For the longest time, we thought we didn’t need a referral system for FeedbackPanda. After all, we had a lot of our customers talk about us on social media anyway.
Well, it turns out that a referral system can super-charge your word-of-mouth marketing. That is precisely what it did for us. After we implemented a dual-reward referral system, we got immediate results, which led to 40% of our new signups come through recommendations.
And those customers were different. Their retention rates were higher; their conversion rates were higher. Why was that?
A referral system is a trust transfer mechanism, mainly when it’s being employed within a tribal structure. Your advocates put their reputation on the line, and the referred users know that. They assume that other tribe members wouldn’t recommend something terrible to your peers.
But referral systems don’t work for every business. I’ve been part of many companies that tried to establish a referral system only to see it fizzle out.
Here are a few reasons why it might not work:
- Customers might lose their edge by referring others. If your product makes them so much better than their peers, sharing the existence of your product might backfire.
- Customers might have to admit that they are novices in their field by referring others. If your product shows that they are just starting out, this can be a reputation hit your customers might not be willing to take.
- Customers might have to admit that they need the savings provided by the referral rewards. In other words, they might imply that they’re financially unstable by referring others.
Luckily, the inversions of those reasons allow you to build great referral systems:
- Network Effects: If your customer has something to gain from new users joining the service because there is some collaboration going on, they’ll gladly share their referral links.
- Reputation Gain: If your customers can show that they’re experts by using your service, they can establish themselves as reputable sources of advice and guidance in their tribe by talking about your business.
- Being Well Off: If using your product is an indicator of their financial success, they won’t mind talking about it at all.
If you want to learn more about the fundamentals of referral systems, reward systems, or the risks and opportunities of such systems, please listen to my The Bootstrapped Founder Podcast episode on referral systems or read the full article called Make It Sell Itself: On Referral Systems.
What Happened in the World of Bootstrapping
I’ve been reading about looking at bootstrapped businesses as an asset class this week. Ultimately, this was inspired by the Earnest Capital Investment Memo from a few months ago. Ever since I read this memo back then, a few thoughts have been zooming around in my head.
Unlike real estate and stocks, there are no easy ways to invest in bootstrapped businesses. You can open an online depot and start pouring your money into ETFs and Government Bonds. But honestly, what do I, a software engineer, know about the intricate psychological swings of the Stock Market?
You should invest in what you know. For most software entrepreneurs, that’s small bootstrapped businesses. But I can’t just open a Bootstrapped-SaaS-depot and start investing in companies like Transistor.fm or Nomadlist. Why is that?
Why is it that there are no opportunities to funnel capital into our bootstrapped SaaS businesses? Not all investment is terrible, and many bootstrapped companies take non-venture capital at some point, through a loan or, in the most bootstrappy way, through personal credit card debt. Even Silicon Valley is starting to understand that debt is coming.
The open data movement has brought us incredible insight into SaaS businesses. Early-stage funding options like Earnest Capital have brought us the Shared Earnings Agreement, where bootstrapped businesses can get access to funding without diluting their ownership structures.
Matt Wensing, founder of Summit, recently talked about the opportunities that plug-and-play business analytics and forecasting tools represent on the Out of Beta podcast. That made me think: why is this happening now but was not on our collective radar in the past?
It is the interconnectivity of SaaS tooling that turned bootstrapped businesses from opaque puzzles into transparent engines of sustainable growth.
Ten years ago, you would have to look at hand-crafted P&L statements to understand the trajectory of a business. Additionally, you would have to trust the source of the report, which would be the entrepreneur trying to sell their business or find funding. You might get a peek into their books, and they might tell you roughly what kind of expenses they have. But the granularity of information is coarse, at best.
The level of insight you find here is limited to what the founder wants you to see.
Today, most bootstrapped SaaS businesses use Stripe or another subscription payment provider to capture their revenue. These services integrate with business analytics tools like Baremetrics or ProfitWell. They also integrate with business forecasting tools like Summit. If they are using Plaid, you can track how much they spend on every single service they use, down to the cent.
All of a sudden, you have centralized, unbiased sources of information that deliver science-backed reports as well as the raw data the reports were generated from. The kinds of insight you can find here are incredible. You are limited only by how well you can interpret it.
And by incredible, I mean genuinely incredible.
Let’s imagine a scenario here. You are looking at a SaaS business from a small-time investor perspective, trying to figure out if investing a small amount of capital might give you a reasonable return over time.
Not only do you have access to all of their past transactions, but you also have access to their bank account. Imagine the kinds of predictions you could make from correlating changes in expenses with revenue movements. Facebook ad spend went up; revenue didn’t move. The founder started a customer service tool subscription, and churn rates went down by half. You see that the founder has hired three people over the last year, and every time, the MRR doubled.
You like what you’re seeing. You look into their business forecasts and how well they reached them, and you see that goals were achieved over 95% of the time. You look at the prior businesses of the founder, and you find that they got more and more successful over the years.
This level of insight is impressive. Most importantly, it does not involve any information distortion. And it can be done at scale, as quantitative analysis. Machine learning systems and “artificial intelligence” will find the most reliable and the most promising businesses from inside these interconnected third-party services.
For us founders, this might sound dangerous, as our business looks like an open book. The analytics and forecasting providers have understood that, and they have taken steps toward anonymizing the raw data before exposing it through reports. I think anonymized data and founder-directed generalization (like using categories for bank statement items instead of their real description) will be a necessity going forward.
I’m envisioning this to become a much bigger thing over the coming years. Tools, services, and structures will appear that allow institutional and private investors to find sustainable bootstrapped businesses to invest in. Invest in their profits without owning shares.
A whole new class of assets, with an entirely new set of tools.
Who knows, maybe you’ll be the one building one of them.
Links I found Interesting
Tim Ferriss, author of The 4-Hour Workweek (which I reviewed ), published a very personal blogpost called “11 Reasons Not to Become Famous (or “A Few Lessons Learned Since 2007”)”, detailing the unexpected problems that being a public figure brings with it. As many bootstrapped founders are building their businesses around a very public personal brand, I invite you to read this, even if it’s just to understand where this path might take you.
Anne-Laure Le Cunff has written about The ambition trilemma: freedom, stability, wealth this week. If you’re a developer, you will have encountered trillemmata before: the CAP theorem. If you struggle making a choice between being a freelancer, an employee, or an entrepreneur, this article will shed some light at the reasons why.
Bootstrapping Success Stories I Noticed (and one Not-so-successful one)
Tim Nolet of Checkly finally managed to pay himself for the first time this week. This is a great feeling for every entrepreneur. It’s validation, compensation, and altogether very encouraging. Great job, Tim. To many more!
Jason Swett was the founder of Snip, and he shut down his business a few years ago. We were chatting recently, and the learnings from his shutdown are as valid today as they were then. “I’m shutting down Snip. Here’s why.” shows the challenges of the hair & beauty industry for bootstrappers. Thank you, Jason, for reflecting on what must have been a very hard decision.
Thank you for reading this week’s edition of The Bootstrapped Founder. If you like what I wrote about, please forward the newsletter to anyone you think would enjoy it too.
If you want to help me share my thoughts and ideas with the world, please share this episode of the newsletter on Twitter or wherever you like or reach out on Twitter at @arvidkahl.
See you next week!
Warm Regards from Berlin,