The Second Act

Problems in Dreamland zeroes in on the operational reasons once promising startups melt down - and how to avoid it. This is perfect for founders, leadership teams, or anyone in a highly cross functional IC role (Chiefs of Staff, product managers, biz ops, etc).

The fourth meltdown trigger: stumbling over the second act.

In the beginning, there was nothing.

Then there was an idea. Then a prototype. Many, actually. Then the holy grail - product market fit!

Now there are a lot of things - a company, a brand, employees, investors, a board, competitors, a valuation, a budget and a plan. It's very noisy.

It's also a lot to lose.

This is where founders stumble over the "second act," which is that moment in time where you have a successful and growing core business, but there is so much pressure for more. To keep growing at a healthy rate you need bigger and bigger raw numbers - so founders naturally turn to new products or product extensions.

Types of New Products and Proximate Causes

I typically join startups around that stage, and have built out new products and revenue streams to graft onto successful core businesses at every stop in my career. Some have been wildly successful, catapulting the company to unicorn status. Others have been epic flops.

I think it's helpful to categorize new product endeavors and the context in which they occur, because each context requires a different approach. Here are the four primary ones (excluding acquisitions and inorganic growth):

• Initial product market fit

• Successful core -> adding new product(s)

• Failing core -> forced pivot

• Traditional business -> digital transformation

Let's zoom in on how to add new products to a successful (and growing) core business. We'll also touch a bit on some of the nuances of how to do that in a traditional (non-tech) business, more popularly know as a digital transformation.

Models and Case Studies

I've been fortunate enough to develop and launch new products at three rapidly scaling startups - Redbox, RetailMeNot, and Main Street Hub. I also took a detour into digital transformation, introducing new digital products in a 100+ year old family owned grocery business, H-E-B (and guess what? We beat Amazon and Whole Foods at their own game).

Here's what I've learned:

• Developing, launching, and scaling new products in the context of an existing business is nothing like finding initial product market fit for your core product. There are a number of positives, namely that you have an established brand and built in customer base to cross sell into, so GTM considerations are typically a bit simpler. However, contention over resources between the core and the new product will cause severe internal friction that is frustrating and taxing at minimum, and deadly to both the new product and potentially the core business at worst. Most promising new products are not killed by the market, they're killed by internal forces. This tension is 10x worse when trying to transform traditional businesses.

• Timing is everything. Chasing new products too early (a common mistake) before the core is truly a scalable engine risks bringing down the whole venture. Start too late, usually in reaction to some unexpected event like a new competitor entering an adjacent market, and you're already dead.

Before we get into models that work, here's what to avoid at all costs - labs. Labs are just what they sound like, dedicated teams focused purely on experimentation. That's all good, but every lab I've encountered lacked direction... no business objectives, no clear set of customer problems to solve, etc. This was presumably to ensure unfettered innovation, but the yield ended up being a bunch of "cool tech" that was totally divorced from the customer experience and any material business outcomes. The talent mix is usually off as well - lots of engineers, maybe a product person, but often lacking necessary design resources and usual absent of anyone with commercialization talent.

Redbox: Core Growth vs Long Term Growth

I was at redbox from 2008 to 2011. This was back when Blockbuster was America's biggest brand and Netflix was shipping DVDs by mail. We scaled from $100M to over $1B of revenue in that time period.

Redbox to this day is still my gold standard for disciplined "second act" new product and revenue stream development. We had two growth teams that that worked outside of the day to day operations of the core business.

The Core Growth Strategy team was a quant heavy shop that focused on how to squeeze more out of the core Redbox movie rental kiosks. Some of this was optimization - where to place the kiosks, when to add multiple kiosks to a location, most effective tactics for ramping new markets quickly, etc. The main goal for that workstream was to increase per kiosk revenue. But we also explored new ways to generate revenue off the existing assets. For example, we ended up building our own retail media network, combining on kiosk media with in-store shopper marketing activations, and using free redbox rental codes as a promotional currency to incentivize certain shopping behaviors. This was a huge hit with CPG brands (imagine buyer Orville Redenbacher popcorn and getting your movie for free), adding nearly $20M in pure profit to the bottom line in the first year. Nearly all efforts here were short to mid term, looking for a positive economic impact in 12-18 months.

