FAKE GROWTH

Welcome to the Age of Fake Growth

It's a SaaS VC cargo cult camouflaged as startup marketing thought leadership. I call it "fake growth".

Fake growth evangelists have different names for it, e.g. so-called "product led growth" or PLG, but the massive red ink and copycat consumerism all look the same. And surprise, surprise...I've never seen it afflict a revenue-hungry, founder-led, bootstrapped B2B tech startup, i.e. the Startup 99%. Whenever I see fake growth, it's infecting the Unicorn Startup 1%, backed by established VCs, and executed by their dropped-in and highly compensated founder replacement "operators". Here's my definition.

Think of it like this. In a fake growth B2B SaaS startup, the "growth team" literally gives away a "free" version of the offering to a "user"--Thereby devolving out of the gate the act of creative B2B selling into the never-ending process of "conversion" of that user from a free into a more feature-rich "paid" or subscribed version of the offering. Fake growth gurus call this the freemium model.

Fake growth startups consistently follow this freemium "user first" path to market--Never an account-first or partner-first approach--as do capital-deprived bootstrappers. Infused with this user-first startup cultism, fake growth mindset represents the mechanical and superficial application of consumer marketing to B2B tech companies. But that's just for starters.

Fake growth's user-first echo chamber is also a function of the abandonment of B2B tech marketing institutional memory, and landscape-based marketing best practices accumulated over decades of evolution of the American tech industry. Why?

Because the fake growth cargo cult has become the "growth framework" of choice for millennial marketers who came to the tech industry as consumers and users--not as knowledge workers in enterprises, or as computer science or engineering students. This generational echo chamber makes the fake growth epidemic in the American tech industry an order of magnitude more dysfunctional than the occasional appearance of "vanity metrics" on a quarterly board meeting slide.

Simply put, fake growth is getting "locked in" as a startup model in American tech, and undermining the fitness of America's innovation ecosystem.

The dirty secret of fake growth SaaS startups is that they MUST BE CAPITAL-SUBSIDIZED FOR VERY LONG PERIODS OF TIME, EVEN AFTER IPO--to support the massive losses and massive cash burn needed for sales and marketing spend on a user-first freemium model.

This fake growth approach now has a name. They call it "blitzscaling", i.e. the use of brute force capital to pre-emptively scale a category dominant winner-take-all in a specific target segment. (Yes. They borrowed the "blitzkrieg" metaphor from you know who. And no. I have zero idea why California billionaires think that's an appropriate branding choice.)

At their core, fake growth startups are those in which the kings and queens of strategic finance--Accelerators, VCs, private equity, venture debt, bankers--have disintermediated both streetsmart founders and strategic marketers. In fact, it would be entirely accurate to describe fake growth as "a monopoly creation model applied to tech startups".

I see fake growth not simply as a new variety of "bubbleboy marketing" but as a form of new category cheating... rapidly headed toward full spectrum venture malfeasance--this obscene use of "patient" brute force capital and massive red ink as "unfair advantage"--this placing of the banker's finger on the entrepreneurial success scale--Not product, and definitely not innovation or creativity as a startup's advantage. Just a heaping helping of racketeering-as-a-service.

One can only hope that folks like Senators Elizabeth Warren and Josh Hawley take notice of BigVC as they capitalize on their first mover calls to investigate Big Tech.

The brute force capital fake growth model robs deserving tech startups of capital access, and rewards market and user manipulation. This is the model--when supercharged with tech supremacist ego--that rationalizes pedestrian-killing UBER autonomous vehicle "MVPs" as appropriate mechanisms for data collection and market "experimentation". This is extremely dangerous, especially as we enter an age of AI and autonomy, to have this model in command of the American startup ecosystem at any level.

From a big picture point of view, it's important for startup founders to see that this cash-rich, high carb/high burn user marketing model of fake growth startups is weakening the overall strategic fitness of the American tech industry while empowering foreign competitors in China, India, Europe, and elsewhere to eat our lunch.

In my 2006 book, Asymmetric Marketing, I shoplifted Richard Feynman's famous "cargo cult science" metaphor to explain the imitative, inefficient marketing of the first tech bubble. We're there again in 2019, and the "cargo cult" metaphor is more relevant than ever.

