B2B VC: Why everyone’s talking about product led growth (PLG)
There has been a subtle movement taking place in the world of software. It has been building momentum for several years, but at the same time, easy to miss if you haven’t been watching — the rise in product led growth (“PLG”) models.
For those unfamiliar with the term, PLG is first and foremost a go-to-market strategy, where the product sits at the centre of customer acquisition, retention and expansion. Software has traditionally been a top-down model — products are designed in isolation from the customer, sold to executives via sales teams, and then pushed down to the end user. PLG flips this around — end users are the first adopters, turn quickly into advocates (when things go right), and help spread the product throughout an organisation.
Virality as a tool for adoption is nothing new to consumer-centric industries (think of any social media platform or consumer brand), and part of our Felix DNA. Over the years, we have been lucky enough to back visionary teams tapping into this force — from Peloton and Farfetch, to Deliveroo and Van Moof (to name a few) — and it is exciting to see this emerge in B2B.
One of our core themes at Felix is the ‘Consumerisation of the Enterprise’. We have seen first hand how consumers are demanding more from their technology. The iPhone paved the way for a best-in-class experience from the palm of your hand, and people are now expecting similar (quality+experience) from the tools they use to work. In parallel, the customer journey has evolved, as the way we buy & interact with technology has changed. We want to touch and feel products before purchasing, and the same goes for software. Today, the words ‘free-trial’ and ‘subscription’ are household parlance, and these concepts form the pillars of PLG.
So, what does PLG look like?
PLG is a mindset which needs to permeate through an organisation and become part of the DNA. It goes without saying, from the outset, PLG businesses recognise the need to invest early in product expertise. One of the easiest ways to spot a PLG business is to ask the simple question — who is responsible for revenue? A traditionalist answer would be ‘the sales team’… A PLG answer would be ‘everyone’ (or a dedicated growth team).
On a more granular level, we’ve recognised that PLG companies often:
- Focus on the end-user: It all starts with understanding the end users pain points, and designing a product which addresses them. Often there is product personalisation involved (dashboards, workflow integrated tools, customised homepages and prompts) and usage-based pricing, but at a higher level it means thinking about who will use your product and how can you make their life easier.
- Reduce (or eliminate) onboarding friction: Taking our consumer learnings, you need to make the onboarding process as frictionless as possible. Once people are using the product, it will spread, but only if it is easy to get going. Free-trials and freemium options are a start, however you need to minimise human involvement in the sales process…. and definitely don’t make people book in consultation sessions or demos!
- Distribute natively: Even an amazing product won’t sell itself. You need to align your distribution with the customer’s use case and where they spend their time. If your product resonates with digital native SMEs, you probably want to distribute through Shopify. Is it more consumer facing… think about the App store. If you have multiple modules or use cases, make sure these are self-serve so consumers can land and expand all on their own.
- Iterate, Understand and Improve: Going back to #1 again — listen to the users, actively solicit feedback and iterate the product. Look at the data, understand how people are interacting with your product and then apply all of this to continuous improvements.
Why we like PLG SaaS?
From an investors perspective, PLG SaaS companies have innate benefits to their top-down counterparts. Linking growth to product usage leads to improved unit economics — higher utilisation (pricing potential), longer retention (customer lifetime value) and reduced customer acquisition costs. Network effects coupled with feedback loops mean best-in-class PLG SaaS products have the potential to become mission critical tools at an enterprise and industry level. We also believe the models’ virality helps PLG SaaS companies grow faster.
This has led to rapid value (and valuation) creation for both private and public markets. Some of the most successful SaaS IPO’s in recent years have been PLG companies — Slack, Zoom, Snowflake, Shopify… a long list of success stories any investor would be envious of.
Beyond value creation potential, PLG SaaS feels like the natural evolution for software. By putting users at the centre of design, we should see further innovation across the spectrum, leading to better products, new technologies, and improved experiences for us all.
Closing remarks
Our manifesto is available online to anyone who wants to read it (here), however perhaps less well known are the three pillars of our Investment Thesis:
- The Power of Brands
- The Power of Design; and
- The Power of Data
All of our investments embody one or more of these pillars, and it comes as no surprise, but we believe the best PLG companies touch on all three. Many of our B2B companies have already started adopting PLG frameworks (including Travelperk, Umind and Adverity), and we are on the hunt to find more amazing founders with the same mindset.
For any PLG founders reading this article, we would love to hear from you, or more broadly anyone passionate about the topic wanting to chat feel free to drop us a line at joseph@felixcap.com
About the Author: Joseph Pizzolato (JP) is an Investor at Felix Capital with 10+ years experience. He specialises in B2B software, Fintech and Consumer Internet businesses and is particularly passionate about PLG.
