place. Employees are able to put aside part of their paycheck into savings, creating a rainy day fund for emergencies. Plus, they’re able to connect payroll & banking in one holistic experience. Looking ahead, Gusto is well-positioned to continue launching new employee services with seamless integration processes. These products are a win-win-win: Employers get value with free benefits for employees, employees have access to powerful spending and savings tools, and Gusto further differentiates its product.\n<img loading=\"lazy\" src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2021/08/6-gusto-img-wallet-e1630292853481.png/" alt=\"Gusto Wallet\" width=\"750\" height=\"1074\" class=\"aligncenter size-full wp-image-1104914\" />\n<h3>A people platform powered by people</h3>\nGusto’s approach to customer service and product has led to levels of customer love previously unheard of in the SMB software space. In the decade since its launch, Gusto has become a beloved nationwide brand, helping 200,000+ SMBs across the US (over 3% market share<a href=https://www.ycombinator.com/"#footnote6\">6</a>) process hundreds of billion dollars of payroll, all while maintaining an NPS that is typically only seen among popular consumer companies. Its significant market share and growth trajectory signal to us that Gusto is already filling a long-standing gap in the SMB landscape. We believe that Gusto will continue to grow and compound for decades to come, as the platform expands and gains a wider reputation as a better and more cost-effective alternative to incumbents.\n<h1>Act 3: New Ways to Empower Teams</h1>\nLooking ahead, we believe Gusto has two major opportunities to build on top of the solid foundation they’ve created.\nThe first is to simply build more products for businesses and their employees. Because Gusto sits at the intersection of employees and employers, it is in a prime position to launch new products for both parties. Gusto can keep making their lives easier, help employers run better businesses, and help employees accomplish their work goals. On the employee side, Gusto could become a primary bank account, seamlessly setting up direct deposits. In time, Gusto could layer on investment products and even peer-to-peer payment tools. On the employer side, Gusto is positioned to help solve many other pain points, including further streamlining government compliance and reporting, making healthcare even more accessible, making business financials easier, and more.\nIn 2021, Gusto expanded into new services through acquisitions. Gusto recently acquired <a href=https://www.ycombinator.com/"https://gusto.com/company-news/welcoming-ardius-to-gusto/">Ardius, an AI-powered tax credit solution, to help SMBs access valuable R&D tax credits that historically have been too cumbersome to apply for. Because Gusto already manages its customers’ payroll documentation, it’s now infinitely easier for SMBs to access these credits and improve their cash flow. Gusto also acquired <a href=https://www.ycombinator.com/"https://gusto.com/company-news/welcoming-symmetry-to-gusto/">Symmetry, an infrastructure company that builds APIs for payroll tax calculations. Together, Symmetry and Gusto will be able to make advances that benefit the entire payroll industry. For example, they could develop an early alert system for tax code changes, notifying business owners when state or local minimum wage requirements change, and ensuring employees complete the required withholding forms.\nThe second major opportunity we see is in embedded services. Gusto recently launched <a href=https://www.ycombinator.com/"https://gusto.com/company-news/introducing-gusto-embedded-payroll/">Gusto Embedded Payroll</a> to allow business-to-business (B2B) software companies to offer payroll capabilities to their own customers via APIs. For example, Squire (YC S16), a company that builds software and tools for barbershops, will offer payroll features in its own app using Gusto’s functionality. This provides a better experience for barbershops, generates more revenue for Squire, and extends Gusto’s payroll platform beyond their direct customers. Embedded services not only unlocks new opportunities to serve SMBs within vertical SaaS, fintech, and business operations, but it also exposes millions of new businesses to modern payroll. And as we’ve seen, payroll is just the beginning. Gusto is working to provide developers with APIs to embed its suite of people products into their own platforms, as a full-fledged Infrastructure-as-a-Service (IaaS) solution.\n<h1>Conclusion</h1>\n“Software is better at following rules but people make the experience incredible.”\nThis quote from Josh Reeves embodies the ethos of Gusto. The company’s powerful software has modernized the way SMBs run and empowered employees to be in the driver’s seat of their finances, but the real key to its success has been the insight that people are the foundation of any business. People are what make SMBs special. With Gusto, SMBs in the US and the people that work in them are positioned better than ever to succeed.\nThank you to Mia Mabanta and Chloe Gordon for reading multiple drafts of this essay, and to Zain Ali for designing and editing the graphics.\n<hr />\n1 US Census: Firms and Establishments by State, Industry (2018; released May 2021) <a href=https://www.ycombinator.com/"#footnoteid1\">↩</a> \n2 2018 Small Business Taxation Survey <a href=https://www.ycombinator.com/"#footnoteid2\">↩</a> \n3 2018 Small Business Taxation Survey <a href=https://www.ycombinator.com/"#footnoteid3\">↩</a> \n4 2018 Internal Revenue Services estimates <a href=https://www.ycombinator.com/"#footnoteid4\">↩</a> \n5 Bureau of Labor Statistics: Employee Benefits in the United States (March 2020). <a href=https://www.ycombinator.com/"#footnoteid5\">↩</a> \n6 There are approximately 6 million employers in the US. <a href=https://www.ycombinator.com/"#footnoteid6\">↩</a>\n","comment_id":"1104906","feature_image":"/blog/content/images/2022/02/3-gusto-blog-img-2.png","featured":false,"visibility":"public","email_recipient_filter":"none","created_at":"2021-08-30T03:00:01.000-07:00","updated_at":"2022-10-17T12:17:00.000-07:00","published_at":"2021-08-30T03:00:01.000-07:00","custom_excerpt":null,"codeinjection_head":null,"codeinjection_foot":null,"custom_template":null,"canonical_url":null,"authors":[{"id":"61fe29e3c7139e0001a7107b","name":"Anu Hariharan","slug":"anu-hariharan","profile_image":"/blog/content/images/2022/02/Anu.png","cover_image":null,"bio":"Anu is a Managing Director & Partner at YC Continuity. Previously, Anu was a Partner at a16z, where she worked actively with the management teams of companies including Airbnb, Instacart, and Medium.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/anu-hariharan/"},{"id":"61fe29e3c7139e0001a710b2","name":"Nic Dardenne","slug":"nic-dardenne","profile_image":"/blog/content/images/2022/02/Nic.jpg","cover_image":null,"bio":"Nic is a principal at YC Continuity. Nic has helped support the teams at Brex, Convoy, Faire, Groww, Monzo, Rappi, Segment, Snapdocs, and Vouch. Before YC, Nic worked as an analyst at Morgan Stanley.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/nic-dardenne/"}],"tags":[{"id":"61fe29efc7139e0001a7116d","name":"Essay","slug":"essay","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/essay/"},{"id":"61fe29efc7139e0001a71170","name":"Startups","slug":"startups","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/startups/"},{"id":"61fe29efc7139e0001a71182","name":"#ycc","slug":"hash-ycc","description":null,"feature_image":null,"visibility":"internal","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/404/"},{"id":"61fe29efc7139e0001a711b7","name":"#24","slug":"hash-24","description":null,"feature_image":null,"visibility":"internal","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/404/"}],"primary_author":{"id":"61fe29e3c7139e0001a7107b","name":"Anu Hariharan","slug":"anu-hariharan","profile_image":"https://ghost.prod.ycinside.com/content/images/2022/02/Anu.png","cover_image":null,"bio":"Anu is a Managing Director & Partner at YC Continuity. Previously, Anu was a Partner at a16z, where she worked actively with the management teams of companies including Airbnb, Instacart, and Medium.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/anu-hariharan/"},"primary_tag":{"id":"61fe29efc7139e0001a7116d","name":"Essay","slug":"essay","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/essay/"},"url":"https://ghost.prod.ycinside.com/gusto-the-people-platform-for-smbs/","excerpt":"Historically, there has been an undeniable gap in business services in the US.There are nearly six million small and medium businesses (SMBs) in the country,employing 43 million people.1 But unlike their larger counterparts, SMBs havebeen ignored by service providers, who have deemed the cost of reaching andserving them too high to warrant the effort. As a result, SMBs have been forcedto cobble together off-the-shelf products, spreadsheets, and manual work to runtheir operations.","reading_time":14,"access":true,"og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"email_subject":null,"frontmatter":null,"feature_image_alt":null,"feature_image_caption":null},{"id":"61fe29f1c7139e0001a71be7","uuid":"dfe1c037-74e0-460c-96ee-cc20ff699ff9","title":"Brex: The Future of Business Finance and Cash Management","slug":"brex-the-future-of-business-banking-and-cash-management","html":"When Henrique Dubugras and Pedro Franceschi joined the YC W17 batch with an idea for a VR startup, they quickly encountered a problem. They had applied for a business credit card to help fund software and other expenses and were denied. Business credit is traditionally underwritten based on the founders’ FICO scores. As international founders with less than a month of credit history, their chances of getting approved were slim to none, despite having $125K in the bank.\nIt wasn’t just them. They discovered that, while early startup founders had access to high-fidelity payments products like <a href=https://www.ycombinator.com/"http://stripe.com/">Stripe (YC S09) right from the get-go, getting access to basic cash management and credit products was a terrible experience for everyone. Even with $125K from YC and $1–2M in venture funding, a startup’s credit limit is still likely to tap out at $20K from an incumbent creditor—which is not nearly enough to cover software, marketing, and other expenses. Cards are particularly a must have for young companies because large vendors don’t often accept ACH and other forms of alternative payment from early startups. In practice, this leads to founders resorting to using their personal credit cards for SaaS subscriptions or digital marketing, and filing reimbursements regularly.\nStripe also set a great example in how they transformed the internet’s payment infrastructure. Stripe’s launch in 2009 made it possible for startups to easily collect payments online via developer-friendly APIs. Over time, Stripe has expanded to support more business models (e.g., ecommerce, SaaS, marketplaces) and verticals.\nWhile products like Stripe and Square have dramatically pushed business-to-consumer (B2C) transactions to credit cards, business-to-business (B2B) card penetration has remained stubbornly low. The US B2B payments market is three times the size of the B2C market—yet B2B digital payments penetration is 36%, half as much as B2C (67%). B2B credit card adoption is especially low, accounting for only 4% of the market.<a href=https://www.ycombinator.com/"#footnote1\">1</a>\n<img src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2021/04/brex-tpv-bar-graphic-01.jpg/" alt=\"US Payments Market\" />\nThe extremely low penetration of credit cards in the B2B space is a historical remnant of the industry. Checks remain the most popular payments channel because, in addition to being simple and virtually free to use, they’ve been around the longest. ACH came next in the 1970s and now makes up half the payments volume as checks (mostly in recurring payments such as payroll and billing).\nMeanwhile, card adoption is only 4% not for a lack of demand, but because of the significant friction in the accessibility, onboarding, and utility of the product. Most banks and card providers ask for excessive documentation, take 3–5 days to onboard customers, and require a personal guarantee from business founders and owner-operators. Even then, the credit limits they offer are minimal, since they’re being underwritten on the personal credit history of the founder and not the health of the business. And a further obstacle: the walled garden of most enterprise resource planning (ERP) systems makes it difficult for new payment solutions to readily integrate with a company’s accounting software, adding administrative cost to reconciliations and making the total cost of introducing a new payment system incredibly high for small businesses.\nTo address this massive underappreciated market opportunity (not to mention a personal pain point), Henrique and Pedro pivoted and built Brex. They had the benefit of having previously founded a Stripe-like payments company as teenagers in Brazil. They had scaled that company to $1B+ in annual payments volume, then sold it. Having already developed an understanding of the initial card infrastructure stack needed to build Brex, they were able to move fast and launched their first product within six months.\nThe initial Brex product was a simple 30-day charge card for startups with credit limits based on cash balance. The value proposition was clear: Founders didn’t have to personally guarantee, it took less than 24 hours to get approved, and businesses could access 10–20x higher credit limits since underwriting was based on cash balance. They further differentiated the product with several intuitive features. Brex gave startup founders a daily view into the month’s cumulative expenses (vs. incumbent offerings which only offered end-of-month reconciliation). They made it 10x easier to file expenses: whenever an employee used their Brex Card to pay for something, they instantly got a text that let them immediately send in the receipt (vs. having to deal with saving receipts and filing them all at the end of the month). Lastly, they designed a rewards program for startups, offering customers things like rewards on SaaS spend and discounts on AWS and Zoom.\nBrex’s product-market fit was instantaneous, and the product has spread like wildfire among venture-backed startups. Within five months of launching, Brex grew from 100 to 1,000 customers. In the less than three years since launching, they’ve scaled to over 20,000 customers (including 60% of all YC companies).\nHenrique and Pedro’s vision for Brex isn’t just to issue credit cards to startups—it’s to become the financial operating system for growing businesses. We believe that Brex’s experience represents the next great shift in global B2B financial transactions.\n<h2>The Beginning: Removing friction to unlock demand</h2>\nEarly on, Brex understood that removing the friction of financial products could meaningfully differentiate them from the status quo. Brex’s initial insight was simple: “You should be able to sign up for a credit card and other financial services as easily as you can set up an email address—in minutes, all online.” Once they began to onboard customers, Brex found that the demand for seamless finance was even bigger than they had initially imagined.\nTo provide the modern and seamless service they envisioned, Brex built a risk assessment system that was fundamentally different from traditional credit card underwriting. They removed the paper-based back-and-forth of traditional KYC<a href=https://www.ycombinator.com/"#footnote2\">2</a> processes and built systems that could collect and verify critical business information (like beneficial ownership) in seconds. They then built their own ledger that used real-time cash, operating, and transaction data to underwrite customers to credit limits with multiple levels of authorization. Incumbent underwriters rely on point-in-time data and must build confidence in customers over long periods of time. Brex’s digital approach enabled them to instantly onboard customers with 10-20x higher credit limits than incumbents were able to offer. These methods have proven to be highly efficient: Brex’s credit losses have been lower than those of Amex and Silicon Valley Bank, even when including the impact of COVID-19.\nDemand for frictionless financial services soon spread far beyond venture-backed startups. Every month, more than 10,000 businesses across the country were signing up. But because their underwriting system was built for tech startups, Brex had been turning away more than 80% of those potential customers. In late 2020, Brex decided to retool their system to serve more customer segments.\nWith the average business in mind, Brex launched a new risk system that could instantly onboard any legitimate business to a cash management account and a same-day charge card (a debit card-like product). This change enabled Brex to grow new monthly customers tenfold, and they were able to maintain instant same-day approvals for 80% of those customers. In the first quarter of 2021, Brex onboarded more customers than it did in the entire history of the company and. Today, more than 70% of new customers are traditional small and medium businesses.\n<h2>Today: Scaling from cards to cash management and financial software tools</h2>\nThe next act for Brex was to launch complementary financial and software products beyond credit cards. Last year, they launched a service that transformed the trajectory of their platform: Brex Cash. Brex Cash was imagined as a bank account replacement product that would let Brex serve companies even before they qualify for credit. It was also a way for customers to send checks, ACH, and wire payments to vendors and third parties that didn’t accept credit cards (remember, 96% of B2B payments in the US are non-card).<a href=https://www.ycombinator.com/"#footnote3\">3</a>\nBut Brex Cash is not just an add-on product. It is a deeply integrated solution that reimagines and streamlines workflows for various forms of payments.\nBrex designed Brex Cash to be the center of a company’s financial operations, rather than an account used solely for financial services. This meant that the product had to be intuitive and designed for daily use. Brex removed all fees on ACH and wires, improved payment speed and user flows (Brex’s payment initiation is 40–50x faster than competitors’), and built in utility beyond financial services. For example, they’ve drastically reduced customers’ accounting workloads by integrating Cash into third-party accounting systems. These integrations have made it possible for SMBs like <a href=https://www.ycombinator.com/"https://www.op2labs.com//">OP2 to save the 20–30 hours a week they previously spent downloading bank statements and doing manual reconciliation.\nToday, Brex has more than 10,000 customers ranging from small venture-backed startups and traditional SMBs to large growth-stage businesses using both Brex Cash and the Brex Card. In our view, Cash is the foundational product that is transitioning Brex from a card-issuing company to an all-in-one finance operations platform.\nAs Brex has scaled, so have their customers. Many of their early startup customers have grown into large organizations whose needs have evolved past simple credit cards. To keep up with customers, Brex has moved quickly to shift from a team-centric product to an enterprise product. They’ve created department- and category-level tracking tools where leadership and finance teams can better understand organizational spend against budgets. Companies can now also use Brex’s virtual cards infrastructure to issue cards to specific organizations and employees rather than dealing with individual reimbursements. This alone translates to hours of time saved for employees and finance teams. Today, large startups like <a href=https://www.ycombinator.com/"https://scale.com//">Scale AI</a> (YC S16), <a href=https://www.ycombinator.com/"https://www.rippling.com//">Rippling (YC W17), <a href=https://www.ycombinator.com/"https://www.rappi.com//">Rappi (YC W16) and <a href=https://www.ycombinator.com/"https://www.flexport.com/?utm_source=google&utm_medium=paid-search&utm_term=flexport&utm_content=402161566078&utm_campaign=us-flexport-trademarks&_bt=402161566078&_bk=flexport&_bm=e&_bn=g&_bg=84747732606&campaign_id=316515561&gclid=CjwKCAjwg4-EBhBwEiwAzYAlspI018GdhXf142JjoTNC2OuR0GaVHDvKtchnW40hGNhIEGVuPMlc3RoCGX4QAvD_BwE\%22>Flexport (YC W14), among many others, use Brex as a central tool for managing finances.\n<h2>The future: All-in-one finance</h2>\nWith more and more companies using Brex Cash, Brex is on its way to becoming a first of its kind all-in-one finance platform. Historically, financial operations software and financial products have existed separately. The incumbent system involves three key “stacks.” The first stack is the payments infrastructure (checks, ACH, and card networks) that processes transactions. The second is the access providers to the underlying infrastructure—institutions like Amex and Chase that manage the storage and movement of funds. Finally there is the value-added services stack, made up of products that handle administrative back-office tasks (such as Intuit, Bill.com, and Concur).\n<img src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2021/04/YC-Brex-AIO-3Stacks.png/" alt=\"The 3 Stacks of Financial Services\" />\nBecause of how this system is designed, the average SMB uses at least six different financial services and software providers to manage its business. A typical ecommerce company may use Chase for storing capital, American Express for travel and software spend, Bill.com to manage payables, Expensify to manage employee spend, Quickbooks for accounting, Shopify or Stripe for accepting payments, and a third-party lender for a longer-term working capital financing product. While all these solutions do have the ability to talk to each other, there is no single entity that has a holistic view of the business’ financial operations.\n<img src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2021/05/brex-operating-system.png/" alt=\"Today's Financial Operating System\" />\nBrex is changing the landscape by combining financial products and software into a single platform. The company has spent the past two years building its card processing and cash management infrastructure, which in turn will power its software (e.g., Expense Management, Bill Pay). Enabled by its financial infrastructure, Brex is building the “financial operating system” for growing businesses, enabling them to spend and track payments across all mediums.\n<img src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2021/04/YC-Brex-AIO-5.png/" alt=\"Brex's Financial Operating System\" />\nWe are already seeing how integrating the financial stack is enabling greater access to financial resources and only expect these resources to improve as Brex moves closer to a true all-in-one finance platform.\nBy owning both software and financial infrastructure, Brex is able to:\n(1) Leverage customer data to offer better financial products than competitors: When customers make the free Brex Cash account their primary operating account, Brex gains full visibility of their customers’ financial health. Currently, Brex uses this data to predict estimated runway and dynamically sets credit limits that can be up to 10–20x more than what legacy competitors offer. <a href=https://www.ycombinator.com/"https://datrics.ai//">Datrics (YC W21) uses both Brex Cash and Card for this reason. In the future, Brex could identify startups and SMBs that serve “safer” customers (i.e., large enterprises) and leverage repayment data and relationship history to offer bill discounting/invoice factoring and other credit products.\n(2) Drive deep value for customers via software: The payment workflow integrations that come with the Spend Management software effectively deliver a product that is not just a system-of-record but also a system-of-engagement for customers. This drives immense value not just through lower fees but cost savings and more efficient operations across the board. Back-office administrative teams spend significant hours in manual processes like standardizing invoices, matching invoices to purchase orders, managing billing information for several vendors, payment approvals, and accounts reconciliation/reporting. By integrating the financial stack, Brex can automate these processes, saving companies time and money.\n(3) Build unique financial products: Building on its positioning as both a software and financial services provider, Brex can offer financial services products that are not readily available from incumbents. There is no better example of this than Instant Payouts, which launched in Q4 of 2020. An ecommerce merchant can instantly settle funds through the click of a button in their Brex dashboard, instead of waiting two weeks for the revenue to be distributed to their account. Funds are instantly disbursed in exchange for a fee that can be paid with Brex Card points. This is incredibly valuable because it enables ecommerce sellers to smooth out their cash flow and reinvest it in growth regardless of the selling platform. While the customer-facing product is simple, the backend infrastructure is sophisticated, integrating Brex Card, Cash and underwriting stacks.\n(4) Lower the cost for customers: As a financial services provider and a software company, Brex is disrupting existing pricing models of point solutions in both layers. By monetizing customers through card interchange fees, Brex is able to price software far lower than a pure SaaS competitor can charge. An SMB with 20 employees may have to pay ~$4,200 per year for Expensify, Bill.com, and Quickbooks. Brex customers can pay a tenth of that in fees and get all of their spend data in a single place. Brex can choose to give even more value back to customers by making any of its products loss leaders to encourage new transactions on the platform. For example, Brex does not charge fees on any bank or wire transfers today, an unconventional practice among incumbents.\n(5) Launch customer-centric products faster: By limiting reliance on third parties, Brex can build and launch products faster. In less than two years, the company has been able to quickly expand from a single-product company to a multiproduct company (Card, Cash, Instant Payouts, Bill Pay, and Expense Management) because they own everything from the general ledger to the credit box and can quickly build on their own infrastructure.\n<img src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2021/04/brex-timeline-graphic-01.jpg/" alt=\"Brex timeline\" />\nAs Brex scales, its data-driven underwriting algorithm will benefit immensely from an expanding customer base that feeds back into the company’s models. Over time, this should yield a lower-delinquency credit book. On the flip side, the diversification of the credit book and seasoning across economic periods should yield cheaper cost of capital over time, which will translate to higher margins for Brex and/or lower pricing for its customers. Brex is also among the first fintech companies (and the first in a B2B use case) that has filed for an industrial loan charter, which will allow Brex Cash to transform into a full-fledged “business bank.” With the ability to lend using Brex Cash customers’ deposits, Brex will be able to provide loans and credit cards at a lower cost of capital.\nThe financial upsides of an integrated system are significant. The overall infrastructure and ease of use create more capital for both small and growing businesses. Digitizing B2B finances can entirely change the trajectory of a business. <a href=https://www.ycombinator.com/"https://www.op2labs.com//">OP2 uses both Brex Cash and Card because the combination enables credit limits three times higher than the next competitor, which has allowed the company to meaningfully grow. We see the future of Brex as existing hand-in-hand with the future of growing businesses.\n<h2>Conclusion: The inevitability of digital B2B payments</h2>\nIn the past decade, we’ve seen the emergence of large players that have reduced friction and enabled digitization of consumer-to-business (C2B) payments by helping both consumers pay digitally (Cash App and PayPal) and helping merchants accept digital payments (Square and Stripe). Meanwhile, B2B payments account for nearly 3x the volume of C2B and the electronic payment penetration is fractional in comparison. The digitization of B2B payments is inevitable in the decades to come.\nThere is no one way to address this problem, and the market has a spectrum of use cases that need to be addressed. This is also not a zero-sum game; we believe the $25T B2B payments market is large enough to support several companies. Brex is only one of the companies that has revealed the underlying demand and it has only grown more desperate in COVID. In a recent Mastercard study of payment type usage during the pandemic, online card payments saw the greatest increase (+60%) while cash (-34%) and checks (-24%) decreased the most. Legacy players’ archaic infrastructure and high-fee models have created a natural ceiling for how many businesses they can service. Just like consumer payments adoption, we believe that the majority of digital payment adoption will be led by Brex and other modern fintech companies, such as <a href=https://www.ycombinator.com/"https://www.moderntreasury.com/?utm_medium=search&utm_source=Google&utm_campaign=Google-brand-2019-02-11&utm_content=search-brand&utm_term=modern%20treasury&utm_campaign=Google-brand-2019-02-11&utm_source=adwords&utm_medium=ppc&hsa_acc=9452648776&hsa_cam=1702893340&hsa_grp=69100369840&hsa_ad=337065672658&hsa_src=g&hsa_tgt=kwd-633654608865&hsa_kw=modern%20treasury&hsa_mt=e&hsa_net=adwords&hsa_ver=3&gclid=CjwKCAjwg4-EBhBwEiwAzYAlspc-ch4IBRzFtcMi0y6SkvdrmGeCqnsqKIet0xRgaAolG0-SOU4xghoCRoEQAvD_BwE\%22>Modern Treasury</a> (YC S18) and <a href=https://www.ycombinator.com/"https://routable.com//">Routable (YC S17). We are excited about the next decade of B2B payments and believe many new multibillion-dollar businesses will emerge.