Why A VC Believes Product Led Growth Will Drive A European Software Boom

It takes a brave and perhaps foolhardy founder to launch a startup aimed squarely at the enterprise software market, not least because corporate buyers tend to favour established solution vendors while shying away from the perceived risk of dealing with young and relatively untried providers. Added to that is the sheer expense and energy required to put sales teams out on the road to meet buyers face to face.

But then again, as Itxaso Del Palacio, a partner at European VC fund, Notion Capital points out, the enterprise market is not the only game in town when it comes to business-to-business sales. “The B2B market has moved from being enterprise focused to being SMB focused,” she says. “That’s because SMBs and mid-sized companies are now using tools that were previously associated with the enterprise. It’s a very good time to be investing in B2B software.”

And as Del Palacio sees it, there are huge opportunities for Europe’s business-to-business software startups – particularly if they adopt the kind of product-led-growth strategies that have proved so successful for companies such as Dropbox, Calandly and Slack.

But what does that mean in practice? When I caught up with Del Palatio at the end of last month, I was keen to find out why she puts so much faith in the product-led growth concept.

Founded 13 years ago, Notion Capital focuses largely on Series A investment in software-as-a-service, cloud and business-to-business solutions. With £700 million in assets under management, the fund has invested in around 80 businesses to date, including the recently exited Messagelab and Star, sold respectively to Symantec and Claranet. Other investments include Go Cardless, Currency Cloud and Tradeshift.

Investment Philosophy

In terms of investment philosophy, Del Palacio says her starting point is always the product. “I am a very product-led investor,” she says. “I’m looking for companies that are willing to build the very best products.”

But the phrase product-led growth has acquired a much more specific meaning and one that ties in neatly with the era of software-as-a-service. Put simply, because so much software functionality is delivered from the cloud, it has never been easier for innovative vendors to invite potential customers to try out a product on. Often there is a free trial period or a tiered payment system with the basic level being free, with charges for extra features.

By getting the product into the hands of users – and usually, there is no need for an on-site visit by sales or technical teams – vendors have an opportunity to become indispensable. Users move from free onto paid-for plans and more importantly, they tell others in their organisations. Thus, the product itself – or to look at another way, the user experience – drives growth.

Del Palacio says this model has made it possible for companies at the Series A investment stage to seriously aspire to become major software providers in a relatively short period of time. “There is a very short time to value,” she says.

That’s the theory, but is it really that easy? After all, as Del Palacio acknowledges “Only good products will win.”,

Try Before You Buy

And here’s the potential problem. In the try-before-you-buy software universe, end users are very likely to shop around for new solutions without feeling any obligation. To take an example. You could try a new type of cloud-delivered presentation software today and another one tomorrow. There is no risk in doing so. And potentially, there is very little loyalty.

So the challenge is simple. How do you avoid being replaced by the next vendor to come along?

Del Palacio says it’s partly about quality. “If there’s a great user experience people will want to go on using the product.” As such, it is important to make the product in question “sticky.”

It’s also perhaps a challenge for investors such as Notion Capital. How, for instance, does Notion assess which of its potential investments offer the kind of user experience needed to underpin a product-led growth approach?

Del Palacio says engagement metrics and the kind of validation generated by good net promoter scores are crucial to investment decisions.

Eyes On The Prize

The prize is the ability of the company to sell anywhere in the world, without having to hire big sales teams or have people on the ground. Del Palacio says this is a particular boon for European companies planning to sell into North America. “Anyone from anywhere – Estonia, Germany, Denmark – can sell to the U.S. without having to go there,” she says. “Half the software companies in Europe have some element of product-led growth.”

So is this the secret sauce that isn’t really that much of a secret? Certainly, Del Palacio believes that product-led-growth strategies have been accelerated by the pandemic – which put face-to-face selling on hold – but she says it’s early days, particularly in Europe. “It’s still a new phenomenon. We’re still looking at ways to implement it. There is no playbook,” she says.

So perhaps the secret is not the concept itself, but the execution. Somehow companies like Zoom and Slack have become synonymous with video conferencing and comms. Aspirants need to think about how their own product rises above the crowd and the factors that will – or could – convert the curious into long-term users. That might not be an easy formula to get right, but Del Palacio is confident that a greater focus on product-led growth will propel many European companies onto the world stage.