How Consumer Unicorns Scale: The Two Growth Engines Behind Billion-Dollar Startups. | VC Jobs
Building Cap Table - Template To Download & Y-Combinator's Guide On Startup Unfair Advantage.
👋Hey Sahil here! Welcome to this bi-weekly venture curator newsletter. Each week, I tackle questions about building products, startups, growth, and venture capital! In today’s newsletter, we -
Deep Dive: How Consumer Unicorns Scale: The Two Growth Engines Behind Billion-Dollar Startups.
Quick Dive:
Building Cap Table As A Founder: Template to Download.
Don’t Price Your Product Based on Costs, Why?
Y-Combinator: Startups’ Unfair Advantage should be related to growth.
Major News: Microsoft bought nearly 500K Nvidia chips, OpenAI may pay its nonprofit arm ‘billions of dollars’ in conversion to for-profit, SoftBank CEO Masayoshi Son commits to invest $200 billion in the US & TikTok asks Supreme Court to block the US ban.
Best Tweet Of This Week On Startups, VC & AI.
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TODAY’S DEEP DIVE
How Consumer Unicorns Scale: The Two Growth Engines Behind Billion-Dollar Startups.
I've been looking at the most-valued US consumer startups (Uber, Airbnb, Lyft, Pinterest, Coinbase, Instacart, Robinhood, Peloton, Doordash, Wish, and Houzz), and a clear pattern emerges in their growth strategies. While these unicorns typically leverage multiple acquisition channels, two channels stand out consistently: SEO and Referrals.
It's worth noting that while paid acquisition is part of most of these companies' strategies, it rarely drives the majority of user acquisition at scale. This is primarily because generating millions of users through paid channels becomes prohibitively expensive, making it less scalable for massive growth. Let me break down why these work so well.
SEO: Scaling Through Search Intent
Why is it such a powerhouse for growth? Google handles over 3.5 billion searches every day. That's 3.5 billion chances to show up in front of people who are looking for something. The best part? Once you're ranking well, you're getting all these eyeballs without paying per click. Your cost per user goes down over time instead of up.
These big companies have figured out a clever approach to SEO - they create thousands of landing pages filled with good content. Think about how Airbnb has a page for every city, or how Pinterest has pages for every type of recipe or craft project.
But here's the thing - you can't just jump into SEO and expect it to work. Your product needs to be a good fit for it. From what I've seen, you need four things to make SEO work on a big scale (like getting a million visits a day):
Your content base needs to keep growing. Search trends change all the time - remember how many people started searching for "work-from-home setup" in recent years? You need fresh content to catch these new trends.
Your content has to be good. Ask yourself: if someone's searching for what you offer, is your page better than what's already showing up on Google? If not, you probably won't rank well.
You need user-generated content. Why? Because trying to create all that content in-house is nearly impossible. You typically need tens or hundreds of thousands of pages to hit big numbers with SEO.
It needs to be mostly text. Sure, images are nice, but Google's still best at understanding text. That's why Wikipedia ranks so well - they have tons of detailed text about pretty much everything.
Let's talk about what makes referral programs actually work. The concept is pretty straightforward - you invite someone, and both of you get rewarded. But getting it right is all about the details.
The Magic Formula What I've noticed across successful referral programs is they all follow one key pattern: give both parties some money. It sounds simple, but it works because you're turning your users into a mini sales force. Here's a great example: I recently read about an Uber driver who made $90,000 in just six months by referring other drivers. That's the power of a well-designed referral program.
Some people have taken this to another level entirely. Back in the day, some clever folks figured out they could make money by running Google Ads with their referral codes. Some even put up small billboards! While most programs have banned Google Ads referrals now, people haven't given up - they've just switched to using SEO to promote their referral codes instead.
Take The Points Guy, for instance. They've built an entire business around reviewing credit cards and earning referral bonuses. They write detailed articles comparing different cards, which serves as free marketing for credit card companies. Pretty smart, right?
Making Sure Referrals Fit Your Product Here's the thing though - referrals work best when users are directly paying for your product. The trick is finding that sweet spot with your discount rate. You want it high enough to get people excited about referring others, but not so high that you're losing money on each new customer.