\nThank you to the Brex team, Mia Mabanta, and Chloe Gordon for reading multiple drafts of this essay, and to Zain Ali for designing the graphics.\n<h2>Notes</h2>\n1. Mastercard, SunTrust – Electronic B2B Payments: The Next Frontier <a href=https://www.ycombinator.com/"#footnoteid1\">↩</a> \n2. Know-Your-Customer, a standard customer identity verification process <a href=https://www.ycombinator.com/"#footnoteid2\">↩</a> \n3. Mastercard, SunTrust – Electronic B2B Payments: The Next Frontier <a href=https://www.ycombinator.com/"#footnoteid3\">↩</a>\n","comment_id":"1104798","feature_image":"/blog/content/images/2022/02/brex-timeline-graphic-01.jpg","featured":false,"visibility":"public","email_recipient_filter":"none","created_at":"2021-04-25T23:30:26.000-07:00","updated_at":"2022-10-17T12:22:05.000-07:00","published_at":"2021-04-25T23:30:26.000-07:00","custom_excerpt":null,"codeinjection_head":null,"codeinjection_foot":null,"custom_template":null,"canonical_url":null,"authors":[{"id":"61fe29e3c7139e0001a7107b","name":"Anu Hariharan","slug":"anu-hariharan","profile_image":"/blog/content/images/2022/02/Anu.png","cover_image":null,"bio":"Anu is a Managing Director & Partner at YC Continuity. Previously, Anu was a Partner at a16z, where she worked actively with the management teams of companies including Airbnb, Instacart, and Medium.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/anu-hariharan/"},{"id":"61fe29e3c7139e0001a710b2","name":"Nic Dardenne","slug":"nic-dardenne","profile_image":"/blog/content/images/2022/02/Nic.jpg","cover_image":null,"bio":"Nic is a principal at YC Continuity. Nic has helped support the teams at Brex, Convoy, Faire, Groww, Monzo, Rappi, Segment, Snapdocs, and Vouch. Before YC, Nic worked as an analyst at Morgan Stanley.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/nic-dardenne/"}],"tags":[{"id":"61fe29efc7139e0001a7116d","name":"Essay","slug":"essay","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/essay/"},{"id":"61fe29efc7139e0001a71170","name":"Startups","slug":"startups","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/startups/"},{"id":"61fe29efc7139e0001a711b8","name":"#1556","slug":"hash-1556","description":null,"feature_image":null,"visibility":"internal","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/404/"}],"primary_author":{"id":"61fe29e3c7139e0001a7107b","name":"Anu Hariharan","slug":"anu-hariharan","profile_image":"https://ghost.prod.ycinside.com/content/images/2022/02/Anu.png","cover_image":null,"bio":"Anu is a Managing Director & Partner at YC Continuity. Previously, Anu was a Partner at a16z, where she worked actively with the management teams of companies including Airbnb, Instacart, and Medium.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/anu-hariharan/"},"primary_tag":{"id":"61fe29efc7139e0001a7116d","name":"Essay","slug":"essay","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/essay/"},"url":"https://ghost.prod.ycinside.com/brex-the-future-of-business-banking-and-cash-management/","excerpt":"When Henrique Dubugras and Pedro Franceschi joined the YC W17 batch with an ideafor a VR startup, they quickly encountered a problem. They had applied for abusiness credit card to help fund software and other expenses and were denied.Business credit is traditionally underwritten based on the founders’ FICOscores. As international founders with less than a month of credit history,their chances of getting approved were slim to none, despite having $125K in thebank.It wasn’t just them.","reading_time":12,"access":true,"og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"email_subject":null,"frontmatter":null,"feature_image_alt":null,"feature_image_caption":null},{"id":"61fe29f1c7139e0001a71bd3","uuid":"ffb2fd1b-41ef-44fb-8765-8e2781e36460","title":"Convoy: The Future of Truck Freight","slug":"convoy-the-future-of-truck-freight","html":"Online marketplaces bring efficiency to traditional sectors. They offer a better user experience and increase margins for participants. They can accrue huge value by reducing friction and aggregating supply and demand — particularly because they have the ability to build network effects and economies of scale. We have seen this play out across several business-to-consumer verticals over the past decade: Airbnb in hospitality, Instacart in grocery, DoorDash in food delivery, and Lyft in transportation.\nTruck freight is one of the largest industries in the US. Domestic shippers like Unilever spend nearly $800 billion annually transporting raw materials and consumer goods by truck<a href=https://www.ycombinator.com/"#footnote1\">1</a>. Truck freight is also one of the least efficient industries: It’s chaotic, highly fragmented, regional, and, plainly, a logistical nightmare. Shippers, trucking companies (“carriers”), and drivers rely on high-priced brokers who coordinate shipments over phone calls and email. Valuable time and money is lost in the process. There is a clear opportunity to upend the status quo, but its intricacies have made freight one of the toughest sectors in which to build an online marketplace. In the last few years, incumbents have started to adopt technology to fix inefficiencies, but they’ve focused on tools to streamline individual tasks (e.g., dashboards to help price freight when brokers are calling around to find a truck), rather than rethinking the process of booking freight entirely.\nWhen we first started working with Convoy in 2017, the company had fewer than five large shippers on its platform, served less than half of the United States, and relied on manual operations for more than 30% of shipments. But we backed Convoy at this early growth stage because we saw its potential to bring the truck freight industry online and transform its utility. Truck freight is uniquely challenging, and we believe Convoy is poised to change the economy of the entire industry.\n<h2>Convoy and the Truck Freight Industry</h2>\nIn building an online freight marketplace, Convoy has had to solve four key industry frictions: (1) a highly fragmented market, (2) complex supply and demand matching requirements, (3) an industry-wide driver shortage, and (4) opaque and highly volatile truck-prices and capacity. Each of these problems drives up costs and time spent for both shippers and carriers.\nConvoy’s platform solves for all four of these issues:\n<img src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2021/01/Blog-Post-Image-1.png/" alt=\"Solves for all four issues\" />\n(1) An Online Platform That Aggregates a Highly Fragmented Market\nFragmented supply and demand is a problem for incumbents, <a href=https://www.ycombinator.com/"https://abovethecrowd.com/2012/11/13/all-markets-are-not-created-equal-10-factors-to-consider-when-evaluating-digital-marketplaces//">but a great opportunity for a digital marketplace</a>. On the supply side of the US freight market, there are 1.6 million carriers, 95% of which operate 10 or fewer trucks<a href=https://www.ycombinator.com/"#footnote2\">2</a>. On the demand side, there are more than 100,000 shippers<a href=https://www.ycombinator.com/"#footnote3\">3</a>. A further source of complexity is the fact that some shipments require specialty vehicles such as refrigeration or flatbed. On top of all of this, many carriers operate regionally. Suppliers must build liquidity on a regional basis and then implement complicated logistics to move between regions.\nTo navigate this fragmented marketplace, shippers and carriers work with a multitude of brokers and sales reps. These middlemen find potential trucks, collect bids, and present the best match to shippers—all of which is typically done in spreadsheets, emails, and phone calls. In return, they collect 15–20% of the shipping cost. This unwieldy process drives up shipper costs and suppresses carrier earnings. But the alternative is to leave shippers and carriers to negotiate amongst themselves, which, given the fragmentation, is almost impossible without software.\nBy building a network that aggregates supply and demand, Convoy has replaced middlemen with efficient algorithms. Complex matching logistics are becoming fast, seamless, and less costly. And, like many rich data marketplaces, the economics will only improve dramatically with experience and scale.\n<img src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2021/01/Blog-Post-Image-2.png/" alt=\"One seamless network\" />\n(2) Automated Matching Reduces Booking Time and Empty Miles\nWhen matching a shipper to a carrier, brokers must take into account at least 10 attributes (e.g., origin, destination, type of truck, load, shipper, facility, seasonality, price per shipment, cost per mile, quality of truck carrier, mix of headhaul and backhaul). No human with a spreadsheet can manually optimize all of these criteria. It’s an extraordinarily inefficient system, with each match costing 1–2 hours and $40–80 per load<a href=https://www.ycombinator.com/"#footnote4\">4</a>. On top of this, brokers are incentivized to maximize carrier margins rather than plan efficient routes. As a result, almost <a href=https://www.ycombinator.com/"http:// https://convoy.com/blog/empty-miles-in-trucking//">35% of all miles driven</a> by trucks in the US aren’t actually transporting any freight.\nConvoy realized freight resembled the <a href=https://www.ycombinator.com/"https://en.wikipedia.org/wiki/Travelling_salesman_problem/">traveling salesman problem</a> in computer science, and built software that incorporates shipment criteria with real-time supply and demand data to generate matches with the fewest empty miles at the lowest price. Today, Convoy <a href=https://www.ycombinator.com/"https://convoy.com/blog/convoy-reaches-automated-brokering-in-top-freight-markets//">automatically brokers 100%</a> of loads in its top markets, bundles shipments on both headhauls (shipments to destination) and backhauls (shipments to return to origin), and optimizes for the shortest trip possible using software-driven scheduling and routing. To date, Convoy has:\n<ul>\n<li>Eliminated the standard $40–80 of broker overhead per load for shippers</li>\n<li>Reduced matching time (the time it takes to match a truck to a shipment) from 2–8 hours to <1 hour in top markets</li>\n<li>Reduced empty miles from <a href=https://www.ycombinator.com/"http:// https://convoy.com/blog/automated-reloads-reducing-empty-mile-carbon-emissions//">35% to 19%</a>, resulting in higher driver earnings and lower waste</li>\n<li>Improved carrier on-time rate from 85% to 92% by tracking carrier performance and shipment progress<a href=https://www.ycombinator.com/"#footnote5\">5</a></li>\n<li>Enabled many shippers to reduce the number of carriers and brokers that they work with</li>\n</ul>\n<img src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2021/01/Blog-Post-Image-3.jpg/" alt=\"Traditional brokering\" />\nConvoy’s industry-leading key performance indicators will only get better with scale. As Convoy’s network grows, and efficiency and service advantages grow even further, it will be a no-brainer for shippers to move their business to the platform.\n(3) A Strategy That Alleviates Systemic Supply Shortage\nFreight matching is further complicated by the fact that the supply base is fixed. The number of truck drivers in the US has remained stable between 3 and 4 million since the early 2000s. Due to increasing shipping demand, regulations that limit driver hours, and a lack of young people joining the trucking workforce, the industry is experiencing a growing driver shortage. In 2019, the American Trucking Association recorded a shortage of 60,000 freight drivers. This number is expected to increase to 160,000 by 2028.<a href=https://www.ycombinator.com/"#footnote6\">6</a>\nUnlike ride-hailing services, Convoy cannot easily increase the number of drivers in the US. Trucking requires commercial licenses and special vehicles. But Convoy’s software-driven approach can help make trucking more attractive to new potential drivers in the long run. An online interface eliminates many of the barriers that discourage workforce entrants. Instead of calling multiple shippers or brokers for jobs, drivers can use Convoy’s mobile app to sign up and book their first load in under an hour. The process requires very little upfront financial investment or social networking by drivers or carriers. As a result, Convoy has enabled the long tail of owner-operator carriers that own 1–2 trucks to carry loads for large shippers. These small carriers now account for the vast majority of volume on Convoy, quickly building supply in the company’s operating regions.\nTo further amplify the existing supply base, Convoy launched <a href=https://www.ycombinator.com/"https://convoy.com/power-only-loads//">Convoy Go</a>, a network of preloaded trailers that can be picked up by any truck driver free of rental fees. By eliminating the need for drivers to wait around for trailers to get loaded and letting drivers flex across loads irrespective of their trailer type, Convoy is able to serve more enterprise shippers with fewer drivers.\nMost crucially, Convoy minimizes empty miles, which increases driver earnings. The company’s data suggest that drivers can increase revenue-earning miles by 25% by switching to Convoy<a href=https://www.ycombinator.com/"#footnote7\">7</a>. Assuming the average driver logs 120,000 miles per year, Convoy can increase each carrier’s annual earnings by ~$40,000 with a negligible increase in their operating costs<a href=https://www.ycombinator.com/"#footnote8\">8</a>. These economics will get even better as Convoy scales its network. Looking at other on-demand marketplaces, we’ve learned that supply follows the money. Higher salaries will both attract new drivers and influence existing drivers to prioritize Convoy shipments.\n<img src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2021/01/Blog-Post-Image-4.png/" alt=\"Driver Earnings Opportunity\" />\n(4) A New Pricing Model Enables Better Options in a Volatile Market\nFreight pricing is more volatile and less predictable than the stock market. Prices move up and down with macroeconomic events and changes in supply and demand, and there is nothing resembling a flat shipping rate. The COVID-19 pandemic caused a surge in demand, pushing freight pricing per mile to increase 56% in the last eight months alone<a href=https://www.ycombinator.com/"#footnote9\">9</a>. Historical price data from <a href=https://www.ycombinator.com/"https://www.dat.com/company/">DAT Solutions</a>, a widely used data source in the industry, show freight pricing volatility over the past several years:\n<img src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2021/01/Blog-Post-Image-5.png/" alt=\"DAT price per mile\" />\nPricing volatility makes it extremely difficult to forecast business outcomes, which can cause margins to swing for carriers, shippers, and brokers. To navigate volatility, the freight industry uses two pricing methods: contract pricing (used by 80% of the market) and spot pricing<a href=https://www.ycombinator.com/"#footnote10\">10</a>. With contract pricing, a shipper agrees on a fixed price for a guaranteed volume of loads with a specific carrier for a fixed period (usually 12 months). Spot pricing is set case-by-case, based on the market clearing price 48 hours before a shipment.\nHigh-volume shippers prefer contract pricing to guarantee reliable shipping and lock in costs. But this predictability comes at a cost: contract freight charges as much as a <a href=https://www.ycombinator.com/"https://medium.com/@aterrazas/contract-freights-paper-curtain-a8f5b935ae45/">7% premium</a>. This premium is rationalized by the fact that contracts rarely go as planned. Even with contracts, carriers turn down loads or renegotiate terms in the face of extreme market changes (e.g., COVID-19 or a hurricane that wipes out supply).\nPricing complexity is exacerbated by the fact that brokers are not incentivized to share rates with shippers and carriers. A broker earns 15–20% on every transaction—the higher the transaction cost, the higher the broker’s earnings. This cost is passed onto the shipper, the carrier, the driver, and eventually the consumer.\nConvoy is flipping the freight business model on its head. Instead of charging a fee, Convoy’s revenue model is based on the spread between the shipper’s willingness to pay and the carrier’s pricing expectations on that route. Using software, they’re able to provide a cost estimate to shippers and run an auction on the carrier side. This eliminates the 15–20% brokerage fee, lets shippers and carriers work with fewer counterparties, and improves pricing visibility.\nSecondarily, Convoy guarantees supply to carriers while minimizing administrative overhead (e.g., RFP processes). Instead of pricing on a fixed rate per mile, Convoy agrees to a fixed margin with a shipper and guarantees that all loads will be tendered. This eliminates the need for contracts and provides partners with upfront, transparent pricing (as well as a clear picture of their savings).\nEnterprise shippers like Home Depot like this model because it reduces administrative costs and spillage onto the spot market. Small shippers like it because it guarantees loads and eases the pricing burden on the spot market. Convoy can reduce annual transportation costs for shippers of all sizes by 4–19%—while also reducing the risk carriers take on contract pricing<a href=https://www.ycombinator.com/"#footnote11\">11</a>. This is just an example of one offering called <a href=https://www.ycombinator.com/"https://convoy.com/blog/introducing-guaranteed-primary//">Guaranteed Primary</a>, one of 6-7 pricing/volume commitment models used by Convoy to tailor to shippers’ needs.\n<img src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2021/01/Blog-Post-Image-6.jpg/" alt=\"Annual estimated savings\" />\n<h2>The Problem of Scaling</h2>\nThe specificities of the freight marketplace make implementing and scaling more complex than other online marketplaces. Unlike Airbnb, where guests are usually only looking for one home at a time, a large shipper is looking to ship across multiple lanes simultaneously (e.g., an enterprise shipper is looking to ship from Chicago to Tampa, Houston to Boise, Boise to Tampa, etc.). In other words, Convoy had to be everywhere and get big fast.\nConvoy’s initial strategy was to support only two large shippers. Instead of launching nationwide, Convoy narrowed its focus to these shippers’ highest-volume routes. There are ~2,000 trucking lanes nationally, and 60% of freight moves through the top 10% of those lanes. Convoy prioritized the top 10% of lanes serviced by the two large shippers. Once Convoy had enough demand to service loads, they used bookings to attract more supply in those lanes. As supply grew, Convoy scaled its capacity to take on other large shippers in these same routes, and eventually shippers of all sizes in additional routes.\nIn most marketplaces, aggregating demand is a lot harder than aggregating supply. Supply naturally gravitates to the platforms where it can make money. This was true for Convoy as well, but acquiring supply was more difficult because of geographic fragmentation. Even with two shippers in their top 10% routes, Convoy still had to solve the problem of traversing multiple regions simultaneously. This was no easy task for a young startup with limited resources, but Convoy stayed focused and it paid off. Within three years of launch, the company had five large shippers, nearly 500 smaller ones, and was growing more than 30% month-over-month.\n<h2>The Flywheel and Unit Economics</h2>\nWhen we met Convoy, even though the company was growing quickly, it was still trying to make the unit economics work (the contribution margin was negative on each load). We invested anyway. As Hamilton Helmer outlines in <a href=https://www.ycombinator.com/"https://bookshop.org/books/7-powers-the-foundations-of-business-strategy/9780998116303/">7 Powers: The Foundations of Business Strategy</a>, it is important to look beyond short-term economics to long-term potential. We believe that Convoy’s model will create outsized returns as it scales its unique strategy.\nConvoy’s automated matching and servicing translates to lower operating cost per load and higher long-term cash flows. Today, Convoy’s operating cost per load for enterprise loads is about one-third of incumbents’ operating cost per load. The advantage is durable; legacy shipping giants like CH Robinson scale with mostly manual operations, and new entrants lack the scale to match the costs. As Convoy continues to grow, neither incumbents nor new competitors will be able to match its low operating costs.\nConvoy’s business also benefits from a powerful flywheel that drives scale benefits. As more drivers join the network, more shippers’ needs are met, and vice versa. More load volume leads to more data to optimize batching and better match rates, which in turn lowers shipper costs while also increasing utilization and driver earnings. Incumbents who have built their businesses on 15–20% take-rates will not be able to match Convoy’s pricing without sacrificing their own unit economics.\n<img src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2021/01/Blog-Post-Image-7.png/" alt=\"Better customer experience\" />\n<img src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2021/01/Blog-Post-Image-8.png/" alt=\"Unit economics at scale\" />\n<h2>Convoy: The Future of Truck Freight</h2>\nWe cannot overstate the opportunity Convoy presents. Freight is a critical industry that is only getting more important in the face of work from home and online retail trends. In a status quo scenario, increased shipping demand might trigger prohibitively high prices, leading to large scale economic consequences once those prices are reflected in the consumer market. In contrast, Convoy is in a position to make the industry more efficient. In the long term, this isn’t just convenient; it’s necessary.\nToday, Convoy’s scale is already substantial; it moves freight across the entire country and has expanded to thousands of shippers. In the near future, we expect that its network-driven approach will enable the company to capture billions of dollars of value while reducing overall freight spend and increasing driver earnings. Much like DoorDash in food delivery or Airbnb in hospitality, we believe it is only a matter of time before Convoy becomes a market leader in freight.\nWhile Convoy is leading the way, freight’s offline to online transition is still in its early days. Within the YC community, we are starting to see other companies approach freight from first principles. <a href=https://www.ycombinator.com/"https://www.kobo360.com/US/en//">Kobo360 (S18) is building a to improve inter- and intra-region freight in Africa. <a href=https://www.ycombinator.com/"https://www.roserocket.com//">RoseRocket (S16) is building software for carriers and brokers to improve connectivity with shipper partners. <a href=https://www.ycombinator.com/"https://www.truenorthfleet.com//">TrueNorth (W20) is building tools for carriers to better manage their businesses. Combined, these companies will transform the way freight is moved in the US and globally.\nThank you to Aaron Terrazas, Chloe Gordon, the entire Convoy team, and to Mia Mabanta at YC, for reviewing this essay.\n<h2>Notes</h2>\n1. American Trucking Association <a href=https://www.ycombinator.com/"#footnoteid1\">↩</a> \n2. FMCSA Registration Statistics <a href=https://www.ycombinator.com/"#footnoteid2\">↩</a> \n3. Convoy data <a href=https://www.ycombinator.com/"#footnoteid3\">↩</a> \n4. Per BLS, the average hourly wage for brokers is $26.50 ($40.15 including non-wage benefits). Assuming 1–2 hours of human time and $40.15 of cost per hour, it costs a traditional broker $40–80 per load for matching. Note: Shippers can use load boards, but these are used for a minority of loads and give carriers limited shipment visibility. <a href=https://www.ycombinator.com/"#footnoteid4\">↩</a> \n5. Based on qualitative feedback from shippers <a href=https://www.ycombinator.com/"#footnoteid5\">↩</a> \n6. American Trucking Association 2019 Driver Shortage Report <a href=https://www.ycombinator.com/"#footnoteid6\">↩</a> \n7. <a href=https://www.ycombinator.com/"https://convoy.com/blog/empty-miles-in-trucking//">convoy.com/blog/empty-miles-in-trucking <a href=https://www.ycombinator.com/"#footnoteid7\">↩</a> \n8. ATRI <a href=https://www.ycombinator.com/"#footnoteid8\">↩</a> \n9. Historical DAT freight pricing data <a href=https://www.ycombinator.com/"#footnoteid9\">↩</a> \n10. <a href=https://www.ycombinator.com/"https://www.freightwaves.com/news/what-is-the-difference-between-trucking-contract-and-spot-rates/">freightwaves.com/news/what-is-the-difference-between-trucking-contract-and-spot-rates <a href=https://www.ycombinator.com/"#footnoteid10\">↩</a> \n11. <a href=https://www.ycombinator.com/"https://convoy.com/blog/introducing-guaranteed-primary//">convoy.com/blog/introducing-guaranteed-primary/ <a href=https://www.ycombinator.com/"#footnoteid11\">↩</a>\n","comment_id":"1104654","feature_image":null,"featured":false,"visibility":"public","email_recipient_filter":"none","created_at":"2021-01-21T00:50:18.000-08:00","updated_at":"2021-10-20T10:52:14.000-07:00","published_at":"2021-01-21T00:50:18.000-08:00","custom_excerpt":null,"codeinjection_head":null,"codeinjection_foot":null,"custom_template":null,"canonical_url":null,"authors":[{"id":"61fe29e3c7139e0001a7107b","name":"Anu Hariharan","slug":"anu-hariharan","profile_image":"/blog/content/images/2022/02/Anu.png","cover_image":null,"bio":"Anu is a Managing Director & Partner at YC Continuity. Previously, Anu was a Partner at a16z, where she worked actively with the management teams of companies including Airbnb, Instacart, and Medium.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/anu-hariharan/"}],"tags":[{"id":"61fe29efc7139e0001a7116d","name":"Essay","slug":"essay","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/essay/"},{"id":"61fe29efc7139e0001a71170","name":"Startups","slug":"startups","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/startups/"}],"primary_author":{"id":"61fe29e3c7139e0001a7107b","name":"Anu Hariharan","slug":"anu-hariharan","profile_image":"https://ghost.prod.ycinside.com/content/images/2022/02/Anu.png","cover_image":null,"bio":"Anu is a Managing Director & Partner at YC Continuity. Previously, Anu was a Partner at a16z, where she worked actively with the management teams of companies including Airbnb, Instacart, and Medium.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/anu-hariharan/"},"primary_tag":{"id":"61fe29efc7139e0001a7116d","name":"Essay","slug":"essay","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/essay/"},"url":"https://ghost.prod.ycinside.com/convoy-the-future-of-truck-freight/","excerpt":"Online marketplaces bring efficiency to traditional sectors. They offer a betteruser experience and increase margins for participants. They can accrue hugevalue by reducing friction and aggregating supply and demand — particularlybecause they have the ability to build network effects and economies of scale.","reading_time":11,"access":true,"og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"email_subject":null,"frontmatter":null,"feature_image_alt":null,"feature_image_caption":null},{"id":"61fe29f1c7139e0001a71bae","uuid":"a4136569-af08-4284-9624-74f85b7bc364","title":"Reimagining B2B Commerce with Faire","slug":"reimagining-b2b-commerce-with-faire","html":"COVID-19 has accelerated the digitization of commerce globally. In the US, e-commerce penetration increased from 16% at the end of 2019 to <a href=https://www.ycombinator.com/"https://www.ga.agency/en/blog/ecommerce-sales-growth-retail-united-states-2020/">27% in April 2020. While most of the news covering the pandemic’s impact on commerce has highlighted the growth in business to consumer (B2C) e-commerce, little has been said about how business to business (B2B) commerce has changed. This focus on B2C makes sense. Over the past two decades, most major successes outside of Alibaba have been in B2C commerce (e.g., Amazon, Mercado Libre, JD, Etsy). We haven’t seen large B2B-first aggregators emerge, despite the fact that the B2B commerce market is $16 trillion in the US alone.<a href=https://www.ycombinator.com/"#footnote1\">1</a>\nToday, only 4% of B2B sales occur online, with Amazon Business driving at least <a href=https://www.ycombinator.com/"https://www.inddist.com/e-commerce/news/21105664/rbc-analyst-amazon-business-sales-will-hit-31b-by-2023/">$10 billion</a> in sales annually.