What the Klaviyo S-1 tells us about business texting and the "My Best Advice" Restart

Insights on an industry and on life

With Klaviyo, Instacart, and Arm all poised to launch IPOs, there’s excitement (and relief) that the sun will rise again over the valuation prairies. Never mind that it was all doom and gloom this time last year, and talk was of an inevitable recession. The market’s mood swings notwithstanding, companies are getting comfortable with the new reality. They are willing to embrace the spotlight that stock market valuations bring. 

The Klaviyo S-1

The Information (paid subscription) and Saastr both have a good analysis of the S-1. There is also a great Insider (paid subscription) profile on its founder. Spoiler alert: He is a frugal operator, which has allowed him to be selective with equity distribution. So, while Klaviyo has some big-name investors, Andrew Bailecki is still the biggest shareholder (38%). Nicely done! 

We’ll focus on Klaviyo’s SMS business and use that as a spyglass to explore the SMB messaging industry. 

The Klaviyo SMS Business

The SMS business is relatively new (2021); however, based on industry chatter, it’s already at a $50M run rate. 

Thanks to its ecommerce focus and its heavy reliance on Shopify integration, Klaviyo has dodged the SMB omnichannel curse. 

SaaS cross-selling is hard. It’s even more challenging in CPaaS because email, SMS, push, WhatsApp, and iMessage are intrinsically different. The vision of consistent customer experience driven by integrated and flexible data falls flat against a unified messaging strategy that does not discern between the mediums. 

Take MailChimp and ConstantContact, for example. They tried to get into SMS and had mixed results. The fact remains that for most omnichannel providers, most customers are single-product users with very little product cross-pollination. 

Klaviyo seems to have dodged this fate. Its email product is growing, but so is its text-messaging business. 

Takeaway: The SMS business is still a small part of its business, but based on industry chatter, it is rapidly growing. Large SMS clients haven’t tested Klaviyo, as it still eats up carrier fees when almost everyone else transfers the cost to the end user (hence the term “pass-thru fees”). 

What Klaviyo didn’t say: How big is its SMS business or the cross-pollination between its products. 

What can we learn: You can have a successful one-platform-for-all-messaging play if you have a tight product focused on a specific use case (ecommerce) and market (SMB). 

Klaviyo Attributed Value (KAV)

Klaviyo tracks the value it delivers to its customers, measuring it as the total revenue generated by orders placed with the customer within five days of an email or twenty-four hours of a text message. The customers who signed up by December 31, 2022, and configured their accounts to track KAV had a generated KAV value by March. Most of them had done so within thirty days. 

Takeaway: The twenty-four-hour window for a text message versus five days for an email shows the power of SMS. A well-crafted, well-timed text message is a call-to-action bullhorn. 

What Klaviyo didn’t say: It didn’t disclose how well KAV correlates to revenue and, most importantly, if it’s an early indicator of ARR. It also didn’t tell how many customers volunteered to have their accounts KAV measured.

Like Slack’s 2,000 messages, Klaviyo probably has a usage magic number for the KAV when it knows the customer will stick. 

What can we learn: All successful companies have an internal, non-financial, usage-based metric that is the leading indicator of growth or churn. The sooner companies can identify and track this, the better they can solve their growth challenges. 

Metrics such as ARPU, LTV, MRR, and ARR are all me-centric, answering the question “What does this customer mean to me?” Many companies neglect to track “How useful are we to our customers?”

As I said in my OpenView article two years ago, pick a standard anchoring metric that measures a core customer activity, one that tracks the quality of product engagement and one that is a non-financial leading indicator of your product’s usage. For Klaviyo, KAV is that metric.

The “Yes, and” Margin Multiplier

Finally, one takeaway from the filing is that there is room for high valuations. The key is to be high up in the buying hierarchy—functionality over price and reliability over convenience. It is a “yes, and” proposition. Yes, we do email well, and we do text. Yes, we do text, and we do e-commerce. Yes, we manage your texts and your data. Such “yes, and-ing” keeps you high on the value chain and minimizes margin compression. 

The “My Best Advice” Restart

Terry Hsiao’s contribution restarts the My Best Advice (MBA) series. As a serial entrepreneur, his advice to be wildly optimistic about the future is grounded in experience and something that everyone needs to hear.

Thank you, and have a great week!

TJ