One of my first seed investments was in a company that was looking to disrupt the textbook publishing space. The team was terrific, and the premise was to develop a digital textbook product that was 20x cheaper, better, and more convenient than traditional textbooks. The team brought an amazing product to market but the business just didn’t work.
The core mistake we made was misclassifying the kind of business we were building. We thought that college textbooks were a media business, but it was not. Students didn’t buy expensive textbooks to spend hours in the content learning. They bought them so that they had them available just in case. Buying the product was as much (if not more) about buying peace of mind vs. buying the information actually contained in the pages.
Other, more obvious examples of “peace of mind” businesses are insurance or credit monitoring. There are others that are less obvious than these, or exist on a spectrum, where buying “peace of mind” is an important component of the value proposition. What’s interesting about these sorts of businesses is that they behave very differently from most other businesses that startup founders tend to build. For example, high levels of user engagement are a common mark of successful software products. But for peace of mind businesses, high engagement is probably a bad sign.
The point of the businesses is for the customer to feel like they don’t have to worry about the problem you are solving. So you only want to engage a customer enough to effectively do your job and to remind the customer that you exist and are worth not cancelling. In a way, a lot of engagement may just give a consumer more opportunities to question whether they ought to be paying for your service and lead to more churn. Engagement for peace of mind businesses is not important.
Peace of mind businesses are built on trust in a way that is probably 10x more important than most other types of companies. The whole point of the business is to not have to worry about the problem they are solving, and so any failure to deliver on one’s brand promise can be disastrous.
Establishing credibility is incredibly difficult as well. Insurance companies have decades if not centuries of brand equity to draw upon. The Lifelock founder established credibility by sharing his social security number with the world. Textbook companies spend most of their time and money winning over college professors, who are the single most important driver of the customer’s purchase decision.
This dynamic makes it insanely difficult for startups to get initial traction in these categories. They often require huge amounts of capital to even get in the game, or a very clever marketing hook or defensible channel to get initial traction.
Not that many businesses are “peace-of-mind” businesses, but those that are can be beautiful. If one is able to scale the initial barrier to entry, they can be rewarded with great customer retention and potentially amazing gross margins. These businesses tend not to be winner-take all, but can be very durable.
This is why insurance companies have been around for 100+ year and why textbook companies could get away selling $200 paper to the most digitally savvy demographic in the world. We have a couple companies in our portfolio today that are taking this sort of strategy, but I’d love to find more.