<a href=https://www.ycombinator.com/"#footnote1\">1</a> <a href=https://www.ycombinator.com/"https://www.digitalcommerce360.com/2019/03/22/b2b-ecommerce-sales-surpass-1-trillion-with-more-growth-to-come//">49% of transactions are still done manually via phone, fax, or in-person meetings with sales representatives and account managers. The remaining transactions happen via electronic data exchange (EDI) and e-procurement systems, old-school technologies specifically designed for B2B transactions. The reasons for the lack of B2B aggregators are twofold: (1) brands, makers, and small manufacturers are harder to reach because they are a smaller audience that has historically been slow to adopt new technology; and (2) B2B buyer/seller transactions are complex (e.g., require payment financing, invoicing/approvals, inventory management) and requirements differ from vertical to vertical.\nFor better or worse, COVID-19 has accelerated e-commerce adoption among businesses in the same way it has accelerated e-commerce adoption among consumers. During the pandemic, it has become incredibly hard for businesses to manage manual transactions and procure new inventory because trade shows have been shut down and in-person interactions have been hard to facilitate. As a result, B2B buyers are looking for online platforms to help with the discovery, purchase, and financing of new products.\nWe believe that new and upcoming B2B players now have the tools to overcome historical constraints, and that large B2B commerce aggregators will emerge over the next decade. Further, given the complexity of B2B transactions and the different vertical requirements (think aerospace vs. chemicals vs. apparel vs. food), we think vertical marketplaces are best positioned to transition B2B commerce from offline to online. At YC, we often look to <a href=https://www.ycombinator.com/"https://www.faire.com//">Faire (YC W17) as a prime example of B2B aggregators that will emerge over the next few years.\nFaire is a B2B marketplace that connects local, independent retailers with brands. In a world where you can order anything online and receive it within two days, independent retailers still travel to multiple trade shows each year, where they make procurement decisions based on gut instinct. Faire has modernized this process, enabling retailers to discover thousands of brands, purchase products online, get free returns on new orders, and finance their working capital. On the other side of the marketplace, Faire enables brands to find new customers, manage their existing customer base, and reduce their risk of non-payment.\nIn this post, we’ll walk through Faire’s opportunity as a B2B marketplace for independent retailers and brands. We define independent retail as independently owned retail firms with <100 employees that are either offline only, online only, or omnichannel.\nFirst, a bit of background on why independent retail will thrive in America\nFaire was founded on the insight that independent retail is not only around to stay, but in fact is positioned to thrive in the changing landscape. To do this, independent retailers will need tools to support their growth in a world that has moved online.\nPublic data suggest Faire’s insight is correct. US retail (which includes categories such as gifts, home goods, groceries, pharmacy goods, apparel, and cosmetics) generated $3.3 trillion of revenue in 2017<a href=https://www.ycombinator.com/"#footnote2\">2</a>. Independent retailers accounted for $752 billion (or 23%) of that. This is up from five years earlier when independent retailers generated $705 billion of revenue (adjusted for inflation)<a href=https://www.ycombinator.com/"#footnote3\">3</a>. Faire’s subset of target retail verticals generated $671 billion of revenue in 2017<a href=https://www.ycombinator.com/"#footnote4\">4</a>.\nThese data highlight the resilience of independent retail in a world where Amazon has grown its market share over time. Among the reasons for this: Independent retailers are nimble and provide a differentiated value proposition from vertical to vertical. The retail businesses most negatively impacted by the acceleration of e-commerce are midsize and large chain stores with expansive physical footprints, which compete on price and product assortment with retailers like Amazon and Walmart.\nThe most common example of this phenomenon is in the books category. The growth of Amazon/e-commerce resulted in the bankruptcy of Borders in 2011 and caused Barnes & Noble to reduce its footprint from 726 stores at its peak in 2008 to 630 in 2018<a href=https://www.ycombinator.com/"#footnote5\">5</a>. In contrast, the number of independent bookstores in the US increased 49% from 1,600 stores in 2009 to 2,500 stores in 2018<a href=https://www.ycombinator.com/"#footnote6\">6</a>. Similarly, independent establishments in Faire’s core categories have grown from 1.47 million in 2012 to 1.55 million in 2017, driven by growth in health & personal care, clothing, and e-commerce<a href=https://www.ycombinator.com/"#footnote7\">7</a>.\nA study conducted by Harvard Business School points to three key factors contributing to the growth in independent retail: (1) community, (2) curation, and (3) convening<a href=https://www.ycombinator.com/"#footnote6\">6</a>. COVID-19 has highlighted a fourth factor: (4) convenience.\n(1) Community: Independent retailers have become staples of their communities by focusing on values that are relevant to local consumers. Successful retailers have taken community building a step further by leveraging tools like Instagram, Facebook, and Twitter. For example, Cliffs Variety, an independent home goods store in San Francisco’s Castro district, uses a <a href=https://www.ycombinator.com/"https://www.facebook.com/Cliffs-Variety-142468435674//">Facebook page</a> to alert neighborhood residents about store openings, pickup times, and product availability. The modern furniture store <a href=https://www.ycombinator.com/"https://www.instagram.com/modanifurniture//">Modani has 45,000 followers on Instagram, where they share daily updates on new items. Both stores have pivoted to enable online delivery orders or in-store pickup in response to COVID-19.\n(2) Curation: Rather than competing on price and inventory, successful independent retailers have focused on curating unique items to offer customers more personal experiences. For example, Claire Tibbs, who owns <a href=https://www.ycombinator.com/"http://humboldthouseco.com//">Humboldt House</a>, a community shop in Chicago, sources all of her products from local brands in the Midwest region to offer her customers a SKU selection that can’t be found elsewhere.\n(3) Convening: Independent stores are increasingly becoming venues for local events and community meetups. Bird & Beckett, a bookstore in San Francisco’s Glen Park neighborhood, regularly hosts poetry readings, open mic nights, and jazz performances. During the pandemic, <a href=https://www.ycombinator.com/"https://birdbeckett.com//">Bird & Beckett</a> has shifted to livestreaming events to continue serving as a meeting “place” for members of the community.\n(4) Convenience: In a world where consumers expect everything instantly, local stores are able to offer same-day delivery or pickup, versus waiting 2–3 days (for most items) from Amazon and other large platforms. As consumer expectations shift toward instant shipping, independent stores are positioned to succeed. Independent retailers are further buoyed by the fact that consumers increasingly want to support their local businesses whenever possible. This was highlighted during the pandemic when shipping delays on all major platforms caused consumers to wait as long as several weeks or over a month for their purchases. During this period, consumers turned to independent retailers, who turned to new selling channels such as online orders and curbside pickup, experimented with new tactics like social selling, and introduced new merchandise categories like masks and food items. Shopify discussed this shift on their Q1 2020 earnings call: “In the six-week period since March 13, 2020, in English-speaking geographies, the percentage of customers per shop coming from within 25 kilometres of the shop’s registered address had increased, as had the number of shops with at least one local customer, while local orders in these geographies more than doubled.”\nAmong Faire’s retailers, 75% adapted by offering curbside pickup, local delivery, shopping appointments, or online sales. Now, about 80% of Faire’s retailers offer curbside pickup, and 50% offer personal shopping—up considerably from pre-COVID levels. Faire’s retailers also doubled down on online selling and experimented with merchandise categories in high demand during the pandemic: 40% are more heavily investing in online channels to drive demand (vs. <20% pre-COVID). Since the onset of COVID, Faire has seen categories like beauty/wellness, food/drink, and children increase from 27% to 43% of total gross merchandise value—a reflection of retailers’ ability to quickly change their category mixes. Because of these adjustments as well as the easing of lockdowns, retailers have sales’ have recovered from being down 50% year/year in March to up +6% year/year in June.\n<img loading=\"lazy\" src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2020/07/chart1.png/" alt=\"\" width=\"874\" height=\"336\" class=\"alignnone size-full wp-image-1104388\" srcset=\"https://ghost.prod.ycinside.com/content/images/wordpress/2020/07/chart1.png 874w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/07/chart1-300x115.png 300w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/07/chart1-768x295.png 768w\" sizes=\"(max-width: 874px) 100vw, 874px\" />\nWill the behavior changes from COVID-19 be permanent?\nThere are questions about whether the behavior changes from COVID-19 will be permanent. While it is premature to know for sure, there are three underlying trends, some of which have been accelerated by COVID-19, that point to independent retail growing over the next 5–10 years.\n(1) Shift to monobrands: Monobrands—retailers that sell only one brand of products—have been growing over the past decade. Rather than walk into a department store to shop around serendipitously for multiple products, customers now prefer to go directly to products and brands on their websites and social media accounts. Independent retailers are in a position to expand monobrands’ reach by carrying their products in their stores. The advantage for monobrands is that (1) they can get their products to customers more conveniently via same-day pickup and delivery, without (2) having to invest in capital-intensive brick and mortar build outs.\n(2) The desire for convenience: Independent retailers have more tools than ever to become omnichannel stores. In a matter of hours, an independent retailer can set up a Shopify store with curbside pickup, enable delivery using last-mile logistics with DoorDash Drive (YC W13), and instantly communicate with customers using tools like Postscript (YC W19). COVID-19 has only accelerated the drive toward convenience. For example, Shopify reported in its Q1 2020 earnings call that gross merchandise value from “in-store point-of-sale declined by 71% between March 13 and April 24, but merchants managed to replace 94% of lost sales via online transactions over the same period.”\n(3) De-densification: Data from the <a href=https://www.ycombinator.com/"https://www.brookings.edu/blog/the-avenue/2018/03/26/us-population-disperses-to-suburbs-exurbs-rural-areas-and-middle-of-the-country-metros//">Brookings Institution</a> suggest that migration in the US had already been shifting to the suburbs before COVID. Annual growth rates of suburban/exurban areas spiked between 2010-11 and 2016-17, while urban growth declined. As remote work becomes more widespread, we expect suburbanization to accelerate, presenting independent suburban retailers the opportunity to serve as key storefronts for brands and products with predominantly urban footprints (e.g., Everlane, Dolls Kill).\nIndependent retail has survived despite limited help from technology companies, but that has begun to change over the past five or so years. Companies like Faire are elevating the sophistication and speed at which independent retailers operate, enabling them to thrive in a world where commerce is increasingly shifting to large internet companies like Amazon.\nThe hallmark of Faire’s value proposition: Free returns and net 60-day payment terms\nBefore Faire, brands and retailers found one another by attending seasonal trade shows or through sales representatives selling door-to-door on behalf of brands. Both channels are inefficient and unnecessarily costly.\nAn average trade show has <a href=https://www.ycombinator.com/"https://www.wholesalecentral.com/trade-shows/Philadelphia-Gift-Show.html?showID=7300\%22>500 exhibits and 10,000 attendees</a>. At these events, retailers can’t efficiently browse or buy products, and a brand’s reach is limited to attendees. Independent sales representatives help brands reach new audiences, but are an expensive and hard-to-scale channel, costing between 30–40% of sales. The retailer side is similarly inefficient. Retailers across all channels often make decisions with very little data. In order to reduce inventory risk, new products make up only 20–30% of their total inventory, and retailers miss out on the opportunity to frequently add new SKUs and create a better experience for customers. On top of this, trade shows usually occur months in advance of the actual selling season, forcing retailers to commit capital and lock in inventory decisions prematurely.\nFaire improves the wholesale experience for both brands and retailers. Retailers are able to discover brands more efficiently, make better decisions, and reduce their inventory risk. Faire enables discovery by aggregating supply across many categories into a single platform where retailers can manage procurement. To help retailers make better decisions, Faire predicts product sell-through based on sales at similar stores in other geographies.\nBut Faire’s most important product innovation has been to reduce inventory risk and increase retailers’ willingness to buy online by offering free returns, net 60-day payment terms, and bulk shipping.\n(1) Free returns: Free returns are essential in wholesale because they make it possible for retailers to test sell-through rates of new SKUs without unnecessary inventory risk. Faire retailers are offered free returns on new inventory. This enables a “try before you buy” experience while retaining the “touch and feel” benefit of trade shows. Faire is able to offer this service due to their visibility into product sales data and ability to predict return rates—something that would have been nearly impossible five years ago, when most brands were offline. Their free returns policy encourages retailers to experiment with new brands and order more frequently, driving up gross merchandise volume (GMV).\n(2) Net 60-day payment terms: Faire covers the upfront cost of purchases for select retailers, giving them 60 days to repay—a service traditionally available only to large retailers. This provides independent retailers with working capital to run their businesses more efficiently, leading them to place more orders through Faire. An added benefit is that brands don’t have to worry about the risk of non-payment because Faire guarantees the order.\n(3) Bulk shipping: By leveraging its position as an aggregator, Faire is able to negotiate bulk shipping rates with national carriers. Faire passes on these savings to its brands, which in turn decreases shipping costs to retailers and reduces the cost of buying products online.\nThe combination value of improved product discovery/access and lowered costs to buy new products has leveled the playing field against big-box retailers. By aggregating demand, Faire gives independent retailers benefits that big-box retailers have enjoyed for years.\nThe primary reason brands are drawn to Faire is to increase their wholesale revenue. Instead of having to navigate a network of independent sales representatives or travel to trade shows, brands can sell into thousands of authenticated accounts already buying inventory on Faire. On top of that, Faire offers a suite of wholesale tools—including a CRM, chat, invoice management, automatic payments, and a mobile app—that brands can use to take orders when they do attend trade shows. Brands also get detailed sell-through analytics where they can, for the first time, understand how different SKUs are performing at retail stores. This insight is a black box for those operating in the legacy wholesale ecosystem, giving brands on Faire the competitive advantage of being able to iterate on existing product mixes, merchandising strategies, and product development in real time. Lastly, Faire gives brands a working capital advantage. Brands can choose to get paid upfront (for a fee), so they don’t have to spend their time approving credit applications and doing collections.\nFaire’s platform tools also encourage brands to onboard their existing retailers so they can manage wholesale entirely within the Faire ecosystem. Combined with the demand aggregation benefits, this positions Faire as a one-stop-shop for a brand to manage their entire wholesale business. If Faire can become the single place where brands manage their business, it has the potential to be the largest wholesale aggregator in the world.\nThe viral loop and network effects\nThe most powerful manifestation of Faire’s model is its viral loop. Brands actively refer their retailers to Faire because they benefit from managing their wholesale business on a single platform. Retailers benefit from joining Faire because they get access to free returns, net 60-day payment terms, and more favorable shipping rates.\n<img loading=\"lazy\" src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2020/07/Faire-viral-loop.png/" alt=\"\" width=\"1213\" height=\"744\" class=\"alignnone size-full wp-image-1104389\" srcset=\"https://ghost.prod.ycinside.com/content/images/wordpress/2020/07/Faire-viral-loop.png 1213w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/07/Faire-viral-loop-300x184.png 300w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/07/Faire-viral-loop-1024x628.png 1024w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/07/Faire-viral-loop-768x471.png 768w\" sizes=\"(max-width: 1213px) 100vw, 1213px\" />\nThe viral loop enables cross-side network effects at scale: As Faire aggregates more demand (retailers) and supply (brands), the marketplace becomes more valuable to both sides. Retailers like having more brands to choose from, and brands want access to more retailers to be able to sell to. As retailers sell more, brands grow their wholesale revenue and refer more retailers. Already, Faire has 10,000 brands and 80,000 retailers on its platform. As the flywheel strengthens and Faire collects more data, retailers and brands get better recommendations and are able to sell even more.\nBeyond wholesale: Neighborhood purchasing and livestreaming trade show tools\nAs a wholesale marketplace, Faire is uniquely positioned to offer other helpful services to retailers and brands. When lockdowns hit the US, most of Faire’s retailers shut down because they were not considered essential. Meanwhile, Amazon and other e-commerce sites were experiencing surges in demand and couldn’t fulfill orders in the usual two-day time frame, especially for essential items like toilet paper or masks.\nTo help retailers cope with lockdowns, Faire piloted a consumer-facing marketplace, <a href=https://www.ycombinator.com/"https://www.shopneighborhood.com//">Neighborhood, giving its retailers direct exposure to consumers. Faire mobilized retailers to list essential products and built infrastructure for curbside pickup and same-day delivery. Retailers quickly sourced essential goods from Faire’s wholesale marketplace and sold these products on Neighborhood.\nThough Neighborhood is still in its pilot phase, we believe the product has staying power beyond COVID-19. Now that local retailers have gone omnichannel, they have a new problem: online discovery. Neighborhood solves this by enabling retailers to list and sell products in under 15 minutes. Faire aggregates retailer data and lets consumers browse by SKU, location on a map, or retailer. Consumers then place orders for curbside pickup or same-day delivery via a logistics partner like DoorDash Drive (DoorDash’s white-label logistics product). For the first time ever, local retailers can be easily discovered online and offer a similar shipping experience to larger commerce players like Amazon or Target.\n<img loading=\"lazy\" src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2020/07/neighborhood.png/" alt=\"\" width=\"1600\" height=\"445\" class=\"alignnone size-full wp-image-1104390\" srcset=\"https://ghost.prod.ycinside.com/content/images/wordpress/2020/07/neighborhood.png 1600w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/07/neighborhood-300x83.png 300w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/07/neighborhood-1024x285.png 1024w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/07/neighborhood-768x214.png 768w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/07/neighborhood-1536x427.png 1536w\" sizes=\"(max-width: 1600px) 100vw, 1600px\" />\nFaire is also building tools to replicate the trade show experience online. Brands, particularly those that sell seasonal products, rely on trade shows. Unfortunately, due to the pandemic, most trade shows have been canceled. Faire plans to launch digital trade show tools for its retailers:\n1) Live Streaming: Faire plans to offer shoppable livestream video where brands can host retailers to walk through their new collections. Building on the consumer popularity of video shopping, live streaming can mimic real-life trade show interactions. A brand can demo new products, showcase colors or textures and offer merchandising suggestions while answering live questions from buyers during the stream.\n2) Brand collections: Brands will be able to present their entire catalog on Faire.com, making it easier to showcase new products and for retailers to discover them than in a traditional showroom or booth setup. On Faire, retailers can get the backstory of a product, search by values like Eco-friendly or Women-owned, and discover new best sellers for their store that will resonate with end customers.\n3) Platform for digital trade show experience and year round buying opportunities: As of June 2020, 73% of B2B trade shows have been canceled presenting a significant economic challenge for brands and retailers who typically leverage trade shows and expos to kick off holiday buying season. Less than 8% of these shows offered a digital solution pre COVID-19. Faire is working with customers to build upon their existing marketplace trusted by tens of thousands of retailers and more than 10,000 brands, adding new features that will make stocking their store more efficient.\nThese tools won’t entirely replace trade shows. Still, we believe that trade shows (similar to sales for B2B software) will shift online and that COVID-19 has accelerated that adoption by permanently changing buying behaviors. Examples such as Pinduoduo in China show that livestream commerce can be very successful even beyond a COVID-19 world. We’re confident Faire’s virtual trade show tools will accelerate both brands’ and retailers’ willingness to transact online.\nThe next offline to online wave is likely to be led by B2B commerce\nOver the next decade, B2B commerce companies will emerge across different verticals. Faire is not the first company to bring local wholesale online. Udaan, in India, is a wholesale platform that connects retailers to manufacturers and brands. Like Faire, Udaan offers discovery and reduces inventory risk by offering flexible returns and working capital financing. Beyond the retail vertical, companies like Meicai in China and Frubana in Colombia are bringing restaurant wholesale procurement online via first-party models.\nThere is no one way to build a B2B commerce company. Faire and Udaan are marketplaces and have focused on (1) discovery and (2) reducing inventory risk for retailers via innovative credit products. Meicai, on the other hand, controls the entire supply chain in order to maintain product quality for their restaurant customers. Given the nuances across verticals, founders need to adapt their offerings to solve specific issues such as product spoilage, inventory financing, and delivery times.\nLastly, it is worth noting that the B2B opportunity extends far beyond marketplaces and first-party e-commerce. For small and medium offline-first retailers, aggregators are powerful because it extends benefits otherwise not available to small businesses and drives incremental wholesale revenue for brands. For medium and large (or online-only) retailers and brands, the services needed to enable better B2B commerce are slightly different. This group needs tools and infrastructure beyond traditional systems (EDI, e-procurement systems) to simplify order creation and management and make it easier to sell on other channels. Companies like Convictional (YCW19) are building the backend tools to solve these problems.\nThe good news is that (1) there is now sufficient online B2B demand and (2) the core infrastructure to overcome business problems (e.g., specific payment/lending needs, logistics, online communication tools) is already available as a service or can be built with software. In the coming years, we expect the number of companies solving B2B commerce problems to only accelerate.\nThank you to the Faire team, Mia Mabanta, and Kat Mañalac for reading and editing multiple drafts of this essay.\n1. Digital Commerce360 Research: The 2020 U.S. B2B E-commerce Market Report <a href=https://www.ycombinator.com/"#footnoteid1\">↩</a> \n2. Excludes automobile sales, retail from gasoline stations, and services revenue from F&B <a href=https://www.ycombinator.com/"#footnoteid2\">↩</a> \n3. US Census Bureau; SUSB Data Tables and Nonemployer statistics <a href=https://www.ycombinator.com/"#footnoteid3\">↩</a> \n4. US Census Bureau; SUSB Data Tables and Nonemployer statistics. Includes Furniture and Home, Building Material and Garden, Grocery, Health and Personal Care, Clothing, Sports, Books, and Hobby, general retail, and e-commerce <a href=https://www.ycombinator.com/"#footnoteid4\">↩</a> \n5. Statista: Barnes and Nobles Public Filings and Press Releases <a href=https://www.ycombinator.com/"#footnoteid5\">↩</a> \n6. Raffaelli, Ryan. “Reinventing Retail: The Novel Resurgence of Independent Bookstores.” Harvard Business School Working Paper, No. 20-068, January, 2020. <a href=https://www.ycombinator.com/"#footnoteid6\">↩</a> \n7. US Census Bureau; SUSB Data Tables and Nonemployer statistics <a href=https://www.ycombinator.com/"#footnoteid7\">↩</a>\n","comment_id":"1104384","feature_image":null,"featured":false,"visibility":"public","email_recipient_filter":"none","created_at":"2020-07-24T02:16:43.000-07:00","updated_at":"2021-10-20T10:52:37.000-07:00","published_at":"2020-07-24T02:16:43.000-07:00","custom_excerpt":null,"codeinjection_head":null,"codeinjection_foot":null,"custom_template":null,"canonical_url":null,"authors":[{"id":"61fe29e3c7139e0001a7107b","name":"Anu Hariharan","slug":"anu-hariharan","profile_image":"/blog/content/images/2022/02/Anu.png","cover_image":null,"bio":"Anu is a Managing Director & Partner at YC Continuity. Previously, Anu was a Partner at a16z, where she worked actively with the management teams of companies including Airbnb, Instacart, and Medium.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/anu-hariharan/"}],"tags":[{"id":"61fe29efc7139e0001a7116d","name":"Essay","slug":"essay","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/essay/"},{"id":"61fe29efc7139e0001a71170","name":"Startups","slug":"startups","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/startups/"}],"primary_author":{"id":"61fe29e3c7139e0001a7107b","name":"Anu Hariharan","slug":"anu-hariharan","profile_image":"https://ghost.prod.ycinside.com/content/images/2022/02/Anu.png","cover_image":null,"bio":"Anu is a Managing Director & Partner at YC Continuity. Previously, Anu was a Partner at a16z, where she worked actively with the management teams of companies including Airbnb, Instacart, and Medium.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/anu-hariharan/"},"primary_tag":{"id":"61fe29efc7139e0001a7116d","name":"Essay","slug":"essay","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/essay/"},"url":"https://ghost.prod.ycinside.com/reimagining-b2b-commerce-with-faire/","excerpt":"COVID-19 has accelerated the digitization of commerce globally. In the US,e-commerce penetration increased from 16% at the end of 2019 to 27% in April 2020. While most of the news covering the pandemic’s impact on commercehas highlighted the growth in business to consumer (B2C) e-commerce, little hasbeen said about how business to business (B2B) commerce has changed. This focuson B2C makes sense.","reading_time":15,"access":true,"og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"email_subject":null,"frontmatter":null,"feature_image_alt":null,"feature_image_caption":null},{"id":"61fe29f1c7139e0001a71ba6","uuid":"ac3c6bb7-77f1-4b4a-8f54-d0aa1ed0ade2","title":"Pinduoduo and The Rise of Social E-Commerce","slug":"pinduoduo-and-the-rise-of-social-e-commerce","html":"Across the globe, as the novel coronavirus moves us from communal spaces into the confinement of our homes, our social experiences are forced to adapt. Beyond the social networks we already know and use, we are finding new ways to integrate social into our online lives. At Y Combinator, we are considering what this might mean for the future of e-commerce. For several years, we have had our eye on Pinduoduo as an interesting case study. But now, as China is recovering from the impact of COVID-19, Pinduoduo and their social-shopping approach is even better poised to fully capture the offline-to-online transition in commerce. The success of Pinduoduo in China suggests there is a huge opportunity for social commerce platforms to emerge in other regions.