For years, I've been obsessed with trying to find patterns to understand why some products just take off, while others have to work hard or don't grow at all.
I may have found an answer.
Miles Grimshaw, partner at Benchmark, talked about the concept of business genetics in an interview on the Invest Like The Best podcast.
Although the concept is more of an art than a science (his words), business genetics can be described as certain predisposing characteristics of a business that have a big impact on its ability to grow. Does the product have an uphill battle to establish its business model? Can it capture a sufficient share of the value it creates? Is it inherently sticky? Is it hard to move away from?
Some products and product categories lend themselves better to these things. They flow and don't need to come up with innovations around business models or distribution hacks.
What good business genetics look like? The best software business models have low churn, even negative churn, which in my view is a result of recurring customer engagement (proof of value) and deep integration into their customers' workflows (resulting in high switching costs).
Here's my list of good genetics:
Engagement: The product solves a high frequency / habitual use case, or there is a recurring external trigger that drives engagement.
Lock-in: The product creates an inherent feedback loop to get better and better over time, and/or the product accumulates valuable data and creates a data lock-in.
Expansion: The product has a natural demand for up-selling (B2B) or for inviting new users (B2C), without the need for hard selling methods.
Pricing: The product can charge based on usage and not just seats/features.
Most products won't have all of these characteristics. But you should aim for at least two.
Categories with good genetics are CRM, storage, systems of records, development tools deep in the stack, or collaboration software. Not surprisingly, this is where most of the most valuable software companies fall.
Here are some examples of products with good genetics:
Personio: Accumulation of valuable information (employee data) and deep integrations into company workflows (e.g., payroll, HR operations), grows with new hires.
Airtable: Accumulation of valuable information (databases) and deep integrations into company workflows (automations), natural upsell if the number of records grows.
Asana: Habitual use case (daily), accumulation of valuable information (project data), and natural flow to onboard users to streamline collaboration (from team to department to company).
Snowflake: Accumulation of valuable information (product data) and deep integrations into company workflows (analytics, automations), revenue grows as data streams of companies grow.
Peloton: High-frequency use case and external trigger (live classes), the product experience improves with connections on the platform, and the hardware creates a lock-in.
Notion: High-frequency use case (project management, collaboration), accumulation of valuable information (company-wide documentation) and natural flow to onboard users (from team to department to company).
These characteristics are an important part of the analysis of a product's and a company's potential. You can also use the concept to evaluate business ideas. Or you can tweak ideas and focus on better genetics.
Of course, you can build a successful company without these attributes. But having good genetics makes it much easier.
Photo by Sangharsh Lohakare on Unsplash