So here's my deconstruction of "the Fake Growth Stack", i.e. a checklist of 10 commonly encountered tenets (aka "stack layers") indicating your startup is eyeballs deep in cargo cult ideation, and you're going to need to get busy on a strategic marketing self-assessment... pronto.

1. Institutional Anti-Incumbency aka "Disruption" Theory

Disruption theory, or as I like to call it, "the religion of institutional anti-incumbency", is the first and foundational layer of the Fake Growth Stack.

Disruption theory's mantra advocates competitive "attack" on incumbents as the starting point for a startup's journey---vs permissioned partner "attach" to incumbents' in-place centers of market gravity--their developer/partner ecosystems, their customer ecozones, and their active program-centered ecoregions--i.e. the incredibly high value "landscape capital" they have catalyzed and accumulated over years of building their businesses.

This landscape based marketing (LBM) approach--to favor an incumbent attach strategy over an incumbent attack strategy--is natively used by bootstrapped startups as the pragmatic alternative to endlessly chasing capital and getting on the VC fake growth treadmill.

Disruption theory itself--as articulated by its creator Clayton Christensen--sees only "2 footholds" for disruption. One foothold is "low cost". Another is "new market". But this way of framing strategy has a huge hole in it. There are actually 3 footholds for initiating a "process of disruption" which fundamentally changes the power equation in an industry.

This "3rd foothold" is an "ingredient or building block product" model that can be embraced and incorporated into "sustaining innovations" of incumbents, and new solutions created by startups. Microsoft the startup's rise to dominance via its PC operating system (an ingredient in the IBM PC and all IBM PC competitors or cloners) is one example of 3rd foothold disruption. Google the startup's placing of its "search box" on existing portal and broadband service provider sites is another example. Both of these were strongly symbiotic initiatives with landscape incumbents that represented "Partner First" mindset, and went on to new category dominance. Both examples of this "superpower pattern" remain relevant today for edge computing and cloud computing startups.

Disruption's embrace by VCs is responsible for the ignorance of startup marketers around engaging landscape incumbents as targets of asymmetric opportunity (TAO). VCs like to sell "disruptive" but money-losing B2B SaaS businesses to incumbents. But they don't appear all that interested in seeing their portfolio companies partner with incumbents as ingredient building block providers, and in so doing become progressively less dependent on VC capital from the start.

Here's a piece I did a few years back, tltled (no surprise) "The Third Foothold", encouraging Christensen to engage on the issue, plug the hole in disruption theory, and update and open source his model to the larger business strategy community for iteration. Never heard back.

2. User First AARRR Framework

When you decide that your startup is going to "disrupt or be disrupted", you've pretty much locked-in your startup to a user-first engagement model at the outset. The user-first AARRR framework is the second layer of the Fake Growth Stack.

Fake growth SaaS startups follow this accelerator-developed "freemium" AARRR framework (Acquire, Activate, Retain, Refer, Revenue). The AARRR framework de-prioritizes creative revenue development and revenue-based self-sufficiency--the life blood of bootstrappers--in favor of one of the true gems of freemium cargo cult mindset, the shady notion of "lifetime customer value" or LTV for short.

The biggest mistake B2B SaaS startups can make is to follow this model at launch. Under the freemium AARRR and the LTV mantra, startups no longer focus on opportunistic revenue development, e.g. white label or OEM licensing of their product to landscape partners, in favor of building up a "user base" for future "conversion". This antagonism to opportunistic revenue development means your startup pre-emptively surrenders the potential to profit from continuous "landscape tectonics", i.e. the pitched rivalry between and among established landscape incumbents. AARRR removes a marketer from landscape context and landscape centers of gravity--in favor of single user engagement.

In this way, user-first AARRR changes the entire growth metabolism of a startup, fostering digital marketing ops silos, sales/marketing fragmentation, and massive ass covering when the "inbound user pipeline" (even if they rebrand it as a "flywheel") that user first marketers are delivering is not and never will be "sales qualified".