\nBut first, a bit of background\nWhen Pinduoduo launched in 2015, there was little room for a new commerce platform in China. Two major e-commerce platforms, JD and Taobao/TMall (sub brands of Alibaba), dominated online commerce in China, much like Amazon dominates in the US. During that same year, JD and Taobao generated a combined $433B of gross merchandise value.<a href=https://www.ycombinator.com/"#footnote1\">1</a> And yet, five years later, Pinduoduo is defying expectations, skyrocketing from a start-up to a 57<a href=https://www.ycombinator.com/"#footnote2\">2</a>-billion-dollar-company with an active buyer base of 585 million that generated over $144B of Gross Merchandise Value in the last twelve months.<a href=https://www.ycombinator.com/"#footnote3\">3</a> In 2020, it is China’s second largest e-commerce platform on an active user basis only lagging behind Alibaba.\nPinduoduo found room in e-commerce, not as a competitor to search-based websites like JD, but as a new e-commerce platform focused on interactive and social shopping experiences online. Social shopping may seem like a new concept, but the reality is that in the physical world, shopping is meant to be “interactive and fun” and purchases are regularly informed by friends and family. Consider how much harder it feels to purchase a new clothing item without immediate feedback from friends. E-commerce platforms like JD, Alibaba, and Amazon don’t account for this. Instead, they optimize for efficiency, funnel conversion, and purchase rates. Pinduoduo, on the other hand, has tried to mimic the offline shopping experience online by building community via their team purchase model, driving engagement via fun and interactive games and rewards, and offering personalized experiences and value via recommendations.\nConsumers’ desire for social engagement while shopping is highlighted by sales within categories. Only 29% of apparel, 11% of health & personal care, and 3% of food & beverage purchases were expected to happen online in 2020 in the US (compared to 55% and 43% of books/music and computers/electronics purchases, respectively<a href=https://www.ycombinator.com/"#footnote4\">4</a>). These numbers reveal a missing element in e-commerce. Social shopping is particularly important for categories where consumers seek feedback or recommendations from friends. Pinduoduo is one of the first companies to successfully create a social shopping experience online, and has accelerated the transition of commerce from offline to online in China.\nIn our view, Pinduoduo’s rapid success in social commerce will be replicated by others globally, which will continue to drive commerce in social-driven categories online. And so, to understand the success of Pinduoduo is to understand the future of global e-commerce.\nCreating Community via Team Purchase\nThe core of the Pinduoduo experience is team purchase, where buyers form a group in order to receive discounts from suppliers. The user experience, as laid out in the graphic below, is as follows: (1) for each item, merchants decide two prices – one for individual purchase and one for team purchase. If the user opts for a team purchase, he or she may either (2.1) initiate a team purchase, or (2.2) join an existing team purchase. If the user has initiated a team purchase, he or she may use social platforms such as WeChat to proactively encourage friends to join their team (3.1) or more passively wait for other buyers to join the purchase on the Pinduoduo (Pinduoduo) platform (3.2). A team needs to be formed within 24 hours to have the order confirmed. Once a team is formed, the purchase is confirmed and the product is shipped within 48 hours.\n<img loading=\"lazy\" src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/PDD-Overview.jpg/" alt=\"\" width=\"1004\" height=\"495\" class=\"alignnone size-full wp-image-1104308\" srcset=\"https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/PDD-Overview.jpg 1004w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/PDD-Overview-300x148.jpg 300w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/PDD-Overview-768x379.jpg 768w\" sizes=\"(max-width: 1004px) 100vw, 1004px\" />\nNearly all Pinduoduo transactions are completed using team purchase. In the early days, the size of many groups was large (e.g., 10+), but as Pinduoduo has scaled the group size requirements have declined. Team purchase is beneficial to both buyers and manufacturers; buyers benefit from better prices for goods they want and sellers benefit from increased demand and better visibility of future demand. In addition to driving down prices, team purchase helps solve the “trust deficit” of retail in China’s developing cities, where more than 80%<a href=https://www.ycombinator.com/"#footnote5\">5</a>) of retail is unorganized and consumers rely heavily on social recommendations to initiate transactions.\nPinduoduo’s team purchase is often compared to Groupon in the US because they both enable a form of group buying. But the models are actually very different. First, Pinduoduo deals are designed by sellers, but initiated by consumers (i.e., users must create or join a group of a certain size to access a deal) whereas Groupon deals are designed and managed by sellers. Second, Pinduoduo’s team purchase is used for everyday goods (e.g., fruits/vegetables, apparel) that are valuable to consumers vs. one-off products/experiences that haven’t sold well elsewhere. Third, products on Pinduoduo are offered by geographically diverse merchants from across China and increasingly from all over the world. This is in contrast to the mostly local sellers that leverage Groupon to drive customers to their stores/locations. This results in a much stronger consumer value proposition as users are getting discounts on goods they might need to purchase anyway vs. letting sellers dictate discounts by aggregating demand on low-value goods or excess inventory.\nTo maximize this effect, Pinduoduo launched in the fruits and vegetables category. This was strategic for two reasons: 1) incumbents were focused on non-perishable items, so competition was limited and 2) fruits and vegetables are lower order value, high frequency goods, which means users had a reason to use Pinduoduo regularly. When potential buyers saw a great deal they would forward it to their neighbors and friends via WeChat to create a team of 10+ buyers to be able to purchase the product. In return, the group initiator would get produce for free as they helped Pinduoduo acquire 10 incremental users. Because team purchase drove organic sharing of the product, Pinduoduo was able to grow its user base very quickly. Only one month after launching their first party application in January 2016 (transactions prior to this happened via WeChat), Pinduoduo already had over 10 million customers. Only four years later, Pinduoduo has grown to 585M active buyers. To compare, Alibaba crossed the 500M active buyer threshold 14-15 years after launching its consumer facing marketplace vs. just 4 years for Pinduoduo. The take away for startups is that the team purchase model is significant because it enables behaviors associated with offline commerce (e.g., sharing products or ideas with friends, browsing a shopping mall with friends) in an online setting. Team Purchase helped Pinduoduo grow quickly and create a unique recommendation engine based on users’ social interactions. While Team Purchase may be unique to China today, we expect social e-commerce to be global. New commerce platforms that can leverage social relationships will accelerate the offline to online transition and if you are able to tap into groups of social relationships vs. one-to-one relationship the faster your platforms will scale. PDD has one of the most powerful network effects in the world (<a href=https://www.ycombinator.com/"https://en.wikipedia.org/wiki/Reed%27s_law/">Reed’s law</a>: The value of a group-forming network is proportional to number and the ease with which groups form within it. Think Slack, WhatsApp Groups — they all grew exponentially as they could tap into groups of social relationships)\nWhile Team Purchase was the main reason for Pinduoduo’s rapid growth, a significant enabler of Pinduoduo’s virality was the widespread use of WeChat as a platform in China. Tencent (WeChat’s owner) is a large investor in Pinduoduo, and as a result was happy to let Pinduoduo grow on top of their ecosystem. We think it is highly unlikely that Facebook would allow a social commerce application like Pinduoduo to be built on top of Messenger or Instagram in the US. That said, messaging is fragmented in the US, so this is not an issue for US-based social e-commerce companies.\nUsers visit Pinduoduo without any specific intent, much like visiting a real-world shopping mall. In a shopping mall, the time that a consumer spends at the mall directly correlates with the amount he or she buys. As such, Pinduoduo has gamified the experience to maximize the amount of time a user spends on the app irrespective of whether they make a purchase or not. The primary features/experiences that have incentivized sharing and usage are Daily Check-Ins, Price Cuts, Card Programs, and Mini Games. Social commerce does not just mean connecting user accounts to Facebook. It means investing in creating physical world experiences online — specifically bringing the fun of shopping offline to online platforms. We will walk through how Pinduoduo has implemented this below.\nDaily check-ins\nThe daily check-in is a feature, prominently featured in the center of the home page. It encourages daily usage by rewarding users with redeemable points each time he or she checks into Pinduoduo. The user experience is laid out in the image below. First, the user clicks the yellow icon to administer a check-in. Each time the user checks-in they are granted a small amount of money and/or credit. Over many months (and many check-ins), these rewards accumulate. In the example below, the user has accumulated 26.6 RMB of rewards. To cash out in the form of a no minimum spend voucher, the user has to reach a certain minimum value (i.e., 30 RMB).\nThe daily check-in is a simple yet brilliant feature that encourages users to engage with Pinduoduo on a daily basis. While each check-in does not generate revenue for Pinduoduo, the product experience eventually ties back to commerce if/when users redeem their vouchers. This theoretically should yield a higher customer lifetime value for Pinduoduo.\n<img loading=\"lazy\" src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/2.png/" alt=\"\" width=\"1172\" height=\"902\" class=\"alignnone size-full wp-image-1104298\" srcset=\"https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/2.png 1172w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/2-300x231.png 300w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/2-1024x788.png 1024w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/2-768x591.png 768w\" sizes=\"(max-width: 1172px) 100vw, 1172px\" />\nPrice Chop\nPrice Chop is a feature that allows users to get products for free by sharing a custom link with their friends. The feature is outlined in detail below. Once in the Price Chop section of Pinduoduo, the user selects the goods that they want for free. Upon selection, a 24 hour timer begins. To get the item for free, the user must share their link with as many friends as possible. Every friend that clicks on the link and engages with Pinduoduo (no purchase required) drives an incremental discount for the initiator. If you don’t reduce the price to 0 within 24 hours you don’t get the item for free and you have to start all over again!\nThe product mimics the experience of “leveling” in a massive online multiplayer game like World of Warcraft whereby it becomes harder to level up as you graduate to higher levels. In the case of Pinduoduo, the difficulty is customized based on the user (i.e., easier for low-engagement users) and the item (i.e., expensive items are more difficult to chop). Additionally, similar to leveling, as you get closer to 0 (i.e., a higher level) each incremental friend that engages with your link grants smaller and smaller discounts.\nSimilar to Daily Check-In, Price Chop encourages users to engage with Pinduoduo, and eventually ties the engagement to an order on the commerce platform. But unlike Daily Check-In, Price Chop incentivizes users to share Pinduoduo with their social network. So in addition to increasing customer lifetime value, Price Chop also helps Pinduoduo efficiently acquire customers via user-user sharing of the product.\n<img loading=\"lazy\" src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/3.png/" alt=\"\" width=\"1188\" height=\"574\" class=\"alignnone size-full wp-image-1104299\" srcset=\"https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/3.png 1188w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/3-300x145.png 300w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/3-1024x495.png 1024w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/3-768x371.png 768w\" sizes=\"(max-width: 1188px) 100vw, 1188px\" />\nCard Program\nPinduoduo’s card program is designed to encourage users to share the product amongst friends and to save money via vouchers/special discounts. Pinduoduo has created several different cards that either (1) encourage certain user behaviors or (2) provide utility to a Pinduoduo user. The three most popular cards are the Free Pass Card, the Black Brand Card, and the Brand Card.\nThe Free Pass Card is similar to a loyalty program where users can enjoy a “team purchase discount” without having to join a team. Users usually get one Free Pass Card after making two purchases on Pinduoduo.\n<img loading=\"lazy\" src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/4.png/" alt=\"\" width=\"1170\" height=\"658\" class=\"alignnone size-full wp-image-1104300\" srcset=\"https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/4.png 1170w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/4-300x169.png 300w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/4-1024x576.png 1024w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/4-768x432.png 768w\" sizes=\"(max-width: 1170px) 100vw, 1170px\" />\nThe Brand Black Card encourages users to leave reviews on the platform by offering them a discount on branded products in return. Pinduoduo gives users a Brand Black Card after they have posted 2 – 4 reviews on the website. This is important as consumers rely on reviews and recommendations from previous buyers when making purchase decisions. The Brand Black Card incentivizes a good user behavior that makes the platform better for the entire user base.\n<img loading=\"lazy\" src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/5.png/" alt=\"\" width=\"1084\" height=\"636\" class=\"alignnone size-full wp-image-1104301\" srcset=\"https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/5.png 1084w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/5-300x176.png 300w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/5-1024x601.png 1024w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/5-768x451.png 768w\" sizes=\"(max-width: 1084px) 100vw, 1084px\" />\nThe Brand Card aims to promote Pinduoduo’s branded products. Consumers get a Brand Card after they have made a purchase on Pinduoduo. They can share their brand cards with friends via WeChat, to attract their friends to browse and buy branded products from Pinduoduo. It is an effective way to encourage users to buy branded products they would not normally buy because the recommendation/card was sent to them by a trusted friend.\nThis is also important because Pinduoduo has historically been used to primarily buy non-branded products. The Brand Card is an effective incentive mechanism to increase Pinduoduo’s branded product market share in China.\n<img loading=\"lazy\" src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/6.png/" alt=\"\" width=\"1170\" height=\"780\" class=\"alignnone size-full wp-image-1104302\" srcset=\"https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/6.png 1170w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/6-300x200.png 300w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/6-1024x683.png 1024w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/6-768x512.png 768w\" sizes=\"(max-width: 1170px) 100vw, 1170px\" />\nMini Games\nPinduoduo wants users to engage with the platform as often as possible, and they want the experience to mimic real-world shopping. As such, they want users to engage with the app to have fun, even if it does not immediately translate into a purchase. Pinduoduo now hosts in-app games to help drive up daily time spent on the platform. The first popular game on Pinduoduo was Duo Duo Orchard. Think of Farmville except now the rewards are real physical goods. The game is simple – a user creates and nurtures a virtual fruit tree to eventually yield a real box of fruit shipped to his or her address. It already has more than 11M DAUs!\n<img loading=\"lazy\" src=https://www.ycombinator.com/"https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/7.png/" alt=\"\" width=\"984\" height=\"482\" class=\"alignnone size-full wp-image-1104303\" srcset=\"https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/7.png 984w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/7-300x147.png 300w, https://ghost.prod.ycinside.com/content/images/wordpress/2020/05/7-768x376.png 768w\" sizes=\"(max-width: 984px) 100vw, 984px\" />\nThough not multiplayer, Orchard has social cooperation aspects that drive up network engagement as well. Once users choose a tree to create (e.g., mango, lemon, macadamia nut), they need to nurture the tree with water and fertilizer. The more you shop on Pinduoduo the more water droplets you receive to nurture your tree. To encourage more interactions with friends, you can also share the water droplets. Team purchases and sharing product links enables users to obtain special tools like a water can, decorations for your orchard, or bags of fertilizer, which accelerate the growth of your tree. Pinduoduo is expanding its in app game selection. It recently launched DD Bank, a piggy bank game where users accumulate exchangeable coins over time.\nGames like Duo Duo Orchard and DD Bank are ingenious because progress or “leveling” is tied to behaviors that drive financial goals for the company. By encouraging users to play games on Pinduoduo, they are able to create a win-win-win situation for merchants, consumers, and themselves. More specifically, merchants see more volume, consumers have fun and receive unique discounts, and Pinduoduo generates revenue.\nCreating Value by Offering Personalized Recommendations\nLastly, unlike search-based platforms, Pinduoduo is highly personalized and recommendation based. This means that users visit Pinduoduo without any specific intent, much like visiting a shopping mall in the physical world. Based on information such as who a user’s friends are, what their favorite categories are, and which of their friend’s they trust, Pinduoduo can make recommendations that are personalized to each user. Pinduoduo is uniquely positioned to do this due to user-user sharing of the product caused by Team Purchase. The data aggregated by the platform allows the company to optimize what items a user encounters on the app by highlighting (1) products that trusted friends have already purchased or recommended and (2) products in a users’ favorite categories. For new customers, the standard practice is to show new users different categories (based on what they know about that user and their friends) and see how they interact with those categories. This is then used to create your buying persona and helps inform future product recommendations.\nBeyond offering personalized product recommendations, Pinduoduo also thinks about value-for-money as a personalizable concept. Based on a user’s purchase/browsing history, Pinduoduo knows whether a user values high-cost branded clothing or low-cost non-branded clothing. Based on a user’s specific buying persona, Pinduoduo will only show you clothing items that match your willingness to pay.\nThe Future of Global E-Commerce\nThere is a huge opportunity for companies to build social into their commerce platforms to take share from transactional platforms and expand e-commerce’s overall share of spend. The success of team purchase may be specific to the commercial landscape of China, but the insights Pinduoduo has surfaced about social integration in commerce is likely entirely universal. Going forward, when building their products, founders should consider the insight that shopping is a social activity. Web 1.0 platforms – including Amazon – optimize for efficiency and don’t serve trust-based categories very well. We firmly believe that by building sharing use cases and fun experiences that mimic the fun of real-world shopping into products, commerce’s offline to online transition will accelerate.\nThere are large indicators that there is major demand for more sophisticated social commerce in the US marketplace already. An obvious example of this is Instagram, which has over one billion users and is now, arguably, one of the world’s largest social shopping platforms. Similarly to Pinduoduo, Instagram has fostered a browsing-based feed from friends and influencers of things that might interest consumers, often accompanied with links to purchase. The rise of the social media influencer economy alone shows that US consumers are ready to fully engage in social online shopping.\nIn fact, we have already seen a few companies come through Y Combinator who are trying to fill this void. <a href=https://www.ycombinator.com/"https://www.snackpass.co//">Snackpass, a food app for college campuses, has built social experiences into their product. Students can send gifts to each other or hatch virtual pets together by ordering food via the app. These interactive experiences encourage increased usage of the company’s product. <a href=https://www.ycombinator.com/"https://meesho.com//">Meesho, a reseller marketplace in India, lets its customers create microbusinesses by selling products/goods to their friends and family via Whatsapp and other messaging channels.\nCompanies like Amazon will continue to grow in market share, for specific shopping needs. But it is inevitable that something will rise to fill the e-commerce-social browsing void in the US market. And the half-hearted attempts some retail platforms are making to bridge that gap are not yet cutting it. Social commerce does not just mean connecting user accounts to Facebook, it means creating new shopping experiences for buyers and sellers online.\nMeanwhile Pinduoduo’s social commerce is only gaining sophistication and market influence. Pinduoduo has already aggregated enough consumer insights that they are able to collaborate with and influence manufacturers in China to cater to their user base. If there is a gap in the US e-commerce market, it is not just an opportunity to grow domestic online retail. As the pandemic drives the worlds’ social lives to the Internet, there is an undeniable opportunity for companies to build social into their commerce platforms to accelerate the offline to online transition globally.\nSpecial thanks to the Pinduoduo team and Chloe Gordon for reading and editing multiple drafts of this essay.\n1. 20-F filings, 1USD:7CNY conversion rate <a href=https://www.ycombinator.com/"#footnoteid1\">↩</a> \n2. As of April 30, 2020 <a href=https://www.ycombinator.com/"#footnoteid2\">↩</a> \n3. As of December 31, 2019 <a href=https://www.ycombinator.com/"#footnoteid3\">↩</a> \n4. eMarketer <a href=https://www.ycombinator.com/"#footnoteid4\">↩</a> \n5. YC company data <a href=https://www.ycombinator.com/"#footnoteid5\">↩</a>\n","comment_id":"1104294","feature_image":null,"featured":false,"visibility":"public","email_recipient_filter":"none","created_at":"2020-05-06T02:49:00.000-07:00","updated_at":"2021-10-20T10:52:43.000-07:00","published_at":"2020-05-06T02:49:00.000-07:00","custom_excerpt":null,"codeinjection_head":null,"codeinjection_foot":null,"custom_template":null,"canonical_url":null,"authors":[{"id":"61fe29e3c7139e0001a7107b","name":"Anu Hariharan","slug":"anu-hariharan","profile_image":"/blog/content/images/2022/02/Anu.png","cover_image":null,"bio":"Anu is a Managing Director & Partner at YC Continuity. Previously, Anu was a Partner at a16z, where she worked actively with the management teams of companies including Airbnb, Instacart, and Medium.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/anu-hariharan/"}],"tags":[{"id":"61fe29efc7139e0001a71186","name":"China","slug":"china","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/china/"},{"id":"61fe29efc7139e0001a7116d","name":"Essay","slug":"essay","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/essay/"}],"primary_author":{"id":"61fe29e3c7139e0001a7107b","name":"Anu Hariharan","slug":"anu-hariharan","profile_image":"https://ghost.prod.ycinside.com/content/images/2022/02/Anu.png","cover_image":null,"bio":"Anu is a Managing Director & Partner at YC Continuity. Previously, Anu was a Partner at a16z, where she worked actively with the management teams of companies including Airbnb, Instacart, and Medium.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/anu-hariharan/"},"primary_tag":{"id":"61fe29efc7139e0001a71186","name":"China","slug":"china","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/china/"},"url":"https://ghost.prod.ycinside.com/pinduoduo-and-the-rise-of-social-e-commerce/","excerpt":"Across the globe, as the novel coronavirus moves us from communal spaces intothe confinement of our homes, our social experiences are forced to adapt. Beyondthe social networks we already know and use, we are finding new ways tointegrate social into our online lives. At Y Combinator, we are considering whatthis might mean for the future of e-commerce. For several years, we have had oureye on Pinduoduo as an interesting case study.","reading_time":13,"access":true,"og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"email_subject":null,"frontmatter":null,"feature_image_alt":null,"feature_image_caption":null},{"id":"61fe29f1c7139e0001a71b50","uuid":"48a359ec-9a9c-404e-b5b6-4a1e9e0a8144","title":"How to Manage a Board","slug":"how-to-manage-a-board","html":"With special contributions from Nic Dardenne\nOne of the most common questions we hear from founders is “How do I manage my board?” It’s something that provokes anxiety, because this is the first time the founder/CEO is subject to external supervision, and the board has powers that include the firing of the CEO and the senior management. It is natural to feel this way. So, in this post, I’m sharing the collective wisdom of the YC community to help guide founders on best practices in managing a board––including running board meetings and overcoming board issues. Where possible, I’ve included specific examples – drawn from YC companies and partners – of how companies have handled board issues.\nBut first, what’s the purpose of a board? The main role of a board is to help guide the company through major decisions, such as hiring and firing senior management; approving corporate actions (e.g. compensation, stock options, and budget); and offering guidance on strategic decisions that impact the business longer term. As a legal matter, every Delaware corporation must have a board once it starts operating. At the start, this consists of the founders and the board functions mostly just as the technical body for approving corporate actions that must follow certain formalities (e.g. option grants). When people refer to setting up a board, what they usually mean is the process of adding outside directors, after the company raises money. These may be investor directors or independent directors.\n<h3>A note on board composition</h3>\nIf you need to have a board, who should be on it? Since the answer depends so much on the particular company and industry, we won’t spend much time on board composition in this post, but the short answer is that the investors who lead your Series A and Series B rounds will typically join the board (later-stage growth stage investors don’t tend to ask for board seats).\nA smaller company will have 3-5 board seats and a public company board will have 7-9 seats. The composition tends to significantly change a few years before going public, beginning with recruiting independent board members. Later, as the company grows, specific topical expertise committees (e.g., audit and compensation) will also be formed.\nBut in terms of how to pick the right board members – for an early stage company – the #1 attribute you need is trust. And the only way you build trust is with time. We recommend getting to know partners at VC firms on your list at least 6 to 9 months before your fundraise. Mathilde Colin, the CEO of Front, shares her experience doing this <a href=https://www.ycombinator.com/"https://medium.com/@collinmathilde/front-series-a-deck-f2e2775a419b/">here.

