Parker Conroad on Compound Startups
Parker Conrad, founder of Rippling and Zenefits, thinks there’s a lot of value to compound startups, which are a suite of products that solve related problems. For example, Rippling tracks employees, payroll, benefits, corporate credit cards, apps and devices. Compound startups are a bunch of apps on top of a common platform and data layer. In case of Rippling, the data layer is the employee graph, and the platform offers features like reporting, analytics, workflow automation, and role-based access control.
Even in 2021, Rippling had 10 products each at $1m+ ARR.
Why build a compound startup?
✅ When you build a compound startup, you solve deeper business problems beyond the scope of any one point solution. You build a global maximum instead of a local.
✅ A compound startup has an underlying platform / data layer, and then multiple apps on top. Some problems are better solved in the platform layer. But a point solution has no such layer, only an app layer, so it has to solve these problems non-optimally.
✅ A company may have 100 point solutions, which are unwieldy to mange. For employees, it’s easier to use a compound1 startup than a whole bunch of separate ones with inconsistent UX. That’s like buying an engine, seats and brakes and assembling them into a bad car. Integration lets you deliver benefits that you wouldn’t otherwise be able to. For example, instead of buying a car AC and seats separately, if you were to buy a car, you’ll get ventilated seats.
✅ CAC is amortised between the multiple constituent products, while point SaaSes have to incur this cost repeatedly2. R&D costs at the platform and data layers are also amortised. You can pass along some of this savings to the customer, so they pay less than it would have cost to buy a bunch of point solutions, which in turn helps you win the deal. And you get more profit than if you’d sold only one point solution. So it’s a win/win.
✅ A decade back, as a lot of SaaS apps were built, there was a question as to how many of them will turn out to be billion-dollar companies. The answer was: all. Every one of them became a billion-dollar company. But that means that the low-hanging fruit of point solutions has already been plucked. Instead of competing in an overcrowded market, compete in a market that everyone is overlooking.
What to keep in mind when building a compound startup
A compound SaaS is as strong as its weakest link. If even one of the constituent products is mediocre, you lose the deal.
You need to organise your company into business units, one for each product, headed by a strong entrepreneurial leader, for parallel execution.
Only if it’s the same employee using the different apps.
This matters because many startups die because the CAC is higher than the LTV.