When you're figuring out your referral program, there are three key numbers to watch:
Lifetime Value (LTV): Obviously, you can't give away more than you'll make from each customer.
Payback Period: The best programs make their money back almost immediately. The faster, the better.
Your Paid CAC: If you're spending less getting customers through ads, you might want to lower your referral rewards.
Real World Example: Coinbase's Program Let me break down how Coinbase does it - it's a great case study. They give both people $10 when the new user buys $100 of crypto. Here's why it works:
Most people buy way more than $100
On a $500 purchase, Coinbase makes about $19.18 in fees
That covers both $10 bonuses right away
Anyone who doesn't complete the $100 purchase costs them nothing
Is This Right for Your Product? To figure out if referrals could work for you, ask yourself:
Can you afford a reward that will motivate people?
Will you make the money back quickly?
Is it cheaper than your other marketing channels?
Do users directly pay for your product?
If you can say yes to these questions, you might have found your next big growth channel. Just remember - the key is finding that perfect balance where the reward is attractive enough to get people sharing but still makes financial sense for your business.
The Bottom Line, If you can nail these elements - making the rewards appealing while keeping the economics sound - referrals can become a powerful growth engine. Just make sure you've done the math on those three key metrics (LTV, payback period, and CAC) before jumping in. When done right, you're essentially getting your existing users to build your business for you, and that's pretty hard to beat.
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QUICK DIVES
1. Building Cap Table As A Founder: Template to Download.
A cap table, or capitalization table, is a chart typically used by startups to show ownership stakes in the business. It lists your company's securities (i.e., stock, options, warrants, etc.), how much investors paid for them, and each investor's percentage of ownership in the company.
You can obtain a stockholder ledger from your lawyer, which lists all stockholders and shows how many shares or options they hold. However, I don't consider this document a comprehensive cap table. In this, I am sharing a cap table template that is used by various leading VC firm’s partners.
The basic outlines of this cap table are:
It shows all the major stockholders of the company listed on the left side. It also shows the major option holders and buckets of option holders
It shows all of the classes of stock and how much was paid for them across the top of the columns
For each investor, you show how much of each class was bought and how many shares of that class they own as a result
You total up the cost and shares and then calculate ownerships on a fully diluted basis (which means you include the options, whether issued or non-issued or vested or non-vested).
I like this presentation for its simplicity and because it shows the progression of financing activity. It also has the benefit of showing how much each investor has put in on a cost basis, which many cap tables leave out.
If you want to make a cap table for your company, feel free to replicate this format. If you have angel investors, put them in the angel section. I would include the largest ones and bucket all the rest into “other angels.”
If you’ve got any questions about this cap table, or cap tables in general, feel free to email me.
2. Don’t Price Your Product Based on Costs, Why?
Founders often struggle with pricing their products correctly early on. Many make the mistake of setting prices based on their costs, especially in non-software startups. While this might seem logical, it's not the best approach. Here's why you should consider "unreasonable" pricing instead:
The Problem with Cost-Based Pricing
It doesn't account for the value you're providing to customers.
It can limit your growth potential and ability to invest in improving your product.
It may attract price-sensitive customers who aren't your ideal target market.
The Benefits of "Unreasonable" Pricing
Identifying Your Ideal Customer Profile (ICP)
High initial prices help you quickly identify customers who feel the pain point most acutely.
These customers are willing to pay more for a solution, even if it's not perfect yet.
Validating Market Demand
If people are willing to pay a premium, it confirms there's a strong need for your product.
This validation can save weeks of experiments and help you focus on the right target audience.
Accelerating Product Development
Higher initial revenue allows you to invest more in improving your product faster.
You can build specifically for your ICP, ensuring product-market fit.
Real-World Example
I see a lot of founders launch a website, with:
A logo that was just an emoji
An onboarding flow using Typeform
A database in Airtable
Also, set the initial price on the higher end. Despite this - they have seen good outcomes of getting a few people onboard 5-6, why? They felt the pain point so strongly that they wanted it solved at all costs.
The Inverse Relationship
There's an inverse relationship between how painful a problem is and how "perfect" the product needs to be:
More painful problem = less perfect product + higher willingness to pay
Less painful problem = needs to be perfect + price sensitivity
When to Launch
Once your product is 70-80% ready for your ICP, they will likely convert. If not, it may indicate that the problem isn't worth investing more time into, as the product will be hard to grow.