Before you add new board members, you should have a sense of their strengths, their weaknesses, and whether you would want to work with them for 10+ years––that’s how long some of these boards may last, given the median time to IPO. So, how do you get to know who these people really are beyond spending time with them? One thing you can do is check references with founders that those investors have worked with – just as with recruiting any talent.\nInterestingly, many founders feel that this reference check and balance may be causing many VCs to be less transparent in terms of providing feedback with the founders they work with – since they’re afraid of getting bad feedback and losing their next investment opportunity – so a number of founders have started bringing on independents much sooner.\nIn their series B, Atrium founder Justin Kan added YC partner Michael Seibel––a former co-founder of his at Justin.tv. Similarly, the Brex founders (Henrique and Pedro) added TFG Founder/CEO Victor Lazarte, another founder from Brazil who has known them since the age of 16. The Faire founders (Max, Marcelo, and Daniele) added Brian Grassadonia, who leads Square Cash and was their former manager at Square. These are all examples of CEOs’ desire for deeply trusted independent board directors. Many of these relationships are likened to family relationships, where the family privately shares the kind of direct feedback no one else will. However this does not mean you add your friend to your board. You need someone you really trust, who is 100% independent, and has the ability to help both you and your team as you scale the company.\n<h2>Managing Your Board</h2>\nBelow, I’ve tried sharing our advice for managing your board – from how often to meet, to the materials you need – in order to ensure a useful and productive group discussion.\n<h3>Meeting Schedule</h3>\nAt the Series A stage, most meetings tend to be informal (like 1:1s), ranging anywhere from bi-weekly to even bi-monthly. By the time you reach the Series B stage, however, you should establish a regular meeting cadence: Every quarter, with all meetings scheduled a year in advance to ensure all board members can attend. Ideally, only in person!\n<h3>Agenda and length</h3>\nAs the CEO it is your job to set and own the agenda for the board meeting, which can last about 3 hours.\nBe careful not to treat board meetings as a status update meeting, but rather as a meeting where you can openly discuss strategic or tough topics. That’s why the best CEOs tend to allot only the first 45 mins for sharing highlights/lowlights and KPIs (Key Performance Indicators), and then use the rest of the time to deep dive on no more than 1-2 strategic topics.\nHere’s an example agenda from the last board meeting I attended for Gusto (a company that offers payroll, benefits and HR for Small and Medium Businesses)––shared with their permission of course!\n<ul>\n<li>Highlights / Lowlights (10 mins)</li>\n<li>Performance / KPIs (50 mins)</li>\n<li>Strategic topic 1: Gusto 3 Year Strategic Plan (45 mins)</li>\n<li>Strategic topic 2: Engineering Org – Current and Future (45 mins)</li>\n<li>Closed Session – 30 mins (e.g., Any board matters such as approvals, sensitive topics, and feedback)</li>\n</ul>\nWhat this shows is that the company spends no more than 1/3rd of the time on the state of the business, and then the majority of the time on the strategic issues that shape its future. I also recommend identifying and aligning on key KPIs with your board members early as it helps the company standardize reporting across board meetings. It also “trains” board members to efficiently process the most important ones quickly – focusing on the “why” (why did or didn’t you hit certain goals?) – so they can turn to more strategic matters.\nWhat really allows Gusto to pull off their strategic focus within their board meeting, however, happens outside the board meeting: (1) They do a lot of prep work on the areas where they’re seeking input. Ideally this is a topic you’re already discussing with your executive team so the materials can be leveraged for multiple discussions; and (2) They send out a pre-read version of their board deck at least a week in advance, collecting questions from each board member in a Google Doc three days before the meeting. The Gusto team then answers all those questions in the Google Doc by the morning of the board meeting, so the subsequent discussion inside the board meeting can focus on the two most strategic topics.\nGetting through the entire agenda effectively requires strict time management. Consider assigning formal time-keeping responsibilities to a rotating member in the room.\n<h3>Elements of a board deck</h3>\nThe board deck is just a tool for discussion, not an end in and of itself. For the principles of what goes into a board deck, Bryan Schrier from Sequoia has a great post <a href=https://www.ycombinator.com/"https://www.sequoiacap.com/article/preparing-a-board-deck//">here.