I recommend B2B startups understand the growth architecture differences between downstream SaaS and upstream XaaS, and the basic elements of Partner First startup strategy. And user-first freemium startups seeking to pivot to a more robust growth framework are in good company. Even user-first companies like Dropbox, prior to IPO, built a multi-modal growth framework integrating users, enterprise accounts, and API-consuming partners over time. I describe this integrated path as "growthtone".

3. VC-Subsidized Free SaaS Dumping

For the fake growth startup, continuous access to capital to subsidize a free product "growth model" IS the primary competitive differentiation. This is the third layer of the Fake Growth Stack--Venture capital subsidized market adoption.

When the starting point of your startup is based on disruptive attack, not symbiotic attach (to pre-existing incumbent landscapes), and when out of the gate you've decided to target "users" instead of accounts or partners (that possess significant "landscape capital"--i.e. a pre-existing network of partner/developers, an installed base of customers, and active ongoing "basehacking" programs), your strategic options narrow.

Simply put, to drive user growth, the fake growth cargo cult tells you you're going to dump a free product (not a trial product) onto the market below its cost.

This subsidized adoption approach is the equivalent of a sugary high carbohydrate diet, and forks the growth metabolism of a startup toward operating obesity. Startup management teams literally sit in board meetings that discuss subsidized free product "pipelines" filled with abstract personas using their "minimum viable product"...... as "market demand".

Is it any wonder that--given this kind of VC-led growth strategy rabbit hole--we see big cloud cross-category superpowers like AWS, Microsoft and Google providing "Free Tier" offerings with scores of web services that pre-emptively destroy less well-capitalized infrastructure competitors. Digital services dumping disguised as "growth" is a form of market predation that kills real innovation in favor of rigged category winners.

A few years back, I encapsulated my views on the chronic problem of VC-subsidized SaaS dumping in a piece titled "Software Is Eating the Income Statement". I paid a price for it but I don't regret it, as it's now clear that capital-subsidized SaaS businesses are being taken public by self-interested VCs seeking to avoid massive losses.

4. Revenue Development as "Conversion" Diversion

In the fourth layer of the Fake Growth Stack, full spectrum revenue development and profitable-from-day-one revenue design patterns (RDPs) go out the startup window--In favor of the "conversion" of a free user to a paid user.

Even advocates of the freemium model recognize this as a self-imposed revenue growth constraint and unforced error, and try to correct it by revising "pricing strategy" to collect higher value and pre-paid subscriptions.

But B2B startups need to return to seeing the journey to operating self-sufficiency as their priority--not chasing the next round of capital to subsidize more free product distribution. Bootstrappers creatively practice strategic revenue development by attaching to incumbent landscapes, and iterate their businesses with a "projects to products" orientation, building out their IP through profitable customer engagements. Unfortunately, the fake growth cargo cult often sees this as a diversion from a capital subsidized "blitzscaling" or a "product led growth (PLG)" model (which is really fake growth speak for "capital led growth").

One of the other things you see with "conversion" as the revenue design pattern (RDP) is the "churn" out of free users, i.e. abandonment of the free product by the user. So in addition to the conversion activities, user-first marketers need to go back and try to "re-acquire" the churned out users. After all, so the thinking goes, you've got to do "free" to do "freemium".

As-a-Service startups have many more growth options than direct-to-user SaaS on the AARRR freemium model. And there is a lot more to be gained by founders from understanding these marked difference between "digital marketing" and "marketing digital", i.e. leveraging partner-based growth models to embed your digital offering in the app, cloud, network, system, or solution of an incumbent that already has a large base of users. In the fake growth cargo cult, there's way too much digital marketing and not enough "marketing digital".

5. "Burnapalooza" Sales/Marketing Spend

Let's review. When you're banking on disruption--executed via free SaaS dumping and a user-first sales approach called "conversion"--you're going to burn an extremely high percentage of incoming revenue on sales and marketing, and have embarrassingly poor sales efficiency. This is the fifth layer of the Fake Growth Stack.

