What it means to be a compound startup

Hearing the word “startup” makes us picture a small team working hard on one big idea in a small garage in Silicon Valley. It’s an adventure of finding one critical solution to a big problem.

The typical startup method has been the way to do things for a long time — finding one thing you’re good at and doing it better than anyone else. After that, the founding team sticks to it to pursue the many other things they may encounter on the way.

Yet, sometimes, sticking to just one thing can mean missing out on other cool ideas, and you might find many other people trying to solve the same problem as you.

Now there’s a model different from the usual one: the “compound startup.”

Instead of just focusing on one solution to a big problem, you’re looking at many solutions that connect together to make an even greater picture. It implies looking around and seeing all the other problems you could be solving. You still focus on one problem at a time. You still create a solution for one problem. However, you create other ones that fit other problems.

So, why stick to one when you can create a whole bunch?

It’s about making things that work together like a team. Multiple companies have been following that model, such as Hubspot, Atlassian, and Apple. They didn’t just make one thing; they made many things that fit together. And it’s interesting to study as it’s like discovering a new way to play the game.

Example of a compound startup

Let’s talk about Atlassian, a name you’ve probably heard often if you’re into product management and software development. Most of us know Jira, that tool we all have a love-hate relationship with. It’s everywhere in our world, helping us keep track of our stories, epics, and what we need to fix. In the product world, Jira is the go-to tool for keeping everything on track.

However, Atlassian continued with Jira. Imagine starting with one cool idea and growing it into many amazing tools. That’s what they did. After Jira, Confluence appeared in 2004.

These tools were all about bringing software teams to work better together. They’re like digital meeting rooms where everyone can share their ideas and documents and collaborate.

Fast forward to today, Atlassian isn’t just about Jira anymore. They’ve grown into this huge portfolio of 16 different products. They succeeded in building a toolbox where each tool does something special for different parts of the product development lifecycle. They didn’t just make new tools; they also acquired some of them. For example, they acquired Trello for $425 million in 2017, a simpler and great way to organize projects.

Atlassian is like a one-stop-shop now for the whole journey of making a product, from the start of an idea with Confluence to managing all the coding with Bitbucket. They’ve made it so that different teams can find exactly what they need in one place. It’s pretty awesome to see a company that started with one product grow into something that covers so much.

Growing big while staying clear

Parker Conrad, the CEO of Rippling, said something that stuck with me:

“I actually think there’s a misconception that the way to build product quality is to focus very narrowly. And that’s the thing that I disagree with the most.”

This idea hits home when we think about Atlassian and Hubspot.

Those platforms became omnipresent. Every company takes them as a standard to achieve their strategy. On top of it, most of the companies have been using them as products. Once you max out one of your solutions, how do you continue to grow? How do you not become obsolete?

For example, you don’t want to be like Facebook, once seen as the standard and precursor of social media and now considered the platform where your parents hang out.

Further, becoming bigger means being more complex. When you try to make something for everyone, sometimes, you must make it perfect. As big as you are, you also start seeing more new entrants coming and getting part of the pie. This is what happened with Atlassian.

So, what did they do when faced with this big decision? They chose to think outside the box and innovate. Atlassian didn’t just sit back and enjoy the success of Jira. Instead, they looked at what else their users might need. They started offering various solutions by bringing in tools like Confluence, Bitbucket, and Trello.

The latest acquisition of Loom for $975 million proves the point.

It was about more than just keeping their users happy with Jira. They wanted to give them a whole set of tools that worked well together — taking care of and supporting each step of the journey and adding new items to solve the problems encountered during the user journey.

Navigating growth

When you’re leading the pack, the big question often is “What’s next?” It’s like being a champion who has won the big game and now must decide how to keep winning. For a company at this juncture, the options are clear but challenging. Do they keep perfecting their winning formula or explore new territories?

We can see currently Airbnb being in this challenge.

We must remember that the point of a startup or those companies at high capitalization is to continue their growth and scale. Unfortunately, the markets are finite. It’s hard to play an infinite game within finite parameters.

This strategy has been repeated again and again. This is why mastodons like Microsoft or Google still perform in an ever-changing landscape. They saw the ever-changing landscape of business needs and the growing demands of teams and organizations.

The compound startup approach to embrace the big picture

So what is the right answer? Focusing on one problem, going all in, or offering a suite of products and adopting the compound startup mindset?

It’s important to clarify that it isn’t about having a lot of products. It’s about creating an ecosystem of independent products that bring value to each other. It’s like building a toolbox where every tool has its unique job, but when you use them together, they can do even more amazing things.

Take, for instance, how Atlassian paired Confluence and Jira. By itself, Jira needed more documentation. You couldn’t write down much in a story, which quickly became cumbersome and unreadable. Confluence is great for writing down ideas, details, project plans, or test playbooks.