This seems obvious, but is underrated: The structure of the board deck should align with the agenda of the meeting. For example, Gusto’s board decks are 30-50 pages long and typically have the following sections:\n<ul>\n<li>Highlights / Lowlights – 1 page</li>\n<li>Performance / KPIs – 15 to 20 pages</li>\n<li>Strategic topic 1: Gusto 3 Year Strategic Plan – 5 to 10 pages \n○ Options they considered \n○ Decision framework \n○ Product roadmap they plan to pursue \n○ Product areas they don’t plan to pursue \n○ Known vs. Unknown risks \n○ Initial assessment of economic value to the business \n○ Discussion on overall thinking and plan </li>\n<li>Strategic topic 2: Engineering Org – 5 to 10 pages \n○ Current Engineering Org \n○ Hiring Scale \n○ Future Engineering Org (18 months) \n○ Talent Assessment \n○ Talent Plan: Retention, Development and Recruitment Opportunities </li>\n<li>Closed Session (no slides)</li>\n<li>Appendix \n○ Health of the organization (10 slides): Hiring metrics by department, Close rates, and Employee Pulse Survey – Results</li>\n</ul>\n<h3>Behind the scenes preparation</h3>\nCompanies usually start planning a month in advance for the board meeting. In the case of Brex, the co-founders, CFO, and Chief of Staff align on the list of topics at least a month in advance and kick off a process to pull the materials together. The CFO leads the charge, working with executives across the company to align on inputs and topics for discussion.\nHere’s an example of a prep email sent by the Brex CFO to the team 28 days in advance of the board meeting, because obviously they are working on other things as well so they need that much time to prepare materials in between.\n<ul>\n<li>T-28 days: \n○ Founders/Chief of Staff: Identify the two strategic topics for discussion with the board \n○ Share with executive team to align on topics for discussion</li>\n<li>T-18 days \n○ Founders/CFO/Finance team:Outline topics and write/collect content to be covered \n○ Share draft deck with end of month close data with executive team</li>\n<li>T-11 days \n○ Execs comment/edit and provide feedback to Finance Team \n○ Finance Team finalizes the deck including formatting \n○ Final review if deck and backup data sent to founders and CFO </li>\n<li>T-7 days \n○ Review and final run of edits \n○ Distribute deck to Board of Directors (BoD)</li>\n<li>T-4 days \n○ BoD submits questions (particularly on KPIs)</li>\n<li>T-2 days \n○ Brex consolidates and answers all questions from BoD</li>\n<li>T-0 \n○ Set expectations upfront (which sections you want to spend the most time and where do you need more feedback)</li>\n</ul>\n<h3>Involving the executive team in board meetings</h3>\nPost-Series B, most companies will have an executive leadership team that helps the CEO scale and grow the company. Note, the general counsel and/or outside counsel can also be invited as part of this. It is important for at least one of the GC and/or outside counsel to attend all your board meetings to capture notes and discuss any sensitive issues that require attorney-client privilege.\nSince the board is tasked with scaling and governance, it is important for execs to get to know the board (and vice versa). There are two approaches here: (1) Ask your leadership team to attend the entire board meeting; or (2) Ask only those executives who have a section to present to the board join the meeting for a particular agenda item, for about 45 minutes.\nThe problem with the first approach of inviting all executives to the meeting is the board meeting can turn into a presentation vs. a discussion. It also becomes challenging for the founders and the CEO to discuss sensitive matters directly.\nThat’s why I prefer the latter approach, where specific execs join just for that agenda item (usually about 45 minutes). This approach achieves three things: a meatier discussion on the strategic issue at hand; the executives hear the board’s feedback directly; and more time at the end of the meeting for the CEO and the board to discuss other sensitive matters on their own.\nRemember: The board meeting is not about selling to your board members. Of course, you want to show off great work and celebrate milestones. But, your board is already bought in, and the highest leverage on their time – and yours! – is in helping you get to the next milestone.\n<h3>Monthly updates</h3>\nIn addition to quarterly in-person board meetings, it’s a good practice to send a 2-page monthly update email (sample <a href=https://www.ycombinator.com/"https://docs.google.com/document/d/1IVAGDTl1O0wQvubGx7Rl8hKpNtA7k_826yCVcZSmRIw/edit/">here) to the board at the beginning of every month. The email usually includes a summary of last month’s performance; a hiring update; a section outlining burning issues; and a section with specific asks for help.\nBrex always makes two specific asks in their monthly emails: potential introductions to business partners/customers, and help with key roles they are looking to fill. In their monthly investor update, GitLab will ask for introductions to specific individuals at companies who can be potential customers — they also applaud specific investors who have helped them in the past, putting pressure on the entire board to do the same.\nGetting into a good rhythm of sending monthly updates accomplishes three things: (1) Board members will go above and beyond to help you with your specific asks; (2) The board is better prepared for the in-person board meetings; and (3) It is a great way for you as the CEO to take a step back and reflect on the most important elements of your business and objectively measure how well you are doing as a company. Often writing vs. talking is more effective for showcasing your clarity of thought, and written narrative is more compelling in sharing ideas than bullet points and slides, as Jeff Bezos has argued <a href=https://www.ycombinator.com/"https://www.inc.com/carmine-gallo/jeff-bezos-bans-powerpoint-in-meetings-his-replacement-is-brilliant.html/">about memos</a>.\n<h3>Bonus: Letter to the board</h3>\nIn fact, some CEOs may even use the board meeting as an opportunity to take a step back and write a letter to the board. For example, Peter Reinhardt, CEO of Segment, writes a 3-5 page memo that focuses on highlights, lowlights, and areas where he would like to spend more time vs. where he’s spending time today. He prefers the written format vs. slides in the deck as it allows him to reflect on the quarter and articulate the company’s future. More importantly, he focuses on his own strengths and weaknesses and what he could be doing better as a CEO.\nFaire often uses the written memo format to discuss the strategic priorities during the board meeting. The memo sets the context for the discussion, articulates their decision framework, and explains why they are recommending a particular approach. They also write down all the uncertainties and blind spots they have when it comes to making that decision. Not only do these memos help the board prepare for the discussion, but they help the CEO create a record of the quality of their decision-making processes.\n<h2>Leveraging Your Board & Navigating Issues</h2>\nMost issues boil down to communication, which is why following the best practices outlined so far can help smooth the way. However, there are a lot of incremental opportunities CEOs may leave on the table when it comes to managing/leveraging their boards — as well as obstacles that come up from frictions or specific issues. I’ll share our collective advice on navigating these below.\n<h3>Mixed messages</h3>\nConflicting viewpoints are a good thing! The job of the board is to push you on your strategy and to ask questions that help you sharpen your thinking. As a CEO you should welcome conflicting opinions and should not feel pressure to get the board to come to a consensus decision.\nHowever, if the conflict reaches a point where it is hard to move the conversation forward, offer to take the conversation offline and set up 1:1’s or small group meetings to understand the conflicting views. After understanding conflicting viewpoints, use a decision-making framework (as an example see one below) to guide the discussion.\nA YC CEO recently shared how two board members had strong, directly conflicting opinions about the order in which they should pursue new products. The CEO took the discussion offline and came up with a decision-making framework (e.g. economic value, resources, cash needs, and competitive threat) to decide which path they were going to take. Coming up with the framework also made it quite clear which path was the right one for the company, and why. Sometimes the answer is not very clear but a framework is helpful when you decide to go against the board’s advice. Your board members will never be as close to the business to make that decision. While board members provide important input all CEOs should seriously consider, the CEO has the authority to make the best decision on behalf of the company. As long as you have a clear decision-making framework, your board members will understand when you disagree. Also with time if you are more right than wrong about your decisions, the board will be willing to disagree and commit to the path forward.\n<h3>Asking board members for help</h3>\nAs you get a better sense of the areas where different board members can be most helpful – whether it’s helping recruit execs, offering fundraising advice, or other areas – don’t hesitate to follow up directly with them outside of board meetings on those topics.\nMany CEOs seem to think it’s important to update every board member 1:1 on every topic. To which I say: NO! Not every board member needs to be in the loop on every topic or issue; it’s an ineffective use of everyone’s time, including yours. I also think it is a poor use of time to update every board member 1:1 before every board meeting. Unless there are sensitive topics that need to be discussed before hand, don’t waste time doing 1:1 calls with board members to get everyone on the same page. Allow your board members to challenge you and the team during the board meetings and encourage conflicting views to help flesh out your thinking.\n<h3>Balancing helpfulness vs control</h3>\nBe cautious of board members who are trying to make decisions for you. A board member’s job is to help you think through the issues by offering tools or decision frameworks––not to give you all the answers on how to run your business.\nIn fact, great board members will often refrain from stating opinions; instead, they ask questions to help flesh out a CEO’s thinking. My fellow board member at Brex, Micky Malka of Ribbit Capital, does this: Even if the CEO asks for his opinion on, say, “What should our typical credit loss rate be?”, Micky would respond with examples of 10 startups in Ribbit’s portfolio and their trajectory along credit loss rates; share pros and cons of each approach; yet refrain from giving one definitive answer. In doing so, he empowers the founders to make the decision.\n<h3>Problem (overbearing / unhelpful) board members</h3>\nAs mentioned earlier, backchannel checks are a great way to test for quality and helpfulness, so take the time to do this. But, if you still end up getting stuck with an unhelpful board member, the best way to handle this is to first meet 1:1 and share that feedback, constructively (not unlike running a feedback meeting with your peers or direct reports).\nBe sure to focus on the issue at hand – don’t make it personal and/or scattered – and share specific examples from past board meetings where their feedback was not helpful. If you have a good relationship with other members of the board, you can also work with them to understand how to raise the issue with the unhelpful board member.\nIn some cases, board members may step in and give feedback to fellow board members. But be careful about a board member who tries to work around the CEO. One YC company recently faced this – the board member started having direct meetings with senior management without the CEOs knowledge and jumped to conclusions without full context. This put the CEO in a really tough spot. The CEO used this as an opportunity to have 1:1 conversations with other board members, gather feedback, and directly approach the board member who was being disruptive. It took about 6 months to get the situation resolved and trust was re-established. The CEO worked with the rest of the board to set up a decision framework on when and how the board can intervene. Use every challenging situation as an opportunity to improve your existing processes.\n<h3>Removing board members</h3>\nThis one is really hard! The situation arises when a board member is destructive to the company – trying to meddle, micromanage, act like an operator running the company – and sometimes even leaking information to the press. If you have tried everything (such as talking to the board member directly) and are convinced that your board member is destructive to the company, then you have a couple of options. I suggest the following, either (1) Approach someone senior at the firm (where the board member works) and seek a replacement or (2) Add more board members (independent or via new investment rounds) who can be a sounding board and help address some of the issues.\nIf you pursue option (1), you will burn bridges with the board member and potentially the firm. If your company is not in good standing (i.e., metrics don’t look good, and potential doesn’t look great) then it will be hard to find a replacement. You will likely be stuck with your current board member. However, if your company is doing well then you have more negotiating leverage than you think. If your company is one of the best performing companies in the VC’s portfolio, the firm will work hard to find you the board member that you want.\nIf you pursue option (2), you can leverage other board members to push back when the unhelpful board member is giving advice that is not productive and could hurt the company. At the end of the day, you don’t have to listen to the board’s advice if you are convinced that it does more harm than good.\nThat said, as a founder and CEO you should work to understand the gravity of the situation. Board members have the right intent––their job and their incentives are aligned to set the company up for success. If all your board members are echoing the same feedback and you are not listening, then the problem is likely you. Some CEOs bring their executive coach to one or two board meetings to get feedback on board dynamics. This may also help calibrate your perception of the board members around the table. I have also seen a few CEOs seek bi-annual feedback from the entire board via the executive coach.\n<h2>Final Thoughts</h2>\nMany CEOs get nervous at the idea of board meetings. But they’re a good thing. They remind you that you are not alone. Your board of directors – when composed and managed well – is dedicated to your company’s success, which means they will challenge you to make better decisions but are on your side as long as you are being ethical and doing the right thing for the company. And of course, what is considered an effective board will evolve over time as the company matures. But, you can be intentional in building the right team of advisors up front, using the best practices outlined above. If knowing is half the battle, why not enlist the best help you can get?\nSpecial thanks to Justin Kan, Sonal Chokshi, Ali Rowghani, Daniel Gackle, Adora Cheung, Craig Cannon, Gusto, Brex, Convoy and Faire founders for reading multiple drafts of this essay. Thank you to numerous YC founders for sharing their perspectives on this topic.\n","comment_id":"1103771","feature_image":"/blog/content/images/2022/02/How-to-Manage-a-Board.png","featured":false,"visibility":"public","email_recipient_filter":"none","created_at":"2019-07-15T00:14:05.000-07:00","updated_at":"2022-02-01T15:54:17.000-08:00","published_at":"2019-07-15T00:14:05.000-07:00","custom_excerpt":null,"codeinjection_head":null,"codeinjection_foot":null,"custom_template":null,"canonical_url":null,"authors":[{"id":"61fe29e3c7139e0001a7107b","name":"Anu Hariharan","slug":"anu-hariharan","profile_image":"/blog/content/images/2022/02/Anu.png","cover_image":null,"bio":"Anu is a Managing Director & Partner at YC Continuity. Previously, Anu was a Partner at a16z, where she worked actively with the management teams of companies including Airbnb, Instacart, and Medium.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/anu-hariharan/"}],"tags":[{"id":"61fe29efc7139e0001a71174","name":"Advice","slug":"advice","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/advice/"},{"id":"61fe29efc7139e0001a7116d","name":"Essay","slug":"essay","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/essay/"},{"id":"61fe29efc7139e0001a71181","name":"YC Continuity","slug":"yc-continuity","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/yc-continuity/"},{"id":"61fe29efc7139e0001a71182","name":"#ycc","slug":"hash-ycc","description":null,"feature_image":null,"visibility":"internal","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/404/"}],"primary_author":{"id":"61fe29e3c7139e0001a7107b","name":"Anu Hariharan","slug":"anu-hariharan","profile_image":"https://ghost.prod.ycinside.com/content/images/2022/02/Anu.png","cover_image":null,"bio":"Anu is a Managing Director & Partner at YC Continuity. Previously, Anu was a Partner at a16z, where she worked actively with the management teams of companies including Airbnb, Instacart, and Medium.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/anu-hariharan/"},"primary_tag":{"id":"61fe29efc7139e0001a71174","name":"Advice","slug":"advice","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/advice/"},"url":"https://ghost.prod.ycinside.com/how-to-manage-a-board/","excerpt":"With special contributions from Nic DardenneOne of the most common questions we hear from founders is “How do I manage myboard?” It’s something that provokes anxiety, because this is the first time thefounder/CEO is subject to external supervision, and the board has powers thatinclude the firing of the CEO and the senior management. It is natural to feelthis way.","reading_time":15,"access":true,"og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"email_subject":null,"frontmatter":null,"feature_image_alt":null,"feature_image_caption":null},{"id":"61fe29f1c7139e0001a719f3","uuid":"81863b91-f815-4376-83e5-01aa1cce8762","title":"The Hidden Forces Behind Toutiao: China's Content King","slug":"the-hidden-forces-behind-toutiao-chinas-content-king","html":"Special contributions from <a href=https://www.ycombinator.com/"https://twitter.com/lukepryor/">Luke Pryor</a> and <a href=https://www.ycombinator.com/"https://twitter.com/bradlightcap/">Brad Lightcap</a>.\nDisclosure: I’m a personal investor in Toutiao.\n<hr />\nUsing Machine and Deep Learning to Create and Serve Content, China’s Toutiao Created a Product with Engagement Similar to that of Social Networks – All without a Social Graph\nToutiao, one of the flagship products of Bytedance*, may be the largest app you’ve never heard of–it’s like every news feed you read, YouTube, and TechMeme in one. Over 120M people in China use it each day. Yet what’s most interesting about Toutiao isn’t that people consume such varied content all in one place… it’s how Toutiao serves it up. Without any explicit user inputs, social graph, or product purchase history to rely on, Toutiao offers a personalized, high quality-content feed for each user that is powered by machine and deep learning algorithms.\nGoing a step further than merely serving up content, Toutiao’s algorithms also create content: During the 2016 Olympics, a Toutiao bot wrote original news coverage, publishing stories on major events more quickly than traditional media outlets. The bot-written articles enjoyed read rates (# of reads and # of impressions) in line with those produced at a slower speed and higher cost by human writers on average.\nThe average user spends more than 74 minutes each day in Toutiao — that’s more than the average user spends on Facebook<a href=https://www.ycombinator.com/"#footnote1\">1</a>, and more than twice what they spend on Snapchat<a href=https://www.ycombinator.com/"#footnote2\">2</a>. More than half that time is spent watching short-form videos; this coupled with over 10 billion video views per day makes Toutiao the YouTube of China (along with, of course, everything else it offers).\nHow did Toutiao do this? Especially without massive consumer platforms at scale like those orchestrated by Chinese conglomerates Alibaba, Baidu, and Tencent? In this post I’ll explore how Toutiao got to 120M daily active users. Toutiao doesn’t attribute its growth to any one factor, but rather to the interplay between many tactical and strategic decisions it made starting at launch; specifically, five key advantages, all of which I have outlined below. And while “super apps” aren’t as common in the U.S., I believe there are specific lessons in this case that can inspire others in building their own products and platforms.\nBut first, a bit of background\nToutiao launched in 2012. The app uses machine and deep learning algorithms to source and surface content that users will find most interesting. Toutiao’s underlying technology learns about readers through their usage – taps, swipes, time spent on each article, time of the day the user reads, pauses, comments, interactions with the content and location – but doesn’t require any explicit input from the user and is not built on their social graph. Today, each user is measured across millions of dimensions and the result is a personalized, extensive, and high-quality content feed for every user, each time they open the app.\n<img loading=\"lazy\" src=https://www.ycombinator.com/"https://ycombinator.wpengine.com/wp-content/uploads/2017/10/Toutiao-Blog-Post-Graphic_Minutes.png/" alt=\"Toutiao Blog Post Graphic_Minutes\" width=\"1312\" height=\"1868\" class=\"aligncenter size-full wp-image-1101027\" srcset=\"https://ghost.prod.ycinside.com/content/images/wordpress/2017/10/Toutiao-Blog-Post-Graphic_Minutes.png 1312w, https://ghost.prod.ycinside.com/content/images/wordpress/2017/10/Toutiao-Blog-Post-Graphic_Minutes-211x300.png 211w, https://ghost.prod.ycinside.com/content/images/wordpress/2017/10/Toutiao-Blog-Post-Graphic_Minutes-768x1093.png 768w, https://ghost.prod.ycinside.com/content/images/wordpress/2017/10/Toutiao-Blog-Post-Graphic_Minutes-719x1024.png 719w\" sizes=\"(max-width: 1312px) 100vw, 1312px\" />\n<center> \n Sources: Snapchat – S-1 filing. Instagram – <a href=https://www.ycombinator.com/"https://www.recode.net/2017/8/2/16081086/instagram-snapchat-stories-anniversary-time-spent/">Recode. Facebook – Q1 2016 earnings report. \n</center>\n<hr />\n<h1>The Five Hidden Forces Behind Toutiao</h1>\n<h2>1: Mind the gap, seize the opportunity</h2>\nWhile timing is everything for a startup, it takes deliberate effort to build an addictive app. Toutiao’s timing was fortuitous, but its exploitation of this unique moment was deliberate. Toutiao launched as smartphone use was taking off in China: mobile penetration increased from nearly nothing in 2010 to 65% by 2014<a href=https://www.ycombinator.com/"#footnote3\">3</a>. Moreover, many of the largest content providers had not yet developed mobile apps or mobile-friendly sites, meaning that true mobile-optimized information and entertainment was rare. By mid-2012, there were only six significant news apps on the Chinese Android platform. Four of them were direct extensions of existing news portals with limited mobile optimization, and the other two were aggregators that relied exclusively on slow and impersonal editor input to determine what stories to show. Further, the Chinese audience’s demand for content (both articles and videos) was underserved by Chinese social networks such as WeChat and Weibo. WeChat launched as a messenger and to this day has a closed social network (i.e. sharing/moments are private to friends only).\nToutiao stepped into this gap with an easy-to-use, personalized, informative, and addictive mobile-first app. From the outset, Toutiao was extremely easy to start using – all it took was a download. There was no need to create an account and password, to link it to social media (unless the user so desired), or to provide information on interests or preferences. The app’s simple design also made it intuitive to use with no prior knowledge or tutorials. For any app, driving initial engagement – moving from downloads to DAUs – is notoriously difficult. It’s typical to lose users at every step of the process due to discouragement, confusion, or annoyance.\nThe name of the app Jinri Toutiao (meaning “today’s headlines” in Chinese) and the icon of the app were catchy for users, resulting in excellent user growth. It was also the first time various news articles were aggregated in one place. From the very early days, Toutiao tracked information about each user – their taps, swipes, time spent per article and location to power the recommendation engine which we will discuss later in the post. One month after launch, Toutiao became a personalized news aggregator for several of its users. The product, the only one of its kind and delicately designed at that time, led to a rapid growth. They hit 1M DAUs only four months after launch. Toutiao gave new internet users something to “do” when their mobile time was still up for grabs. Toutiao updated the app almost weekly throughout its first year, as it consistently innovated, iterated, and improved its features and algorithms, and this resulted in improved retention over time.\nIn the years that followed, competition for user share of attention on mobile would drastically increase – the number of mobile apps available in China more than tripled in the three years from 2012 to 2015<a href=https://www.ycombinator.com/"#footnote4\">4</a>. But Toutiao’s early lead meant that, by the time competitors arrived, it already had an important and valuable foothold.\nThe image below shows the personalized feed of two different users.\n<a href=https://www.ycombinator.com/"https://ycombinator.wpengine.com/wp-content/uploads/2017/10/Toutiao-2-1.png/"> $\"Toutiao$ here. Simply put, the more users use your product, the more data they contribute. The more data they contribute, the smarter your product becomes. The smarter your product is (e.g., better personalization, recommendations), the better it serves your users and they are more likely to come back often and contribute more data — thus creating a virtuous cycle.\nBy building an addictive product, Toutiao generates engagement data from their users. That data is fed into Toutiao’s algorithms, which in turn further refines the products’ quality. Ultimately, the company plans to use this virtuous cycle to optimize every stage of what they call the “content lifecycle”: Creation, Curation, Recommendation and Interaction.\n<a href=https://www.ycombinator.com/"https://ycombinator.wpengine.com/wp-content/uploads/2017/10/Toutiao-3-1.jpg/"> $\"Toutiao$ $\"Toutiao$ paper for the ACL conference touting these results. Their proposed “Conditional Focused Neural Question Answering with Large-Scale Knowledge Bases approach” achieves an accuracy of 75.7% on a data set of 108K questions, and outperforms the current state of the art (better than the Memory Network and LTG-CNN methods on the benchmark dataset) by an 11.8% margin.\nToutiao’s underlying technology not only creates a better user experience, but also serves to strengthen the company’s competitive moat. More compelling content and interactions meant users would spend more time on the platform, and the more time they spent on the platform the better the use of algorithms became. The smarter the system is, the better it can distribute content – and the more content creators it attracts. This, in turn, drives more users to the platform. And thus is born a strong data network effect – the power of the system grows exponentially with the scale of the system. There are competitors who have launched since then (especially after seeing Toutiao’s success), however it has been difficult to match the accuracy and efficacy of the Toutiao recommendation engine leading to continued rapid growth for Toutiao.\n<h2>3. From content aggregation to content destination</h2>\nIt is not uncommon to see apps strive to move from content aggregation to content destination. However it is extremely challenging from a brand and creative strategy to make that happen. Here is how Toutiao did it. Toutiao offered two significant benefits to content contributors over the platforms.\nStrong incentives via revenue sharing that enabled writers to make money from very early on. In 2014, Toutiao rolled out incentive programs to attract more content creators to the platform. These ranged from offering office space, tools, minimum guarantees per month if they hit certain key milestones (e.g., # of articles, read rates) to sharing revenue via monetization. Toutiao began monetizing via ads since 2014 and this enabled revenue sharing opportunities with their content contributors.\nThis was the function that launched Toutiao, but as it has grown, Toutiao has transitioned into a deeper platform for content generation, consumption, and connections. Today, it hosts more than 800,000 Toutiaohao accounts – professional media outlets, bloggers, and influencers who use the platform to share articles, images, and videos with Toutiao users . It hosts many more users sharing short posts through Wei Toutiao. The result is the wide variety of content that Toutiao hosts today ranging from news to stocks to science to relationships. Top 20 categories account for only 60% of the content supply and no single category contributes over 10% of the content.\nBelow is an example of a variety of content that a user can choose from (the screenshot only displays the 40 of the 50+ channels users can choose from):\n<a href=https://www.ycombinator.com/"https://ycombinator.wpengine.com/wp-content/uploads/2017/10/Toutiao-5-1.png/"> $\"Toutiao$ http://time.com/4272935/snapchat-users-usage-time-app-advertising/.http://www.businessinsider.com/china-has-more-smartphone-users-than-us-brazil-and-indonesia-combined-2015-7.https://www.statista.com/statistics/315485/china-number-of-mobile-apps-available/.Eric Colson</a> (former VP of data science and engineering from Netflix and one of the early hires Stitch Fix made).\nWhile success cannot be attributed to the growth team alone, having a growth team in place early on helps accelerate the overall growth trajectory of the company.\nTypically, the first growth team hire is a Product Manager (PM). We found some strong trends in PMs, Engineers and Data Scientist traits highlighted by growth experts who built successful growth teams:\n<div id=\"PMcandidate\">\n</div>\n<h3>The Ideal Growth PM Candidate</h3>\n<img loading=\"lazy\" src=https://www.ycombinator.com/"https://ycombinator.wpengine.com/wp-content/uploads/2017/07/GrowthPM.png/" alt=\"GrowthPM\" width=\"1505\" height=\"602\" class=\"aligncenter size-full wp-image-1100039\" srcset=\"https://ghost.prod.ycinside.com/content/images/wordpress/2017/07/GrowthPM.png 1505w, https://ghost.prod.ycinside.com/content/images/wordpress/2017/07/GrowthPM-300x120.png 300w, https://ghost.prod.ycinside.com/content/images/wordpress/2017/07/GrowthPM-768x307.png 768w, https://ghost.prod.ycinside.com/content/images/wordpress/2017/07/GrowthPM-1024x410.png 1024w\" sizes=\"(max-width: 1505px) 100vw, 1505px\" />\n<ol>\n<li>Data-oriented: The ideal candidate is intensely data-driven and inquisitive. All of the experts we spoke with said this is a must-have. You want someone in this role who will constantly ask “Why?” – even when growth numbers are up. One of the experts we spoke to said, “The scariest day is when numbers are down, the second scariest day is when numbers are up and you don’t know why.” </li>\n<li>Prior growth experience: It’s important that the PM has experience at a company focused on driving growth in a competitive space (e.g., e-commerce, dating apps, gaming apps, social networks). This means that you won’t be recruiting out of a company like Google or Apple, as those teams didn’t scale based on competitive growth strategies. More than 90% of the experts mentioned that prior growth experience is an important characteristic for the team lead to have. </li>\n<li>Former startup founder (bonus) : Interestingly, 60% of growth experts in our interviews were former founders. Why are they great PMs? Because people who’ve started companies tend to be able to think independently, are comfortable with taking risks, and have high levels of perseverance. This is important as many experiments will fail. </li>\n<li>Existing PM (bonus): If an existing PM has the above characteristics, then you might have the opportunity to appoint them as the Growth PM (as Facebook and Slack did). The growth team has to work with all stakeholders within the company and having someone who has already built up social capital within the company can accelerate the team’s progress. This is great, but not a must have. 40% of the growth leads we spoke with were already PMs at the company prior to leading the growth team. Others, like Airbnb and Uber, hired a Growth PM especially for this function. </li>\n</ol>\n<div id=\"engineercandidate\">\n</div>\nThe Ideal Growth Engineer Candidate\n<img loading=\"lazy\" src=https://www.ycombinator.com/"https://ycombinator.wpengine.com/wp-content/uploads/2017/07/GrowthEng.png/" alt=\"GrowthEng\" width=\"1488\" height=\"602\" class=\"aligncenter size-full wp-image-1100038\" srcset=\"https://ghost.prod.ycinside.com/content/images/wordpress/2017/07/GrowthEng.png 1488w, https://ghost.prod.ycinside.com/content/images/wordpress/2017/07/GrowthEng-300x121.png 300w, https://ghost.prod.ycinside.com/content/images/wordpress/2017/07/GrowthEng-768x311.png 768w, https://ghost.prod.ycinside.com/content/images/wordpress/2017/07/GrowthEng-1024x414.png 1024w\" sizes=\"(max-width: 1488px) 100vw, 1488px\" />\n<ol>\n<li>\nSelf-starter: Since a big chunk of the work involves running experiments to determine what really works, the engineer should be proactive about coming up with their own hypotheses and experiments and iterating. Similar to the growth PM, they should have infinite curiosity and constantly ask “Why?” to uncover hidden insights.\n</li>\n<li>\nDoesn’t cry over lost code: This is someone who should be very comfortable with experimentation, knowing that a large amount of work won’t make it into the final product.\n</li>\n</ol>\n3. OK doing things that don’t scale: Many of the tests will be small and without much impact– so an engineer who is fairly new – just 2-4 years of experience – might fit better with this mentality vs. someone one with many years of experience that may train toward rigid requirements and roadmaps.