Last year I posted Unicorn Burnapalooza, illustrating how the overwhelming majority of B2B SaaS players going public were burning 60/70/80/90% or more of top line revenue on sales and marketing spend. Public tech companies should not be that inefficient. The fact that they are points to the potential for a rigged system in which VCs "exit" money losing deals by shifting their operating capital burden onto public markets. That needs to stop.

Since then, two of the SaaS companies I wrote about with high sales/marketing burn have been acquired--Mulesoft, is now part of Salesforce, and Cloudera merged with HortonWorks. And the two XaaS IPOs with the best sales efficiency, Twilio and SendGrid, have joined forces.

While the Startup 1% can "afford" to follow a high burn direct-to-user SaaS sales/marketing spend model (VCs in for a buck stay in for a bundle), this model is not available to the Startup 99%.

If your startup is in the freemium fake growth model, plan to audit all your marketing and growth activities and costs as a first step to preparing to pivot. And keep reading. We're only half way through the checklist of symptoms.

6. Martech Magical Thinking

When startup management teams realize the revenue limitations of a free VC subsidized adoption/conversion model, they reflexively turn to a form of magical thinking that sees automated digital marketing toolsets, known as "martech", as their salvation. This martech magical thinking is the 6th layer of the Fake Growth Stack.

Martech has emerged as the latest toy or "shiny object" in user-first digital marketing. As of April of 2019, the "market map" of martech players, both big tech marketing clouds and startup service providers--compiled by Hubspot's VP of Platform Ecosystem--now contains around 7000 discrete vendors claiming various value props around growth automation.

But no martech stack and/or AI-driven customer journey automation is going to overcome the inherent limitations of the fake growth freemium model. If it could, Hubspot itself, the leader in "inbound marketing", would be GAAP profitable 13 years after its founding and 5 years removed from its own IPO, not burning almost $50 million in operating losses in 2018 (up from 2017) on its income statement.

And beyond that, there's a whole lot more magical thinking that needs an "intervention" around the whole martech construct that seeks to embed technocratic and developer-supremacist mindset into the "growth process". Turning marketers into "developers" in a freemium product model is more of a justification for failed marketing, not a manifesto of the future of marketing.

A popular landscape based marketing (LBM) alternative to investing in user-direct martech is to "hunt where the ducks are", i.e. market your XaaS innovation as a partner in one of the big cloud marketplaces where the lion's share of B2B traction originates these days.

Here's a piece I did called Cloud Marketplace Wars explaining to startups how to juice your growth by gaming QoM or 'quality of marketplace' rivalry among the big cloud players. The thinking behind it? That pitched rivalry between and among landscape incumbents--what I call "landscape tectonics"--is the main driver of opportunity for B2B startups......not more martech and more disruption based on subsidized user adoption.

7. Boiler Room Telesales, aka the SDR

I'm about to show my age. I was sure that Seth Godin had put a wooden stake through the dark vampire heart of "interruption marketing" with his iconic work, Permission Marketing. I was wrong. It's back, and its the seventh layer of the Fake Growth Stack.

They call them "Sales Development Representatives". They cold call "the free user pipeline" and try to drive "conversion" to a paid product, or a department or enterprise-wide upsell from a paid user. This is what happens when the discredited telesales "boiler room" model of yesteryear meet the freemium model of "conversion" of free products.

Part of this whole "tech startups doing telesales" impetus is also coming from ABM or account based marketing practitioners. ABM is a bolt on to the user first model that advocates "content personalization" and other forms of user targeting to try to gain a referral (one of the R's in AARRR) to a departmental or enterprise buyer.

If you want to do ABM right, i.e. as a way to overcome some of the inherent limitations of the user-first model, then quit thinking about user manipulation via content personalization, and do real thought leadership that changes the way your emerging category and value proposition are perceived on the landscape.

Here's an example of what that looks like.

Hint. It's not about a marketing guru "ego trip". It's about your startup's landscape-based "eco trip".

8. "Skinner Box Marketing" Data Collection & Privacy Invasion

Eventually, the subsidized freemium user-first "growth model" treats its own users like lab rats, tracking every behavior inside their applications, and consuming as much user data as possible. This is the 8th layer of the Fake Growth Stack.