Living in the same ecosystem means you can use the information and keep the user in context throughout the experience. I use, for example, Apple Products. The fact that I can seamlessly connect my Airpods and switch them from my iPhone to my Mac is a pain-free experience.

Atlassian does exactly the same thing. While I am writing down a project plan or PRD in confluence, I reference tickets, epics, bugs, or tasks. I also use this integration to bring relevant information such as the status, the title, and the dependencies. It gives my reader a contextual experience without looking for data in another tool.

At their Investor Day 2022, Atlassian talked about their strategy and said, “We can amortize our R&D efforts across multiple products for maximum return. Whenever we invest in new functionality, we build it into the platform supporting all our products instead of building features on an ad-hoc, per-product basis.”

We know how research and customer discovery are the foundation of every great product. By covering a large spectrum, they can get more out of their discovery research session and multiply the benefits of investment.

Components of a compound startup

So, what makes these compound startups different? It’s like they have a special recipe for success. Let’s check out the key ingredients of the compound startup.

As I explained in my example of how I use Apple products, those companies build an ecosystem. Their mindset and culture are on the bigger picture. They think first about the product portfolio. It is exactly as it sounds — an ecosystem of products that serve various customer needs.

There are certain difficulties that arise with the compound mindset. They can’t focus all their efforts on only one problem. The compound startup strategy needs to strike a balance between solving the right problems without putting too much effort into edge cases.

The way to achieve this strategy is to focus on the process. Returning to Atlassian’s example, they look at the development process. They are not focusing on one target customer, such as the product managers or the engineers.

If we want to understand their strategy, we must zoom out. They don’t adhere to the traditional startup business model. The problem, value proposition, user needs, and solution compound startups create are all directed towards a process.

The amazing thing about focusing on the process is that it is agnostic of the organization, people, country, or language. How we develop products in the US is the same as in Japan. Sure, there are differences, but those differences are generally due to the culture and how people are.

Agnostic solutions allow them to grow quickly and help standardize their solutions. This standardization offers advantages in terms of research, success, sales, and support. Compound startups can mutualize their efforts. One customer discovery exercise conducted for a specific product can uncover findings for another portfolio product.

The challenges of being a compound startup

Compound startups may seem fantastic when considering their long list of benefits. However, every coin has two sides. These types of startups face their unique set of challenges.

Developing a product portfolio and implementing a process are appealing ideas. Yet, making them a reality is a complex and challenging journey. Success is not guaranteed, and the required resources can quickly spiral out of control.

Take product portfolio complexity, for instance. Imagine each product as a cog in a machine; every intersection needs to function flawlessly with the others. Each product should not only excel on its own but also enhance the others, creating a dependency between them. Every intersection and connection introduces its management challenges, potentially leading to an exponential increase in complexity.

Like any organization, compound startups operate with a finite set of resources and capabilities. The critical question is how to deploy these effectively. Each product demands attention, and neglecting even one can significantly impact overall growth.

The complexity doesn’t just stem from establishing roadmaps or strategies. It also places a heavy load on customer support and training. Understanding every aspect and deriving full value from the ecosystem can be daunting, accessible only to a select few.

Internally, support, sales, and customer success teams also require comprehensive training. Developing content and playbooks for support or sales quickly becomes a complex labyrinth that employees must navigate.

Turning to external challenges, compound startups face a constantly evolving competitive landscape. Founders are continually seeking innovative ways to offer solutions to the market.

Consider Jira as an example. Despite widespread complaints about it in the industry, users don’t readily switch to other solutions. Over the last decade, competitors like Clubhouse have emerged, yet Jira retains a strong user base.

Having an extensive product portfolio complicates maintaining a unified brand. The overarching message and brand identity must be cohesive, ensuring all products fit under one broad umbrella. This affects market messaging. Compound startups must articulate why each product is tailored to meet the specific needs of different target segments.

Conclusion

Compound startups have been a part of the market landscape for quite some time now, and many of us interact with them regularly in both our professional and personal lives.

The journey for these startups to firmly establish themselves can be lengthy. Take Uber, for instance, which continues to broaden its range of services. In the UK, Uber has started offering train tickets and is branching out into other modes of transportation.

However, once these companies have established a solid footing, competing with them becomes an incredibly tough challenge. Consider the rivalry between Slack and Microsoft Teams. Microsoft leveraged its existing stronghold in the office market to expand its user base, effectively dominating the market with a solution that rivals Slack.

Ultimately, for founders to navigate their compound startups to success, it demands immense discipline, resilience, and a strong foundational strategy.

Featured image source: IconScout