\n4. Great communicator: Growth engineers should be particularly comfortable working with teams with several functions – design, copywriting, data, etc. \n<div id=\"datascientist\">\n</div>\nThe Ideal Data Scientist Candidate\n<img loading=\"lazy\" src=https://www.ycombinator.com/"https://ycombinator.wpengine.com/wp-content/uploads/2017/07/GrowthDataScientist.png/" alt=\"GrowthDataScientist\" width=\"1488\" height=\"602\" class=\"aligncenter size-full wp-image-1100037\" srcset=\"https://ghost.prod.ycinside.com/content/images/wordpress/2017/07/GrowthDataScientist.png 1488w, https://ghost.prod.ycinside.com/content/images/wordpress/2017/07/GrowthDataScientist-300x121.png 300w, https://ghost.prod.ycinside.com/content/images/wordpress/2017/07/GrowthDataScientist-768x311.png 768w, https://ghost.prod.ycinside.com/content/images/wordpress/2017/07/GrowthDataScientist-1024x414.png 1024w\" sizes=\"(max-width: 1488px) 100vw, 1488px\" />\nLastly, a data scientist is a vital hire for a well-rounded growth team. Data scientists are in such demand that <a href=https://www.ycombinator.com/"https://techcrunch.com/2017/05/24/airbnb-is-running-its-own-internal-university-to-teach-data-science//">Airbnb announced</a> recently that they have an internal university dedicated to training up data scientists.\n<ol>\n<li>Fluency with experimental design and interpretation: Since growth is about running a lot of experiments — more so than other data science roles — it is important to test for this during the interview process. You can pose questions like, “Under a particular scenario, roughly how large of a sample size would you need?” and “How would you correct for multiple comparisons in this case?” You can also pull together a sample data set and run through the analysis live in a pair coding interview. </li>\n<li>Coding Ability: More so than other data science roles, growth requires more work to get & prepare data. This is simply because growth is often dealing with new data sets, and new data logging. Some suggested testing for this in an interview by doing live coding on cleaning up a data set together in Python or R. </li>\n<li>Great Communication Skills: The two most important elements of communication are (a) Communicating the results of experiments — especially what can and what cannot be validly deduced from an experiment and (b) articulating the persuasive case for investing in certain growth initiatives. Someone with a strong business background and a strong familiarity with causal inference (econometric and experimental backgrounds are ideal). </li>\n</ol>\n<div id=\"first-year\">\n</div>\n<h2>To Do: Your Growth Team’s First Year</h2>\nOnce you have a team, there are five key initiatives you (and the team) will need to tackle in the first year. Here they are with additional detail on each below.\n<ol>\n<li><a href=https://www.ycombinator.com/"https://ycombinator.wpengine.com/growth-guide2017/#goal-and-metrics\">Set absolute goal (with CEO) & Define key metrics</a> </li>\n<li><a href=https://www.ycombinator.com/"https://ycombinator.wpengine.com/growth-guide2017/#IDgrowth-channels\">Identify growth channels</a> </li>\n<li><a href=https://www.ycombinator.com/"https://ycombinator.wpengine.com/growth-guide2017/#Est-systems-and-tools\">Establish systems & tools</a> </li>\n<li><a href=https://www.ycombinator.com/"https://ycombinator.wpengine.com/growth-guide2017/#user-research\">Establish user research</a> </li>\n<li><a href=https://www.ycombinator.com/"https://ycombinator.wpengine.com/growth-guide2017/#continue-to-iterate\">Continue to iterate</a> </li>\n</ol>\n<div id=\"goal-and-metrics\">\n</div>\n<h3>1. Set an absolute goal and define key metrics</h3>\nThe most important thing is to identify your absolute goal and drive every aspect of the funnel toward improving your goal. Casey Winters, former Growth Product Lead at Pinterest, wrote an excellent <a href=https://www.ycombinator.com/"http://caseyaccidental.com/growth-goals/"> post</a> about this. What we mean by absolute is that goals cannot be percentage changes or rate changes (for example, you should not have a goal like “improve conversion rates by 10%”). The goal needs to be an absolute number. (For example, “achieve 5M first-time room nights this year”). Note that this is an absolute milestone the entire team needs to hit.\nAn important next step is to break down an absolute goal into subgoals – for example, if Airbnb’s goal is 15M incremental room nights per year, it would need to achieve sub-goals with an absolute number of bookings from both new users and existing users. Jonathan Hsu, Partner at Social Capital (also part of Facebook’s early growth team), has shared his <a href=https://www.ycombinator.com/"https://medium.com/swlh/diligence-at-social-capital-part-1-accounting-for-user-growth-4a8a449fddfc/">growth accounting equation</a> — here’s how Airbnb’s equation would break down:\n[x] Room Nights = [A] Room nights from new users + [B] Room nights from existing users\nSimilarly, Facebook’s absolute goal of monthly active users (MAU) incorporates both new and existing users. Here’s Facebook’s growth accounting equation:\n[x] Monthly Active Users = [A] New monthly active users + [B] Retained monthly active users + [C] Resurrected monthly active users\nFor marketplaces, the companies would have absolute goals (and sub-goals) for both the supply and demand sides, and sometimes companies will have separate teams working on each side. For example, in the case of Airbnb the supply side metrics would include Host Activation, Quality and retention.\nAt times, teams make the goal too unrealistic or set it in such a way that it is too easy to achieve. The most common advice from growth experts is to set a goal that is halfway between “Sandbagging” and “Too hard to achieve”. You want to set something that is a stretch, but at the same time motivate the team such that it is realistic to achieve.\n100% of the growth experts said that the CEO must be aligned when setting and defining the absolute goal. The goal also needs to be communicated with the entire company so all teams are aware what the company plans to accomplish that year. Often CEOs wait too long or don’t fully endorse the goal and as a result, aligning teams within the company takes too long. This could severely hinder the growth team’s progress in the first year.\n<div id=\"IDgrowth-channels\">\n</div>\n<h3>2. Identify growth channels</h3>\nOnce an absolute goal and subgoals have been defined, the next step is for the team to identify channels for their first few experiments. The most common framework growth experts use to identify channels is based on existing user behavior. The two key questions to ask are the following:\n<ol>\n<li>How do customers find solutions / solve this issue today? </li>\n<li>How do your best users use your product today? Can you do something to get more such users to discover the product quickly? </li>\n</ol>\nThe below behaviors were highlighted by <a href=https://www.ycombinator.com/"https://www.slideshare.net/tractionconf/aatif-awan-head-of-growth-linkedin-growth-hacking-is-dead-long-live-growth?ref=https://www.linkedin.com/\%22>Linkedin’s Aatif Awan</a>, and we share some examples of companies that used those channels.\n<table>\n<thead>\n<tr>\n<th>\n User Behavior\n </th>\n<th>\n Channels to Explore\n </th>\n<th>\n Example Companies\n </th>\n</tr>\n</thead>\n<tbody>\n<tr>\n<td>\n To use the product you need to connect with another user\n </td>\n<td>\n Product itself\n </td>\n<td>\n Facebook, PayPal, Slack\n </td>\n</tr>\n<tr>\n<td>\n Existing users talk about the product\n </td>\n<td>\n Referrals, Community\n </td>\n<td>\n Uber, Airbnb, Dropbox\n </td>\n</tr>\n<tr>\n<td>\n Use search to find a solution to their pain point\n </td>\n<td>\n SEO, SEM\n </td>\n<td>\n Airbnb\n </td>\n</tr>\n<tr>\n<td>\n Look for inspiration from experts\n </td>\n<td>\n Affiliate bloggers, Pinterest, Partnerships, Content\n </td>\n<td>\n Stitch Fix, Glossier, Intercom\n </td>\n</tr>\n<tr>\n<td>\n High LTV users\n </td>\n<td>\n Paid acquisition (social, search, native, offline)\n </td>\n<td>\n Airbnb, Expedia, Uber\n </td>\n</tr>\n</tbody>\n</table>\nNot every channel is relevant for all companies. Most products find 1-2 relevant channels early on that really work for them. ~70% of experts mentioned that referrals were the top channel within the first year. Over time (as brand awareness increased) other online advertising channels were more fruitful.\nThere are some exceptions to this rule were referrals do not work as well. For example – you can’t offer a $20 discount and expect team members to persuade other team members to join Slack.\n<div id=\"Est-systems-and-tools\">\n</div>\n<h3>3. Establish Systems & Tools</h3>\nThe 4 most important elements you need to kick off a growth team are the following:\n<ul>\n<li>Clean data set to track key metrics and goals </li>\n<li>Segmentation tools to be able to understand and segment the customer and activity at a granular level </li>\n<li>Rigorous experiment dashboard to analyze the experiment results and the statistical significance behind them </li>\n<li>Peer review process to discuss and analyze findings </li>\n</ul>\nIt is critical for teams to have the right systems and tools in place to run experiments at scale. Especially key in the first year is the experiment dashboard. Experiment dashboards are essentially a single destination to track experiments/results, and allow for easy analysis by lots of people at the company. Dashboards contain:\n<ul>\n<li>Experiment group metrics </li>\n<li>Control group metrics </li>\n<li>A set of metrics defined to track and measure statistical significance </li>\n</ul>\nThe dashboard helps the team to run various experiments and test the results before proposing every single idea to be added to the product. As the growth team scales, the number of engineers increase and it becomes unwieldy without an experiment dashboard. A company at scale typically runs 1 experiment per growth engineer per week. With that future state in mind, it’s vital to start early with a solid growth experiment dashboard. The dashboard also becomes an invaluable archive of past experiments that is also immensely helpful when adding new team members or iterating on past experiments.\n100% of the experts we spoke with emphasized their decision to build their own internal tools at scale. Initially, you can use tools like <a href=https://www.ycombinator.com/"https://mixpanel.com//">Mixpanel, <a href=https://www.ycombinator.com/"https://www.optimizely.com//">Optimizely, <a href=https://www.ycombinator.com/"http://airbnb.io/projects/superset//">Superset and</a> <a href=https://www.ycombinator.com/"https://chartio.com/">Chartio to track your experiments.\nHere’s a screenshot of Airbnb’s internal experiment dashboard:\n<img loading=\"lazy\" src=https://www.ycombinator.com/"https://ycombinator.wpengine.com/wp-content/uploads/2017/07/Airbnb-Experiment-Dashboard.png/" alt=\"Airbnb built its own dashboard to manage the growth team's experiments\" width=\"2316\" height=\"1208\" class=\"size-full wp-image-1100043\" srcset=\"https://ghost.prod.ycinside.com/content/images/wordpress/2017/07/Airbnb-Experiment-Dashboard.png 2316w, https://ghost.prod.ycinside.com/content/images/wordpress/2017/07/Airbnb-Experiment-Dashboard-300x156.png 300w, https://ghost.prod.ycinside.com/content/images/wordpress/2017/07/Airbnb-Experiment-Dashboard-768x401.png 768w, https://ghost.prod.ycinside.com/content/images/wordpress/2017/07/Airbnb-Experiment-Dashboard-1024x534.png 1024w\" sizes=\"(max-width: 2316px) 100vw, 2316px\" />\nIt can take several iterations to formalize the experiment dashboard. For example – one of the experts cited that the experiment dashboard was formalized after several iterations only after they had ~25 to 30 growth engineers on the team.\nPeer review & Individual Experimentation\nTeams often set up an internal experiment review process on a biweekly basis. Team members present their hypothesis and share the results of the experiment they ran to test the hypothesis. Peers ask a lot of questions to decide whether they agree or disagree with the findings. Growth teams that run 100+ experiments per year cite that only a third of their experiments turn out to be positive.\nThough the success rate is only 20% to 30%, the point of this exercise is to encourage engineers to take more risks.\nA common contention is whether engineers are allowed to run experiments independently. Companies in their early stages often encourage engineers to run growth experiments on their own. However some of them require PM oversight as they scale, especially as they get more rigid with quality standards.\nAnother important element is to make sure you set heuristics for the growth team. Growth teams are constantly testing hypotheses and running experiments. One of the most common heuristic experts use is: “Don’t test things you wouldn’t ship to everybody”\n<div id=\"user-research\">\n</div>\n<h3>4. Establish User Research</h3>\nData alone cannot answer all the questions. It is equally important to have user researchers in place to really understand what is happening behind the numbers.\nYour first 100M users will look a lot different from the second 100M users. Therefore it is important to do the following:\n<ul>\n<li>Solicit real time feedback from users </li>\n<li>Use tools like <a href=https://www.ycombinator.com/"https://www.inspectlet.com//">Inspectlet to track UX </li>\n<li>Meet users outside of San Francisco, especially if it was your first core market. Other markets will look a lot different from SF </li>\n<li>Pay attention to how users use the product internationally. There may be cultural nuances in addition to language gaps (for example, people in Japan do not like to post photos of people without their permission and products may need to adapt to local taste). </li>\n<li>Document every single use case. What is perfectly normal for one group can be very different for another group of users. </li>\n<li>As you scale it is important to add dedicated user researchers to the growth team </li>\n</ul>\n<div id=\"continue-to-iterate\">\n</div>\n<h3>5. Continue to Iterate</h3>\nWhile the above roadmap items will help set the foundation for a strong growth program, a lot of the tools, processes and systems will evolve at scale.\n<div id=\"where-does-growth-sit\">\n</div>\n<h2>Where Should the Growth Team Sit?</h2>\n<img loading=\"lazy\" src=https://www.ycombinator.com/"https://ycombinator.wpengine.com/wp-content/uploads/2017/07/GrowthTeamSitToday.png/" alt=\"GrowthTeamSitToday\" width=\"1130\" height=\"1526\" class=\"aligncenter size-full wp-image-1100084\" srcset=\"https://ghost.prod.ycinside.com/content/images/wordpress/2017/07/GrowthTeamSitToday.png 1130w, https://ghost.prod.ycinside.com/content/images/wordpress/2017/07/GrowthTeamSitToday-222x300.png 222w, https://ghost.prod.ycinside.com/content/images/wordpress/2017/07/GrowthTeamSitToday-768x1037.png 768w, https://ghost.prod.ycinside.com/content/images/wordpress/2017/07/GrowthTeamSitToday-758x1024.png 758w\" sizes=\"(max-width: 1130px) 100vw, 1130px\" />\nThis has been the biggest source of debate among companies. Facebook pioneered the concept of a separate growth team (meaning: Growth is essentially a department within the company). The rationale behind it was if they didn’t assign sole responsibility for growth of MAUs, then no one would own it. This has worked very well for Facebook, which recently hit 2 billion MAUs (the only social network in the world to have achieved this). Facebook was also really good at clarifying responsibilities across various teams. Advocates of separate growth teams cite that it is important for the Head of Growth to report directly to the CEO.\nHowever other companies like Uber, Airbnb and Slack, started with separate growth teams but later merged them with product team. Growth is not about just looking at data to drive insight. The growth team also experiments and makes subtle changes to the product to fuel growth, and this becomes increasingly important at scale. Therefore, advocates of this approach cite that it is crucial that the product and growth teams are within the same org. In these cases the Head of Growth reports to Head of Product.\nTraditionally, a company’s marketing team has been responsible for driving user acquisition (and the associated budget), so this is sometimes a default department in which to house a growth team. Often this evolves from prior functions that have lived in the marketing department (like performance marketing and user acquisition). In these cases, the Head of Growth would report to the Head of Marketing. The general sentiment about this approach is that the line of reporting is a bit rooted in the past, and most growth experts cited this as the least-favorable option.\nThe commonality, regardless of their department, is that the growth team can be more than 100 cross-functional people. It is roughly composed of the following:\n<ul>\n<li>10% Product Managers </li>\n<li>50% Engineers, </li>\n<li>10%-15% Data Scientists, </li>\n<li>10% Product Marketing, </li>\n<li>10%-15% Designers </li>\n<li>~5% Researchers </li>\n</ul>\n<div id=\"growth-in-DNA\">\n</div>\n<h2>The End Goal: Growth is in the Company’s DNA</h2>\nHopefully, when you’re ready to create a scalable growth program, this will be helpful. This is the newest frontier in the cross-section of marketing and product, so it’s still evolving. When done right, an amazing growth program will permeate the entire organization, making an evidence-based mindset part of the company’s DNA.\nIf you have any other growth program advice to share, please reach out <a href=https://www.ycombinator.com/"http://twitter.com/ycombinator/">@YCombinator or <a href=https://www.ycombinator.com/"http://twitter.com/AnuHariharan/">@AnuHariharan on Twitter or on Hacker News.\n<div id=\"thanks-growth-experts\">\n</div>\nI want to thank the growth experts who have pioneered this practice and whose combined insights allowed us to draw these trends:\n<ul>\n<li><a href=https://www.ycombinator.com/"https://www.linkedin.com/in/gustafalstromer//">Gustaf Alstromer</a>, Former Product lead, growth, at <a href=https://www.ycombinator.com/"https://www.airbnb.com//">Airbnb (who recently <a href=https://www.ycombinator.com/"https://ycombinator.wpengine.com/welcome-eric-gustaf-and-jocelyn//">joined us as a Partner at YC</a>) </li>\n<li><a href=https://www.ycombinator.com/"https://www.linkedin.com/in/merci//">Merci-Victoria Grace</a>, Growth Lead at <a href=https://www.ycombinator.com/"https://slack.com//">Slack </li>\n<li><a href=https://www.ycombinator.com/"https://www.linkedin.com/in/esbaker//">Ed Baker</a>, Former Head of Growth at <a href=https://www.ycombinator.com/"https://www.uber.com//">Uber </li>\n<li><a href=https://www.ycombinator.com/"https://www.linkedin.com/in/mikeduboe//">Mike Duboe</a>, Head of Growth at <a href=https://www.ycombinator.com/"https://www.stitchfix.com//">Stitch Fix</a> </li>\n<li><a href=https://www.ycombinator.com/"https://www.linkedin.com/in/caseywinters//">Casey Winters</a>, Former Growth Product Lead at <a href=https://www.ycombinator.com/"https://www.pinterest.com//">Pinterest </li>\n<li><a href=https://www.ycombinator.com/"https://www.linkedin.com/in/geolee//">George Lee</a>, Former Head of Growth at <a href=https://www.ycombinator.com/"https://www.instagram.com//">Instagram </li>\n<li><a href=https://www.ycombinator.com/"https://www.linkedin.com/in/julieyizhou//">Julie Zhou</a>, Former Head of growth at YikYak </li>\n<li><a href=https://www.ycombinator.com/"https://www.linkedin.com/in/ray-ko-1898291//">Ray Ko</a>, Partner at <a href=https://www.ycombinator.com/"http://www.socialcapital.com//">Social Capital</a> and Former Director of Growth @ <a href=https://www.ycombinator.com/"https://www.facebook.com/facebook/">Facebook </li>\n<li><a href=https://www.ycombinator.com/"https://www.linkedin.com/in/jonathanphsu//">Jonathan Hsu</a>, Partner at <a href=https://www.ycombinator.com/"http://www.socialcapital.com//">Social Capital</a>, Former Data Scientist @ <a href=https://www.ycombinator.com/"https://www.facebook.com/facebook/">Facebook </li>\n<li><a href=https://www.ycombinator.com/"https://www.linkedin.com/in/beauhartshorne//">Beau Hartshorne</a>, Former Growth Engineer at <a href=https://www.ycombinator.com/"https://www.facebook.com/facebook/">Facebook </li>\n<li><a href=https://www.ycombinator.com/"https://www.linkedin.com/in/john-mcdonnell-65833233//">John McDonnell</a>, Data Science Manager at <a href=https://www.ycombinator.com/"https://www.stitchfix.com//">Stitch Fix</a> </li>\n<li><a href=https://www.ycombinator.com/"https://www.linkedin.com/in/slater-stich-4658a849//">Slater Stich</a>, Former Data Scientist at <a href=https://www.ycombinator.com/"https://squareup.com//">Square </li>\n<li><a href=https://www.ycombinator.com/"https://www.linkedin.com/in/maxmullen//">Max Mullen</a>, Cofounder at <a href=https://www.ycombinator.com/"https://www.instacart.com//">Instacart </li>\n<li><a href=https://www.ycombinator.com/"https://www.linkedin.com/in/fareed//">Fareed Mosavat</a>, Senior PM, Growth at <a href=https://www.ycombinator.com/"https://slack.com//">Slack </li>\n<li><a href=https://www.ycombinator.com/"https://www.linkedin.com/in/othmanlaraki//">Othman Laraki</a>, Cofounder Color Genomics, Former VP of Product @ <a href=https://www.ycombinator.com/"https://about.twitter.com/company/">Twitter </li>\n<li><a href=https://www.ycombinator.com/"http://dennisgoedegebuure.com/">Dennis Goedegebuure</a>, VP of Growth & SEO @ <a href=https://www.ycombinator.com/"http://www.fanatics.com/">Fanatics </li>\n<li>And several others who opted to stay anonymous </li>\n</ul>\nThank you also to Sharon Pope, Nic Dardenne, Craig Cannon, Ali Rowghani, Daniel Gackle and Scott Bell for contributing to this guide.\n<hr />\nNotes\n1. High velocity implies frequent usage – for example daily, weekly or even monthly.<a href=https://www.ycombinator.com/"#footnoteid1\">↩</a>\n2.Low velocity implies occasional usage -for example, annually or once in 6 months.<a href=https://www.ycombinator.com/"#footnoteid2\">↩</a>\n3.Second Measure (anonymized credit card transaction data) unless otherwise stated.<a href=https://www.ycombinator.com/"#footnoteid3\">↩</a>\n4.Business insider; http://www.businessinsider.com/whatsapp-engagement-chart-2014-2. <a href=https://www.ycombinator.com/"#footnoteid4\">↩</a>\n","comment_id":"1100014","feature_image":null,"featured":false,"visibility":"public","email_recipient_filter":"none","created_at":"2017-07-20T03:00:05.000-07:00","updated_at":"2021-10-20T13:00:27.000-07:00","published_at":"2017-07-20T03:00:05.000-07:00","custom_excerpt":null,"codeinjection_head":null,"codeinjection_foot":null,"custom_template":null,"canonical_url":null,"authors":[{"id":"61fe29e3c7139e0001a7107b","name":"Anu Hariharan","slug":"anu-hariharan","profile_image":"/blog/content/images/2022/02/Anu.png","cover_image":null,"bio":"Anu is a Managing Director & Partner at YC Continuity. Previously, Anu was a Partner at a16z, where she worked actively with the management teams of companies including Airbnb, Instacart, and Medium.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/anu-hariharan/"}],"tags":[{"id":"61fe29efc7139e0001a71174","name":"Advice","slug":"advice","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/advice/"},{"id":"61fe29efc7139e0001a71181","name":"YC Continuity","slug":"yc-continuity","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/yc-continuity/"},{"id":"61fe29efc7139e0001a71182","name":"#ycc","slug":"hash-ycc","description":null,"feature_image":null,"visibility":"internal","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/404/"}],"primary_author":{"id":"61fe29e3c7139e0001a7107b","name":"Anu Hariharan","slug":"anu-hariharan","profile_image":"https://ghost.prod.ycinside.com/content/images/2022/02/Anu.png","cover_image":null,"bio":"Anu is a Managing Director & Partner at YC Continuity. Previously, Anu was a Partner at a16z, where she worked actively with the management teams of companies including Airbnb, Instacart, and Medium.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/anu-hariharan/"},"primary_tag":{"id":"61fe29efc7139e0001a71174","name":"Advice","slug":"advice","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/advice/"},"url":"https://ghost.prod.ycinside.com/growth-guide2017/","excerpt":"with special contributions from Gustaf AlstromerAdvice from 25 preeminent growth experts at top startups“Growth hacks,” like Hotmail’s inclusion of a signup link in its user’s default email signature, can be extremely helpful in driving viralgrowth early in a product’s path to product market fit (PMF).","reading_time":19,"access":true,"og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"email_subject":null,"frontmatter":null,"feature_image_alt":null,"feature_image_caption":null},{"id":"61fe29f1c7139e0001a7196b","uuid":"8bd6a96d-3404-4b34-b52a-5159ea638a3f","title":"On Growing: 7 Lessons from the Story of WeChat","slug":"lessons-from-wechat","html":"Founders are increasingly pointing to Asia when asked for an example of a product they aspire to create, and WeChat is very often that aspirational product. My friend and former colleague <a href=https://www.ycombinator.com/"https://twitter.com/conniechan?lang=en\%22>Connie Chan</a> described WeChat as “<a href=https://www.ycombinator.com/"http://a16z.com/2015/08/06/wechat-china-mobile-first//">the one app to rule them all</a>”. It dominates the Chinese mobile market with 889 million monthly active users<a href=https://www.ycombinator.com/"#footnote1\">1</a>. The WeChat platform has completely evolved the way Chinese people communicate and socialize online, and it has also changed the way they pay each other and pay for their groceries. WeChat is no longer just an app. And while WeChat’s blazing success has been concentrated in China, everyone in the Western world has experienced WeChat’s work, as the service has inspired a new category of “messaging as a platform.” You don’t have to look hard to see hints of WeChat in other messaging platforms such as Apple’s iMessage or Facebook’s Messenger platform.\nWe partnered up with <a href=https://www.ycombinator.com/"https://www.chinatechinsights.com//">China Tech Insights</a>, a research group within Tencent (WeChat’s parent company) to understand how WeChat drives its 889 Million monthly active users to use the app an average of 50+ minutes, and 9 to 11 separate times, per day<a href=https://www.ycombinator.com/"#footnote2\">2</a>. To put that in context, it is the same as the “combined time” users spend across a portfolio of Facebook apps, including Instagram, Facebook and Facebook messenger, on a daily basis<a href=https://www.ycombinator.com/"#footnote3\">3</a>.\nThis post dives into the growth strategy that led to key WeChat milestones, lessons learned and gives insight into the method behind the madness as WeChat scaled from 0 to 800M+ MAUs in less than 6 years. Unlike AOL and Yahoo, Tencent is one of the few companies to have evolved its messaging product portfolio successfully from a web/desktop product to a mobile/messaging platform.\n<a href=https://www.ycombinator.com/"https://ycombinator.wpengine.com/wp-content/uploads/2017/04/WeChat-Growth.png/"> $\"WeChat-Growth\"$ $\"WeChat-Pay\"$ one ad every ~10 posts</a> in News Feed).\n<a href=https://www.ycombinator.com/"https://ycombinator.wpengine.com/wp-content/uploads/2017/04/WeChat-Moment-Ad.png/"> $\"WeChat-Moment-Ad\"$ $\"WeChat-Moment\"$ tap on the ad</a>, you can see that the Airbnb ad is similar to a visual story and feels native in “Moments.” The “likes and comments” can only be seen by mutual friends and not by “friends of friends.” Despite restricting both ad load and limiting the conversation to only mutual friends, the above Airbnb ad, received more than 1.8M views after it was shared, saw a 5x increase in click through rate, and drove a 600% increase in new sign-ups after it was shared by users.\nWeChat even adapted the classic coupon model to a friend-based endorsement model for products and services. When a user redeems a coupon offered by a vendor during an offline purchase, the user can opt-in to share the offer with their friends resulting in all of the user’s friends being able to view and use the same offer. Vendors can also reward a user who redeemed a coupon by giving the user another coupon for use and sharing, thereby extending the exposure of their products and services. Thus WeChat established a coupon credit system for vendors to purchase credits from WeChat for promoting their services through this coupon sharing model.\n<h1>Lesson 6: Measure What You Value, Not What You’re Supposed to</h1>\nWeChat defies the popular belief that growth is all about user growth. Instead they think about growth as increasing value (e.g., the number of tasks WeChat can do in the daily lives of users).\nUnlike other social products, WeChat does not only measure growth by number of users or messages sent. Instead they also focus on measuring how deeply is the product engaged in every aspect of daily life (e.g., the number of tasks WeChat can help with in a day). While WeChat does have KPIs, these are typically shared only among department heads. The drumbeat-message engineers receive every day is “are you creating more value for the user?” In support of this goal to be a tool through which people accomplish their daily tasks, WeChat puts limits on how many friends you have, how many promotional messages you can see, how much engagement they display from your social circles — ultimately they see this as noise that may distract from the utility of WeChat.\n<a href=https://www.ycombinator.com/"https://ycombinator.wpengine.com/wp-content/uploads/2017/04/WeChat-Engagement.png/"> $\"WeChat-Engagement\"$ Rhea Liu</a> and the rest of the Tencent team for partnering with us to share first hand the learnings from WeChat. Thanks also to <a href=https://www.ycombinator.com/"https://twitter.com/conniechan/">Connie Chan</a>, <a href=https://www.ycombinator.com/"https://twitter.com/jonathanhsu/">Jonathan Hsu</a>, <a href=https://www.ycombinator.com/"https://twitter.com/yanyunx/">Yanyun Xiao</a>, <a href=https://www.ycombinator.com/"https://twitter.com/benrbn/">Ben Rubin</a>, <a href=https://www.ycombinator.com/"https://twitter.com/_ram_/">Ram Parameswaran</a>, <a href=https://www.ycombinator.com/"https://twitter.com/smc90/">Sonal Chokshi</a>, <a href=https://www.ycombinator.com/"https://twitter.com/sama/">Sam Altman</a>, <a href=https://www.ycombinator.com/"https://twitter.com/rowghani/">Ali Rowghani</a>, <a href=https://www.ycombinator.com/"https://twitter.com/bradlightcap/">Brad Lightcap</a>, <a href=https://www.ycombinator.com/"https://ycombinator.wpengine.com/welcome-sharon//">Sharon Pope</a>, <a href=https://www.ycombinator.com/"https://twitter.com/craigcannon/">Craig Cannon</a>, <a href=https://www.ycombinator.com/"https://twitter.com/simonlu/">Simon Lu</a>, and <a href=https://www.ycombinator.com/"https://twitter.com/ndardenn/">Nic Dardenne</a> for reading multiple drafts of this essay.\n<hr />\nNotes \n1. Source: MAU accounts based on Tencent data as of 2016.<a href=https://www.ycombinator.com/"#footnoteid1\">↩</a> \n2. Source: iResearch, Jiguang.<a href=https://www.ycombinator.com/"#footnoteid2\">↩</a> \n3. Source: Facebook Q1 2016 Earnings Call.<a href=https://www.ycombinator.com/"#footnoteid3\">↩</a> \n4. Source: Tencent Annual Report 2010.<a href=https://www.ycombinator.com/"#footnoteid4\">↩</a> \n5. Source: Tencent Annual Results for 2016; Smart Device MAU of QQ.<a href=https://www.ycombinator.com/"#footnoteid5\">↩</a> \n6. Note: Users not using “People Nearby” would not appear.<a href=https://www.ycombinator.com/"#footnoteid6\">↩</a> \n7. Source: The Story Of Tencent by Xiaobo Wu.<a href=https://www.ycombinator.com/"#footnoteid7\">↩</a> \n8. Source: The Story Of Tencent by Xiaobo Wu.<a href=https://www.ycombinator.com/"#footnoteid8\">↩</a> \n9. Source: The Story Of Tencent by Xiaobo Wu.<a href=https://www.ycombinator.com/"#footnoteid9\">↩</a>\n<hr />\n","comment_id":"1099076","feature_image":null,"featured":false,"visibility":"public","email_recipient_filter":"none","created_at":"2017-04-12T00:57:24.000-07:00","updated_at":"2021-10-20T13:11:58.000-07:00","published_at":"2017-04-12T00:57:24.000-07:00","custom_excerpt":null,"codeinjection_head":null,"codeinjection_foot":null,"custom_template":null,"canonical_url":null,"authors":[{"id":"61fe29e3c7139e0001a7107b","name":"Anu Hariharan","slug":"anu-hariharan","profile_image":"/blog/content/images/2022/02/Anu.png","cover_image":null,"bio":"Anu is a Managing Director & Partner at YC Continuity. Previously, Anu was a Partner at a16z, where she worked actively with the management teams of companies including Airbnb, Instacart, and Medium.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/anu-hariharan/"}],"tags":[{"id":"61fe29efc7139e0001a71186","name":"China","slug":"china","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/china/"},{"id":"61fe29efc7139e0001a7116d","name":"Essay","slug":"essay","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/essay/"},{"id":"61fe29efc7139e0001a71181","name":"YC Continuity","slug":"yc-continuity","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/yc-continuity/"},{"id":"61fe29efc7139e0001a71182","name":"#ycc","slug":"hash-ycc","description":null,"feature_image":null,"visibility":"internal","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/404/"}],"primary_author":{"id":"61fe29e3c7139e0001a7107b","name":"Anu Hariharan","slug":"anu-hariharan","profile_image":"https://ghost.prod.ycinside.com/content/images/2022/02/Anu.png","cover_image":null,"bio":"Anu is a Managing Director & Partner at YC Continuity. Previously, Anu was a Partner at a16z, where she worked actively with the management teams of companies including Airbnb, Instacart, and Medium.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/anu-hariharan/"},"primary_tag":{"id":"61fe29efc7139e0001a71186","name":"China","slug":"china","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/china/"},"url":"https://ghost.prod.ycinside.com/lessons-from-wechat/","excerpt":"Founders are increasingly pointing to Asia when asked for an example of aproduct they aspire to create, and WeChat is very often that aspirationalproduct. My friend and former colleague Connie Chan described WeChat as “the one app torule them all ”. Itdominates the Chinese mobile market with 889 million monthly active users1.","reading_time":16,"access":true,"og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"email_subject":null,"frontmatter":null,"feature_image_alt":null,"feature_image_caption":null}],"filter":"By Anu Hariharan","featured":null,"pagination":{"page":1,"limit":10,"pages":1,"total":10,"next":null,"prev":null}},"url":"/blog/author/anu-hariharan","version":null,"rails_context":{"railsEnv":"production","inMailer":false,"i18nLocale":"en","i18nDefaultLocale":"en","href":"https://www.ycombinator.com/blog/author/anu-hariharan","location":"/blog/author/anu-hariharan","scheme":"https","host":"www.ycombinator.com","port":null,"pathname":"/blog/author/anu-hariharan","search":null,"httpAcceptLanguage":"en, *","applyBatchLong":"Winter 2024","applyBatchShort":"W2024","applyDeadlineShort":"October 13","ycdcRetroMode":true,"currentUser":null,"serverSide":true},"id":"ycdc_new/pages/BlogList-react-component-98072329-e1f9-466e-80f9-8f31d0a0c70d","server_side":true}" data-reactroot="">