Back in 2014, I described this trend as Digital Skinner Box Marketing, in connection to the news that Facebook had run undisclosed neuromarketing A/B tests on their users. Fake growth startups now live and die by running "experiments" on their users.

They also like to frame this non-permissioned overreach in data collection, privacy invasion, and neuromarketing CX manipulation--in terms of user experience personalization. Because under the mantra of "personalized experience", the user-first fake growth cargo cult feels justified in knowing everything about you in order to guide your "customer journey". I think the millennial-first word they excitedly use to rationalize this non-permissioned overreach is "awesome".

Sometimes this data collection overreach comes back to bite a startup in the butt when they do it to the wrong folks. For example, Meerkat, a video application startup, consumed the Twitter social graph of their users, and got taken to the woodshed by Twitter, who launched a competing video product as an add-on to their social network. Meerkat went away as result. Similary, Zenefits, a SaaS company, even screen scraped data from ADP systems that wasn't theirs, and ended up in a little dust-up with their "partner" ADP.

When your "growth model" is incumbent "attack", not symbiotic and permissioned partner "attach", you can pretty much rationalize anything. Translation. Some of the biggest promoters of "CX", "design thinking", and user personalization can become the biggest tramplers of customer permission.

9. Valuation Over Victory

The fake growth cargo cult--as the progeny of strategic finance--has conditioned an entire generation of founders and marketers to define success as startup valuation, especially startup valuation at exit, not competitive victory in the market. This is the 9th layer of the Fake Growth Stack.

Think I'm too extreme on this issue. Tim O'Reilly underscores this very point in his February 2019 critique of "blitzscaling". He states unequivocally that:

In contrast to VC-subsidized fake growth and blitzscaling, the goal of most bootstrapped tech startups I've encountered has been progressive market power accumulation through competitive wins. For LBM practitioners, this market power accumulation flows from a partner-first growth approach that is symbiotic with, and complementary to, landscape incumbents. When this partner-based approach is successfully executed, your startup literally receives what I call a "DNA inheritance" from your established partner that supercharges your organic growth.

This DNA inheritance is triggered by your first upstream partner deal with a tech incumbent--and serves to attract new "targets of asymmetric opportunity" (TAO). Think IBM buying a PC operating system from Microsoft the startup--and that one deal making Microsoft the arms dealer of choice for any cloner that wanted to compete with IBM.  

This DNA inheritance effect is very powerful, very real, and very repeatable, but rarely happens with startups that are pushing "free" something to atomic level users. In fact, this approach is derided as "old school" by the new generation of subsidized startup marketers.

10. Loss-Layering Monoculture Camouflage

When it becomes clear that a capital-subsidized, user-first freemium SaaS B2B startup will never achieve profitability in its core business within the projected time frames, the fake growth cargo cult pivots--camouflaging the subsidized startup as a multi-LOB, cross-category B2B monoculture. This is the 10th layer of the Fake Growth Stack.

It's a continuously recurring question for the fake growth cargo cult. What does a freemium SaaS B2B startup do when after 5 years, 10 years, or more of capital-subsidized free products and user-first digital marketing, the company is still not a GAAP profitable business--Not self-sufficient from incoming revenue, but continuing to survive and "scale" from investor dollars, not customer dollars?

Answer. It "doubles down" on the fake growth model by layering on entirely new products and new lines of business that transform the company into a de facto multi-product, multi-category monoculture. This is a major departure from prior periods of tech startup evolution. Here's why.

Historically, tech startups that grow into multi-product, cross-category superpowers do so on the back of a category-defining, category-dominant core product or service. For example, the MS Office franchise grew out of the PC-dominant MS Windows franchise. But now we see the kings and queens of strategic finance pre-emptively subsidizing multi-product lines of business in the age of XaaS or "anything as a service".

One particularly obscene example of this as would be B2C Uber's diversification from ridesharing into delivery and more, including Uber Freight, a B2B initiative, as well as their autonomous vehicle tech--despite burning $1Billion in GAAP losses each and every quarter. This is the approach you see happening--albeit with less nakedly obscene losses than a billion bucks a quarter--in B2B SaaS. And this subsidized monoculture model has metastacized, and affected SaaS players that don't even qualify as "freemium", e.g. a company like Okta.

