"Advertising doesn't work at scale", and other myths about growth 👀

addressing one of the most common misunderstandings around ads

Raise your hand if you have heard the phrase “Facebook ads don’t work at scale”. That you can’t obtain true growth through paid acquisition. 😅

Keep raising your hand if you’ve heard the advice that an early stage startup should be driven by “organic growth” and not even try any advertising.

I know that many of you reading this might truly believe this advice, and I know it was given by some famous people who are honestly a lot smarter than me - still, I know this advice to not only be deeply wrong but detrimental to a startups growth.

Allow me to explain. 🙏🏼

Despite all the hype around growth loops, growth at scale is almost always broken down into a small group of core channels.

For every startup, there is usually 1-3 different channels that are the core driver of users.

This can be anything from viral referrals + built in network effects, to Facebook/Google ads, to a direct sales strategy, a distribution system (think Walmart or Amazon), or maybe you’re OG Airbnb who “hacked” Craigslist to list your postings.

Channels drive growth. They are the first bottleneck. While important to maximizing growth rates, no amount of product work around increasing engagement, activation rates, or reducing churn is going to save your business if there is no way for people to start using your product.

Engagement, activation rates, and churn are key indicators of an amazing product, NOT an amazing market.

So here’s the thing about advertising. What do you think are the largest channels of growth that exist in the world?

A: Facebook and Google ads.

For small startups being able to profitably advertise on Facebook and Google is one of the clearest signs of basic PMF. It means that people are searching for the problem that your product solves, it means that you’re able to show your product to a market of people who love it so much they click through and then purchase.

For large startups with huge markets and strong PMF, they are very often the #1 driver of new users. There is a reason why over $175 billion dollars a year are spent between these two channels alone. 🤯

Why do investors think advertising doesn’t scale?

Short answer - it’s because “Facebook ads don’t work anymore” is an extremely common way that products run into the cap of their market.

What happens super frequently is that investors will find a over hyped startup with “solid PMF” and put in a bunch of money. They’ll do all of the measurements, is it passing the Superhuman PMF survey, what’s the NPS, how’s the churn rate, does the market seem really big?

The problem is that they make a critical mistake around the market size.

The real market size isn’t an industry report put together that says there’s X million people in Y market. The actual market size is determined by how many people your #1 channel of growth is able to reach.

A market with 10 billion people doesn’t matter if you’re not actually able to effectively talk to any of them.

So the investor sees this product that users love growing super fast, they put in a ton of money… and then the Facebook ads start to cap out. They see the startup frantically increasing the CPA targets, moving from a 6 month payback period, to 12 months, to 24 months, to 4 years.

And the startup of course is driven by high expectations, got to go from that $100M series A to the $500M series B.

Eventually the startup dies because they’ve hired too many people and their #1 channel of growth has hit its cap, but they’ve promised investors huge returns that they ultimately aren’t able to materialize.

The issue here isn’t “spending money is bad” the issue is that the market wasn’t quite as good as the investors and founders thought it was. The market wasn’t really 10 billion people, it was the 1 million person audience you were able to target on Facebook (which was your largest channel of growth) and that dried up super quick.

You had a great product, for a small market.

Advertising At Scale

Advertising absolutely works at scale, if your market is good and your product is good. There is nothing special about “advertising” vs any other channel of growth.

It doesn’t matter if your #1 channel is spending money on Facebook or posting your product listing on Craigslist. Your market cap is going to be the wall you run into when you have maximized your top channels of growth.

Even if Facebook and Google ads were 100% free, the audience you are able to reach on those platforms is fixed.

What happens with these channels at scale in a good market with a good product, is that you are able to spend a lot of money profitably. Your actual audience size is maybe 20M-50M people and you’re able to spend $5M a month with a 100% ROI on a 12 month payback period.

How good your product is, starts to play an impact in how effectively you are able to maximize your ads.

Improve your engagement + churn? Boom your LTV now goes from $50 to $100 and you’re able to increase your tCPA to double your MoM Facebook volume. How good your product is directly impacts the volume you’re able to purchase, how profitable your ad campaigns become, and how competitively you can bid against competitors.

Facebook and Google ads aren’t just good channels, they are arguably some of the best channels of growth in human history. They aren’t the #1 channel for every product in the world, but every channel “breaks down” at scale if your market isn’t as good as you think it is.

Don’t let “advertising doesn’t work at scale” be a scapegoat for not focusing on creating a product that works for some of the best channels of growth that exist.

Build amazing products around amazing markets

This is basically the thesis for my entire career in tech. Don’t build products then go searching for a market, start with a market and build a product that fits it.

And by market, I mean a specific channel of growth.

For this Substack, my market is people in the growth/marketing industry and my “channel” is ABM style email. My market is freaking huge it’s like 1,000,000 people that I can easily reach (not an industry report but the actual size of my email list).

I didn’t start out going “i’m going to build playbooks around organic instagram reach” and then tried to find a way to get people to read my dog poo. I figured out a strong means of distribution, a clear underserved market I had a deep understanding around, and then started talking to my users to figure out what they wanted me to write about.

If you are building for developers look at the Google search volume it’s the 1st thing they do when they have a problem. If you’re building for addicts look at how many people are searching for a quit timer on the iOS store. If you’re building for hippies look for how many of them exist on a Facebook audience.

A good market means millions of searches or audience members. If it isn’t really big, your LTV should be huge otherwise you will run into serious issues scaling no matter what your channel paid or unpaid.

Identify a large underserved market, figure out which channels best reach them, and then build something they love. 🔥