What it means to
'Invest in Product'

Advice for tech-enabled service companies.
Software is an investment. It costs money to build and money to maintain. If you're going to invest in software it's essential there's a clear view of the return on that investment. So, how should you evaluate a product idea and determine when it makes sense to invest?

The decision to invest in software or digital products is no different from any other investment decision. It starts with a business case. Technology investment needs to be linked to the primary revenue streams or value drivers within your business. This means starting with the key metrics that determine the success or health of your business and brainstorming how technology can improve those metrics.
The decision to invest in software or digital products is no different from any other investment decision. It starts with a business case.
If you're an events business, it could mean increasing the frequency of re-attendance or the cost of running an event. If you're an insurance business, it can mean accelerating the assessment of a claim.

In software anything is possible, so it's important to focus initially on the 'why' rather than the 'what'. And it's important to be 'default no'. Nine out of 10 product ideas are not worth building from an investment perspective.

A common assumption we encounter at Castle is that new software products can reinvent the core business, transforming a services company into a social network for instance. This is very rarely, if ever, the case. The smart application of software within an existing business means enhancing value drivers beyond the limits of what can be achieved with human resources alone.

Margins can be improved by reducing cost through automation. Or growth can be achieved by enabling new customers to self-serve through the extension of digital channels.
Over-investment in product at an early stage is another common problem we encounter. New product adoption now requires significant behavior change. No one needs a new app or website. Our phones (and our lives) are already full. It's becoming exponentially harder to achieve traction with a new product, even when you already have an engaged community of users.

Because effecting behavior change is hard, it's advisable to start small and build the simplest possible version of your idea and assess the response from your target audience or customer base. Our experience is that, if it fulfills a pressing need, people will engage even when the execution is primitive. All too often we see a great product idea lost within an over-engineered feature set that obscures the core value.

From an investment perspective, it's more sensible to build your initial product with web technologies that are accessible by anyone, demonstrate solid traction, then invest in native versions once the product opportunity has been validated. Native apps are powerful vehicles for delivering customer value, but the wrong vehicle for early stage experiments.The upfront cost of building apps for both platforms (iOS and Android) is substantial and regular upgrades by Apple and Google mean maintenance costs are high.

Over-investment in product also occurs at the expense of marketing and promotion. Too often we see significant investment in software accompanied by an expectation that users will find it and use it on their own. The vast majority of apps are abandoned after a handful of sessions, nearly a quarter are used only once and many are never downloaded at all. It's vital to have a communication plan in place that drives the necessary behavior change that precedes long-term adoption.

If you plan to generate additional revenue from a new product, ensure you conduct a realistic assessment of the available monetisation options. We often encounter the misguided notion that monetisation can be 'figured out downstream', once a product has been developed and deployed.

Although technology has witnessed rapid advancement in the last decade, revenue models have remained comparatively static. The most valuable tech companies monetise via models that are at least 150 years old. Our advice is, don't expect to 'discover' new monetisation models as (chances are) they don't exist. Focus on ones that are already established (charging for downloads, software as a service, advertising) and, if you can't foresee a path to profit, then question the value of the investment.

The value proposition of digital transformation within tech-enabled companies is substantial. It can increase valuation multiples and opens doors to capital. Most management teams understand the value proposition of transformation. But the path to achieving this transformation is not always clear and is frequently perceived as high risk. This is why a Digital Partner can be the right route for some.

As a Venture Services firm, Castle has helped dozens of companies realize their digital opportunity and ensure their investment in product is returned. If you're unsure how to respond to disruption in your industry, or how to start the process of 'tech-enabling' your company, then we'd love to chat. As partner and investor we think we can create significant value together.
Castle Digital Partners
Castle is a digital partner for management teams of software-driven businesses. We team with management to envision, design, develop and operate digital platforms, products and services that drive growth, market differentiation — and ultimately enterprise value.

We are a venture services firm operating as a true partner and investor in our portfolio businesses. We focus on software-as-a-service, digital commerce, and tech-enabled services companies that have strong management, solid business traction, and a clear opportunity for digital product creation or transformation. We then partner on the execution of the digital thesis with creative deal structures involving equity investment and/or fees.

To date, we have executed over 50 digital platform programs and invested in 18 of these companies.