Conventional wisdom says you need to focus on one single problem when building a software startup. Find your niche, the cliché goes… Do that one thing well, and perish the thought of making multiple products at once.
According to Rippling cofounder and CEO Parker Conrad, this myopic pick-and-stick approach has it all wrong.
Parker coined the term "compound startup" for his contrarian take on building software. And it’s his central insight behind Rippling, which unites HR, IT, and finance within a single workforce platform—and globally, too.
In this post, we’ll walk you through what a compound startup is, why it works, and how it can trump the typical “focused” startup model when it comes to making better products for your customers.
For more information on this topic, check out Parker’s SaaStr Europa talk with Founders Fund partner Sam Blond.
What is a compound startup?
Most startups tackle a narrow issue. According to Parker, a compound startup addresses a range of point solution systems all at once to build a broad portfolio of interoperable products. And this is how Rippling is built: uniting HR, IT, and finance within a single workforce platform—and globally, too.
“Because the conventional wisdom is so strong in the idea that you shouldn’t do this,” he said at the SaaStr Europa conference, “there are these undiscovered islands of product market fit that are just beyond the horizon line. If you can sail out and make it there, everything else about your company will work.”
Why should startups broaden their scope?
The idea of a compound startup bucks against most of the advice you’ve heard. And it isn’t easy to build; Parker isn’t advocating for companies to sacrifice quality for quantity.
“The challenge of a compound startup is that you need to be good at parallel execution across all of these different products,” says Parker. “You're only as strong as your weakest link.”
But if you can pull it off, there are significant advantages:
- Deeper integration. When building a set of related products within the same company, you can identify shared components and reuse them across different product lines to ramp up R&D efficiency and avoid repeating yourself as an engineer. All of Rippling’s products, for instance, are integrated with a breadth of employee data, which unlocks a world of functionality for reports and analytics, workflow automation, role-based permissions, custom policies, and more.
- Common UX patterns. By learning how to use one product, clients develop a knowledge base to learn other products quickly—without starting from scratch.
- Bundled pricing. You can optimize prices for the value of a bundle rather than for a single-point solution, which saves clients money while beating competitors on cost.
The result? “Companies that tend to be bigger and more ambitious are solving the whole problem as opposed to just building a tool,” says Parker.
Drawbacks of a “focused” startup model
Before delving more into how to implement a compound startup, consider how the “focused” model, its conventional alternative, may be slowing you down:
The deepest business problems span multiple business systems
If you narrow your startup’s focus as soon as you conceive it, you’re closing the door on a range of solutions to work on in the future. “When you think about the problems your clients have, they often span a lot of different business systems or point solutions,” says Parker.
“I think some of the biggest problems, that potentially could give rise to the most valuable companies, tend to be things that span a lot of different point solution products within a business. And therefore, only building one point solution product can't really address them.” Ambitious compound startups can solve a whole problem instead of just building a single, limited tool.
You’re running out of single-issue products to focus on
While the focused startup model was sensible a decade ago, there’s now a crowded presence in almost every narrow point-solution vertical imaginable. According to Parker, better opportunities lie in going bigger—combining disparate point-solutions into one product.
It’s rare for “focused” companies to break out and build that second or third successful product
Focused startups often say they’ll broaden their scope as soon as they first build their first specific product. But according to Parker, this tends to not happen. He says that companies are fated to their initial makeup, ”I think a company’s ambition is circumscribed on day one when it’s founded—it’s hard to move beyond that.”
Builds one product
Builds multiple products
Builds a tool
Solves a coordination problem across systems
Maximizes revenue for a single SKU
Maximizes revenue on a bundle of SKUs
Adds to a client's systems complexity
Consolidates business systems to reduce complexity
Bringing Rippling’s compound startup to the UK payroll market
On June 6, Rippling launched its full slate of products in the United Kingdom. Historically, payroll companies in the UK followed the focused model, causing businesses to slap together a hodgepodge of disconnected systems to separately manage employee data like salary, leave, and pensions. “Anything can go wrong at any point between these systems,” Parker says. “Then once you get stuff over into payroll, you know, you've got to deal with all of the change management in the payroll system.”
The alternative—which Rippling is spearheading in the UK—is a global, automated system that manages HR, payroll, and benefits under the same roof. As a compound startup, Rippling takes your employee data to power an interoperable HRIS that administers benefits, builds workforce reports, sets leave policies, and reimburses expenses—all without outsourcing information to any third-party systems.
Many UK companies spend up to 6 full days a month processing payroll. Rippling can run it on a company’s behalf in a fraction of the time. “It's an enormous amount of work that can be just dramatically compressed when you take this sort of compound, all-in-one approach to the problem,” Parker says.
Compound startup playbook
There’s a pattern to making a compound startup successful. Here’s what to keep in mind.
Integration is the product
Parker urges startup leaders to make integration the centerpiece of the product.
“If the integration doesn’t matter, then there’s no product value to you or your clients for doing these things together,” he says. “All you have is the difficulty and challenge of doing multiple things in parallel well. You want to make sure there’s value to the integration.”
Maximize the price of your bundle
As mentioned, compound startups have a structural advantage against focused startups because you can bundle the pricing of your solutions. While the focused startup has to optimize revenue from a single SKU, a compound startup can optimize for the group price. Clients save money, startups undercut competitors, and leaders can reduce complexity by consolidating systems into one.
When structuring your startup, aim for “parallel execution”
Compound startups need to be working on several products simultaneously. Rather than building a monolithic team designed to service one product line, compound startups need what Parker calls “a loose federation of individually focused teams.” Rippling, for instance, has a large overall engineering team made up of smaller teams that specialize in payroll, device management, and benefits administration, respectively. Team leaders have the autonomy to work at their own pace while having access to knowledge sharing for customer support, product management, design, and more. It’s one of the reasons Rippling has hired more than 50 former founders to build out product lines.
Want to learn more about how Rippling pioneered the compound startup, both in concept and execution? Catch Parker’s recorded conversation with Founders Fund partner Sam Blond for more information.
Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.