Long-Term Strategy
While starting with "unreasonable" pricing can be beneficial, it's important to note that this approach isn't permanent. As you grow and expand your market, you may need to adjust your pricing strategy. However, the initial high pricing helps validate the market, identify your ICP, and provide capital leverage for faster growth.
Remember, don't let perfect be the enemy of good. If you're solving a truly painful problem, your early adopters will be willing to pay a premium for an imperfect solution.
Even in one of the previous writeups, I have shared 5 frameworks that can help you to find out if your pricing strategy working.
3. Y-Combinator: Startups’ Unfair Advantage should be related to growth.
What are the reasons — why this solution is going to work out? What are those insights? All these are down to your unfair advantage. Investors always want to know these things from founders.
In one of the startup school videos, Y-Combinator shared unique insights that might help to answer these questions. Just remember that the unfair advantage should be related to growth. So how can you explain your unfair advantage - there are five different types of unfair advantage.
As a startup, You need to have at least one. If you look at successful startups you will find that they have multiple unfair advantages which lead them to achieve that tag. As a founder, just ask yourself about these five unfair advantages,
Founder Advantage: Are you among the top experts in the world in solving this problem? If not, it’s a weak advantage.
Market Advantage: Is your market growing at least 20% a year? This sets a trend for automatic growth.
Product Advantage: Is your product 10x better than the competition? Clear differentiation is crucial.
Acquisition Advantage: Can your startup grow without relying on paid acquisition? Word-of-mouth is a powerful channel.
Many entrepreneurs believe that demonstrating a successful track record in paid advertising through platforms like Facebook, Twitter, or Google Ads, along with presenting detailed metrics such as Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV), can prove the sustainability of their acquisition model. However, it’s crucial to understand that relying solely on paid acquisition can be risky.
If your company’s growth strategy heavily depends on paid advertising, it’s a vulnerable position to be in. As your popularity surges and revenues reach substantial figures, you’ll inevitably attract fierce competition. Think of it as becoming a significant player in a game where newcomers constantly join, making it harder to maintain your edge.
A prime example of this scenario is evident in companies where most of their early growth was fueled by paid acquisitions. Over time, this advantage eroded as the market became saturated, leaving them with limited room for further expansion.
The key is to explore acquisition channels that require little to no financial investment. The most potent and sustainable growth often comes from word-of-mouth referrals. Cultivating a product or service that people naturally want to talk about and share with others can be a game-changer.
In the initial stages of your startup, when funds are tight, focusing on methods that don’t require a significant financial outlay is not just a necessity; it’s a strategic advantage.
This is why startup advisors often stress the importance of doing things that don’t scale at the beginning. It’s about finding creative, low-cost, or preferably, no-cost strategies to grow your business organically.
5. Monopoly Advantage: Does your company become stronger and harder to defeat as it grows? Think network effects or winner-takes-all scenarios.
The concept of having a monopoly in the business world isn’t about the traditional board game with a monocle-wearing tycoon.
It’s about whether, as your company grows, it becomes increasingly challenging for competitors to defeat you. In essence, do you get stronger as you expand?
Companies with network effects in marketplaces exemplify this phenomenon. In these winner-takes-all scenarios, one company tends to dominate. Network effects mean that as my network within the platform grows, so does the strength of my company. The value of the product or service escalates in tandem with the expanding user base.
You can check out the Y-Combinator video here.
THIS WEEK’S NEWS RECAP
Major News In VC, Startup Funding & Tech
Microsoft bought nearly 500K Nvidia Hopper chips this year. (Link)
OpenAI may pay its nonprofit arm ‘billions of dollars’ in conversion to for-profit. (Link)
OpenAI's o1 model is now available for developers. (Link)
Menlo Ventures and Anthropic have picked the first 18 startups for their $100M fund. (Link)
NVIDIA’s latest compact generative AI supercomputer is also its cheapest. (Link)
The DOJ wants a Perplexity executive to testify in its Google antitrust case. (Link)
Salesforce plans to hire 2,000 people to sell its AI products. (Link)
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TWEET OF THIS WEEK
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