RavingFans® – how can it be used in growth and expansion-stage companies?
[Video Inside] – How To Design Your Raving Fans Product
28 December
How to be a Data-Driven Investor
7 February
Beneath the big names, shiny buzzwords, and glowing “statistics”, in a dark corner of any company, there’s an activity in which the real value of the company resides. It is something that cannot be easily copied, faked, or artificially manufactured. You cannot just throw more money at it and make it grow. The company either has it, or it doesn’t.
They say that half of what humans do is about making others believe what isn’t true. That’s probably true in startups, as well. In nature, when a species is fighting for resources that will ensure its survival or avoid predators, it can sometimes achieve that aim by “bluffing” or pretending to be something else.
When investing in growth or expansion-stage companies, investors sometimes lose tens of millions of dollars (and sometimes even more, when they make the wrong decision).
The jury is still out on the Alibaba group investment of US$215M in Tango and the US$900M acquisition of Viber by the Japanese company Rakuten, but it would not have been difficult to examine these companies and to verify whether or not they have a high RavingFans® score.
RavingFans® is an algorithm that is designed to detect products and services that have managed to create a strong emotional connection with their customers. It processes usage data in the product / service, looking for patterns of irrational behavior—obsessive, compulsive and addictive behavior by a critical mass of users.
Once a critical mass of Raving Fans is formed, that means that the company has managed to create a group of customers that will ignore alternatives in the marketplace and will consistently prefer that company’s offerings, regardless of whether it’s the best in the market or the cheapest. In essence, Raving Fans® is a data-driven method to ascertain whether the company has managed to create a powerful brand in the marketplace.
Why do you need that if you’re an investor considering an investment in a growing company? If the company hasn’t created a powerful brand, how come it has millions of users and is growing?
Consider the following scenario:
You’re a CEO of a company that is making mediocre products – not great, not bad. They’re kind of “okay” products. But you want growth, and your product development team is not that great (obviously). What can you do?
The easiest way for you would be to spend money on advertising and PR: buy more users, issue public relations announcements, and make some noise. If investors like you, they will give you more money, and you can spend more on making noise and getting bigger. Eventually, someone will buy your venture—even if they don’t like the technology—just because you’re so big. That’s the theory, anyway.
Now, if you’re an investor, and what you’re really investing in is that CEO’s talent for storytelling, that’s fine. But if you’re looking to invest in a technology venture with some substance and a competitive advantage, you want to go with a different type of company. You should look for a company that has many customers who look at its brand, products, and services, and tell themselves “I must have this in my life”.
(As an exercise: If you’re a US resident or have US-based friends, ask them if they would mind giving up buying from Amazon. The reactions you will get will be priceless.)
Obsessive, addictive, and compulsive customers are the best customers imaginable:
- They fall in love with your product
- They use them as much as they can, sometimes for things you didn’t envision
- They tell their friends about it and try to get them to fall in love with the product too
- They ignore better, cheaper alternatives in the market, and recommend to their friends to do the same
- And they do all of that without you having to pay them for it, or even ask them to do so.
What RavingFans® companies don’t need to do, for example, is “buy” users. They have a unique recipe concocted in their labs that makes some customers unexplainably fall in love. Every time you meet a venture that explains to you why it needs tens of millions in advertising dollars, ask them if they recall the WhatsApp, Instagram, or Facebook launch campaigns. Great companies do not need to buy users. Great companies have many Raving Fans® customers.
The Raving Fans® algorithm will tell you:
- Whether the growth of the company is real or based on paid advertising. A company dependent on advertising is also a company depending on advertising prices not rising, as well as the availability of advertising, and it also shows that it doesn’t have enough word-of-mouth advertising from satisfied customers to support its product.
- Whether that growth is sustainable or not (the algorithm also detects the levels of retention). Some companies are great at getting customers to sign in or download their product, but not so good at getting that customer to use it.
- Whether the company’s story, while great, has any facts to support it.
If you’re risking a lot of money and spending time on due diligence anyway, using the Raving Fans® algorithm as another tool to verify your assumptions would be the sensible thing to do.
