I really like the book The Innovators Dilemma by Clayton Christensen. It talks about how over time companies move into higher revenue segments, effectively abandoning the lower ones. This then allows new companies to be born to serve those smaller segments. The cycle then repeats itself.

Over time I’ve noticed that the same is true for startups as they move through the different funding stages. With the close of each funding round the company starts moving to a higher segment.

Here are three examples at different stages.

Dendron, the note taking application, used to be open source. I used it extensively and put in effort to submit detailed feedback. It recently closed funding. Within a month they implemented telemetry and didn’t properly inform users. There was also a perceptible shift towards what I suspect are pro features. They also started replying much more reservedly to user issues and prioritizing features posted by their team and their own internal roadmap.

Similarly, Rollbar closed series B and immediately started shifting features away from their free plans.

Finally what prompted me to write this is DigitalOcean. I run the infra for three (small) businesses on DO. I supported using DO early on because my experience with their customer service was so great.

Over the past year and a half or so, I’ve had to contact their customer support regarding several issues. Most tickets ended with me just giving up and stopping to reply because the responses were just so poor.

Then, they had their IPO and it all made sense.

Startups value growth above all

A startup is a company designed to grow fast.

That means two things:

1. The company is optimized for growth

So everything that’s done needs to be in service of growing some important metric.

2. Different aspects need to grow

As the company reaches different stages different metrics indicate growth.

So customer service must support that growth

Customer service is a significant cost. That cost needs to be employed in the service of growth. Once it can no longer be used for that it needs to be restructured for the new objective.

As the company goes through different stages of funding customer service is employed differently.

First, it’s about the PMF

Figuring out the product-market fit is often the make or break stage for the individual founders. If no one wants to pay for the product, there is no point in building it, so there is no point in funding it.

At this stage, customer service involves getting personal calls from the CEO who attentively listens to your issues. It means individual, active customers can have a direct impact on the product roadmap.

Eventually, the product reaches a phase where a small number of customers are satisfied with it, and the service they’re given.

The company can then use those customers to justify the product-market fit and raise additional funding.

Then it’s about user growth

After the product-market fit has been established the next step is to grow the number of users.

A great way to do that is to provide the best service possible compared to the competition. That attracts early adopters who will further evangelize on the company’s behalf.

At this point profitability is not a concern, so the unit-cost of customer service doesn’t matter. Given that it’s also considered to be a part of marketing as well, it gets an even higher priority.

Once they reach a threshold number of users they can use that to justify further funding.

Then it’s about revenue and profitability

Early-adopters, often individuals or small companies, are not the best source of big numbers that can demonstrate big revenue and profitability that’s required for this stage.

Instead, services have to be restructured so that bigger contracts can be sold.

Similarly, customer service also has to be restructured to serve those bigger customers better. They get customer service comparable to what the early-adopters got in the beginning.

Conversely, because the gains are no longer in the small customers, they can no longer get access to that.

They get nested pages of FAQs. Canned responses start being the norm. Channels where you can submit suggestions that would be seriously considered also start disappearing. Eventually “community experts” start getting involved.

As a result of these changes long-term revenue and profitability can be demonstrated and the company can have an IPO.

But as these changes are happening, a new startup is born to address these deficiencies for the lower market segment.

So, what does all this mean?

It means that there is a never-ending cycle of startups being created to address concerns with their predecessors. Once they capture the market on the back of addressing that concern they end up doing the exact same thing. And so on ad nauseam.

It also means that there is very little point in being loyal to any company, startup or otherwise. Startups operate under the guise of changing the world and being more in touch with the human. And I think I bought into this for too long. I must remember that they’re companies just like any other and they serve their shareholders first and foremost.

[PS. If you’ve read this, please take a second to email me what you think and how I could have done better.]

PS: Ethics 🤝🏼 Customer service

Another thing that is affected is the ethics of the company. Whereas a small company is often built on top of a strong set of principles the more funding is injected the less weight those principles carry.

Uber is a classic example of this. It started off by giving as much to their drivers as possible. But once they captured market, they don’t need to really care about the drivers much. As a result they can reduce costs. I’m in no way delusional that it’s a business but at some point we must understand that this is at least exploitative, probably unethical and at certain points illegal.

This is also frequently manifested in ecommerce, particularly in South East Asia. Small startups have great discounts. Larger funded companies, on the other hand, have what seem to be constant discounts. In reality, they are deceptive in two ways. First, they often increase the RRP of the products and then display a discount that results in the price being the actual RRP. Secondly, they do provide what seem to be attractive discounts but are in fact very miniscule: think 50% discount up to $2.