But the more interesting piece was the Long Term Growth Strategy team (no sexy naming at redbox, just the plain facts). This team was focused on incubating entirely new lines of business leveraging redbox's core competencies in automated retail. The time horizon was more like 3-5 years, but we were looking for an entirely different scale of impact - businesses that could generate $100M+ of revenue on their own, entirely incremental to the core.

This group operated more like a highly disciplined internal venture group. They had a set of hypotheses around retail use cases ripe for automation, ranging from beauty products to key cutting to trading in used cell phones for cash. After clearing some initial validation hurdles, vetted concepts were set up as separate LLCs, and entrepreneurs were hired as GMs of what we called the "seed" businesses. The GMs were granted a budget to design and build a handful of kiosks and run initial real world pilots, and were able to leverage shared resources, like data analysts. They had clear checkpoints where they had to report back to an internal investment committee. If they cleared agreed upon traction hurdles, additional funding was unlocked. If not, the concept was often killed. We also weren't precious about building in house vs acquiring external companies if the economics were right.

RetailMeNot: Focused Skunk Works

I was at RetailMeNot (RMN) from 2011 through 2015, including our unicorn valued IPO. RMN's core business was a marketplace for coupons and promotion codes that could be used at the .com sites of all the biggest retailers - Gap, Best Buy, etc. This was before omni-channel promotions were a thing.

Most of our traffic at the time was desktop, but around 2012 or 2013 the majority of consumer internet traffic flipped over to mobile (and just kept climbing). We had huge usage of the RMN native apps - nearly 40M MAUs - but guess what? They weren't trying to shop online, they were trying to shop in store, using coupons and promo codes that retailers only supported in their e-commerce channel (sounds silly now, doesn't it?).

It was a user experience disaster, but also a huge business opportunity.

I was given the opportunity to form a new products team to chase this opportunity. I got to "hire" one designer and two engineers from the core company, and we set up a skunk works on a different floor of the building and just kept grinding on the problem. The combination of isolation + clear objectives allowed us to iterate incredibly quickly. The first versions of the solution were ugly and failed in a number of different ways (I had to spend a shocking amount of time in malls observing transaction and checkout behavior in the wild).

But, we eventually built a lightweight SaaS app for omni-channel promotions, and began cross selling it into our retail partners. While we had existing relationships, this was tricky, because our contacts were affiliate marketers at these retailers - typically bottom of the rung. But, as a new concept (at the time), we often had to make our way to the CMO.

Within roughly three years it was contributing > 15% of company revenue, and was a key part of our IPO story.

H-E-B: Digital Transformation

H-E-B is a multi-generation family owned grocery chain and retailer in Texas and Mexico, founded in 1905. They are also one of the most successful privately held firms in the US. However, in late 2017 they came under digital attack when Amazon acquired Whole Foods Market.

H-E-B realized they needed to move beyond traditional IT and undertake a full digital transformation, with a focus on new digital products and user experiences. I joined to co-lead this endeavor. As a result of the transformation efforts, H-E-B has since been named America's top grocery three times, due in large part to the "superior digital capabilities" developed during that time. However, it was not an easy journey - probably the most challenging of my career - and I'll save all those lessons learned for a separate piece on digital transformation.

Common Success Factors

What do these case studies teach us about how to set yourself up for success in your second act?

• Be crystal clear on what the company's competitive advantage is and why the new product has a "right to win" - why is the new concept better inside the company vs as a stand alone venture?

• Define success criteria - what winning looks like - right at the start. This typically ties to key business metrics, like how long the runway is for the new product to scale, and what scale it must hit to be material to the overall business.

• Ensure there are clear and testable hypotheses, tied to regular traction checkpoints. There also needs to be a discipline around killing underperforming concepts quickly.

• Build in a fully walled off and protected budget for the new products, with gated access to additional funds upon achieving certain success criteria.

Further Reading

• McKinsey's Three Horizons model (slightly modified for current times)

• Bessemer Venture Partners Atlas: Six Product Strategies to Catalyze Your Second Act

Problems in Dreamland is a five part series:

• Silos and civilizations

• Overzealous customer centricity

• Lack of focus

• Stumbling over the second act

• Who's the boss?