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Convoy: The Future of Truck Freight

by Anu Hariharan1/21/2021

Online marketplaces bring efficiency to traditional sectors. They offer a betteruser experience and increase margins for participants. They can accrue hugevalue by reducing friction and aggregating supply and demand — particularlybecause they have the ability to build network effects and economies of scale.

Reimagining B2B Commerce with Faire

by Anu Hariharan7/24/2020

COVID-19 has accelerated the digitization of commerce globally. In the US,e-commerce penetration increased from 16% at the end of 2019 to 27% in April 2020. While most of the news covering the pandemic’s impact on commercehas highlighted the growth in business to consumer (B2C) e-commerce, little hasbeen said about how business to business (B2B) commerce has changed. This focuson B2C makes sense.

Pinduoduo and The Rise of Social E-Commerce

by Anu Hariharan5/6/2020

Across the globe, as the novel coronavirus moves us from communal spaces intothe confinement of our homes, our social experiences are forced to adapt. Beyondthe social networks we already know and use, we are finding new ways tointegrate social into our online lives. At Y Combinator, we are considering whatthis might mean for the future of e-commerce. For several years, we have had oureye on Pinduoduo as an interesting case study.

How to Manage a Board

by Anu Hariharan7/15/2019

With special contributions from Nic DardenneOne of the most common questions we hear from founders is “How do I manage myboard?” It’s something that provokes anxiety, because this is the first time thefounder/CEO is subject to external supervision, and the board has powers thatinclude the firing of the CEO and the senior management. It is natural to feelthis way.

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by Anu Hariharan10/12/2017

Special contributions from Luke Pryor and BradLightcap .Disclosure: I’m a personal investor in Toutiao.

Growth Guide: How to Set Up, Staff and Scale a Growth Program

by Anu Hariharan7/20/2017

with special contributions from Gustaf AlstromerAdvice from 25 preeminent growth experts at top startups“Growth hacks,” like Hotmail’s inclusion of a signup link in its user’s default email signature, can be extremely helpful in driving viralgrowth early in a product’s path to product market fit (PMF).

On Growing: 7 Lessons from the Story of WeChat

by Anu Hariharan4/12/2017

Founders are increasingly pointing to Asia when asked for an example of aproduct they aspire to create, and WeChat is very often that aspirationalproduct. My friend and former colleague Connie Chan described WeChat as “the one app torule them all ”. Itdominates the Chinese mobile market with 889 million monthly active users1.

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