Okta, a SaaS security player that IPO'd in 2017 is still burning $50+ million bucks in GAAP losses per quarter, and allocates 70% of subscription revenue to sales/marketing spend. Okta is an example of a capital-subsidized monoculture that keeps layering new products on top of its core single sign-on offering. But Okta is not alone in this. We see the same thing in Hubspot's evolution to a product monoculture competing head to head with Salesforce.

As you can see in the above visual, Hubspot now packages its value proposition into a Marketing Hub, a Sales Hub, and a Service Hub, with a free-for-life CRM that is the kernel of this 3-product suite or bundled product monoculture. This Marketing/Sales/Service product marketing approach runs parallel to the Salesforce packaging of their Marketing Cloud, Sales Cloud, and Service cloud--albeit Salesforce is a much larger player with many more modules in its end to end portfolio.

In its 13 year journey from inbound marketing new category wonder kid to Marketing/Sales/Service cloud wannabe, I see Hubspot as a classic tech case of "the cobbler's kids have no shoes", i.e. selling a value proposition--the promised land of user-first freemium SaaS 'inbound growth"--that they have not fully realized themselves.

As a poster child of the user-first marketing movement, Hubspot's inability to build a profitable conversion-based B2B SaaS business--after digesting so much investor capital and after such a long period of time--should raise valid questions about the model itself to its leadership. But that's not what's happening.

Instead, we see even more promotion of. and evangelism for, the user-first model--applied to B2B--by the Hubspot CEO from the stage of a SaaS VC event. See below.

What the Hubspot CEO is advocating is clear. His preferred "path to revenue" is through freemium individual users on the AARRR model, despite his company's continuous losses on that model since founding.

This is not far at all from Feynman's description of a "cargo cult".

But I don't blame him, really. At this point the Hubspot CEO has no choice but to take the position he has taken, given that his product family's value prop is so heavily tied to advocacy of the user-first freemium growth model, and its associated martech magical thinking.

But you, as a founder or future founder of an "As a Service" startup--whether cloud-based or edge-based--still have a choice.

Conclusion: "Financial Instruments" or "Accumulated Earnings" is the Question

Normally, by this point in a long form blog post, I'd be introducing my Landscape Based Marketing (LBM) alternative to the freemium SaaS cargo cult.

I say something positively sunshiney like "Don't build a SaaS app, build a XaaS API that every app vendor can incorporate as a building block ingredient", or "Don't think downstream users, think upstream partners...Just look at Twilio's revenue efficiency if you don't get it". But I'm not going to do that. There's a bigger issue at stake around "fake growth".

Tim O'Reilly properly framed that issue when he wrote the following in his critique of blitzscaling. I'm going to repeat that now. He characterized the issue in terms of startups that are:

This is a serious critique of the American startup ecosystem as a whole. I agree completely.

At bottom, the brute force capital-subsidized adoption of free products, the massive red ink marketing spend tied to "converting" those free users to paid, and the institutional anti-incumbency we see in 2019 SaaS "thought leadership"--the very marketing mindset I'm characterizing as "fake growth"-- is entirely consistent with seeing a startup as a financial instrument. As O'Reilly puts it:

When Steve Jobs uttered the phrase "Insanely Great", or when Bill Gates envisioned the Microsoft mission as a "PC in every home", they were not talking about a startup planning an exit.

They were talking about building profitable centers of market gravity to anchor the future. They were planning on victory and market power accumulation, not valuation improvement at exit via free product dumping. They were not talking like "financial instruments", they were talking like leaders of a "continuing business projecting those earnings into the future".

That way of thinking needs to re-emerge in the American startup ecosystem. I'm committed to seeing it does. I'm glad that there are other folks who feel the same way.

Joseph Bentzel is the founder and senior consultant at Platformula1.

If you'd like to learn more about Landscape Based Marketing (LBM) and build a Partner1st startup or enterprise digital initiative that capitalizes on non-stop landscape tectonics, contact him at Joe@platformula1.com or follow us on Twitter @Platformula1