A compound startup is a business that develops and launches multiple integrated products or services, often leveraging shared resources, technology, or market insights to drive growth across all areas simultaneously. This approach allows the startup to scale faster by tapping into various revenue streams and diversifying its offerings.
Compound startups vs. point solutions
Rippling CEO Parker Conrad coined the term “compound startup”—or compound software company—when he started building Rippling.
“The secret to building better business software is building a system where you can build multiple parallel business software applications that are all natively built into the same system,” he said during an appearance on TechCrunch’s “Found” podcast, where he explained compound software in more detail.
According to Parker, compound software companies and point solutions represent two different approaches to business development.
A compound startup focuses on creating a broad range of products or services under a single company, leveraging shared resources, technologies, and market insights to drive growth across multiple areas simultaneously. This strategy allows the startup to diversify its offerings and tap into various revenue streams.
A point solution is a business model where the company focuses on solving a specific problem with a single, specific product or service. While point solutions can have excellent product-market fit that makes them highly effective in addressing niche markets, they often face limitations in scaling and diversifying their offerings compared to compound startups.
The secret to building better business software is natively building multiple parallel business software applications that are all in the same system.
Parker Conrad
CEO of Rippling
Components of a compound startup
A compound startup typically includes the following components:
- Diverse product or service offerings: A compound startup develops multiple different products or services that cater to diverse market needs or segments
- Integrated tools and business strategy: Compound startups often have an integrated strategy that aligns the development and marketing of multiple products or services, so each complements and enhances the others. Plus, the products they develop are natively built together, often on top of a shared source of data (more on that below).
- Scalable infrastructure: The company’s infrastructure is designed to support rapid scaling across various products or services. Compound startups can typically adapt quickly to market changes and growth opportunities.
- Cross-selling opportunities: With multiple products or services under one roof, compound startups can create cross-selling opportunities, increasing customer lifetime value and loyalty
Drawbacks of point solutions
Point solutions, while effective for solving specific problems, have some common drawbacks that can limit their long-term growth and scalability:
- Limited market reach: By focusing on a single product or service, point solutions often address a narrow market segment, which can restrict their potential customer base and revenue opportunities.
- Challenges scaling: As point solutions are designed to solve a specific problem, they may face difficulties in scaling beyond their initial market or expanding into new areas, limiting their growth.
- Higher risk: With all resources concentrated on a single offering, point solutions are more vulnerable to market fluctuations, competition, or technological changes.
- Resource constraints: Point solutions may lack the shared resources and infrastructure that compound startups benefit from, leading to higher operational costs and less efficiency.
- Less diversification: Expanding into new markets or developing additional products can be challenging for point solutions, as their expertise and resources are often tied to a single focus area.
Advantages of compound startups
Compound startups offer several key advantages over more narrow point solutions. These are the five ways compound startups are now winning—even though point solutions have proliferated during the rise of SaaS companies over on-premise solutions:
1. Better integrations
One of the biggest benefits of compound startups is the seamless integration of the business applications within them. Unlike point solutions, which often require complex integrations with other tools in a tech stack, compound startups develop multiple products in parallel, which means multiple business applications that are natively integrated in one platform.
2. Natively built on top of a shared dataset
Another significant advantage is that, in a compound startup, all applications are natively built on a shared data foundation. For example, Rippling’s apps are all built on a single source of truth for employee data, which allows for powerful reporting, automation, permissions, and more across all the apps in the platform.
3. Platform capabilities are built in
Platform capabilities amplify the impact of compound startups. Rather than operating as isolated tools, the various products within a compound startup enhance one other’s functionality. This creates a more powerful and comprehensive platform where features like analytics, permissions, and workflow automations work seamlessly across all applications.
4. The user experience is consistent
The user experience is significantly improved in a compound startup. Users only need to learn one set of UX patterns, making it easier to adopt new products within the platform. This consistency in user experience can lead to faster onboarding, greater productivity, and a more intuitive interaction with the software.
5. Pricing advantages
Compound startups offer price advantages by bundling multiple products and offering them as part of a single platform. This provides cost savings to customers, in contrast to point solutions, which often become more expensive as they try to compete with comprehensive platforms by adding features that don’t integrate as smoothly.
The compound startup playbook
Adopting a compound startup mindset takes a strategic shift from focusing on a single product to developing a suite of interconnected products that leverage shared resources, data, and infrastructure. We developed this playbook to capture the pattern of making a compound startup successful:
- Know that integration is the product. If you can’t do integration well—or if it doesn’t add value to the product—you may be offering a stack of poorly integrated point solutions rather than a true compound platform.
- Maximize the price of the bundle. Point solutions have to optimize revenue from a single SKU. With a bundle of products, you can undercut them while helping your customers save money. Win-win.
- Aim for “parallel execution.” Compound startups need to work on several products simultaneously to succeed. Don’t build huge engineering teams that only focus on one product or feature. Hire expert engineers who can adapt and pivot.
Examples of compound startups
Here are a couple of notable examples of companies that have successfully adopted a compound startup model.
Rippling
Rippling is one example of a company that has successfully implemented the compound startup approach. Rippling offers a platform that unifies HR, IT, and finance, and by building multiple products in parallel—such as payroll, benefits administration, device management, and expense management—Rippling ensures that all its applications work seamlessly together. Plus, they’re all built on top of a single source of truth for employee data, which not only enhances the user experience but also simplifies complex business processes, making Rippling a powerful tool for businesses of all sizes.
Apple
Initially known for its computers, Apple expanded its product line to include a wide range of interconnected devices and services, such as the iPhone, iPad, Apple Watch, and Apple TV, along with software like iOS, macOS, and iCloud.
Each Apple product is designed to work seamlessly within the company’s ecosystem, creating a cohesive user experience across multiple devices. This multi-product strategy has not only strengthened Apple's brand loyalty but also allowed the company to dominate multiple market segments, from personal computing to mobile technology and beyond.
Frequently asked questions about compound startups
Who came up with the concept of compound startups?
The concept of compound startups was popularized by Parker Conrad, co-founder and CEO of Rippling. He introduced the idea as a way to challenge the traditional approach of building point solutions, popularized by legacy, “megalopoly” companies like Microsoft and SAP, advocating instead for creating multiple, interconnected products within a single platform to better serve businesses' needs.
How can entrepreneurs discover if a compound startup model is right for their business?
First, evaluate your target audience’s needs to understand how interconnected products can offer a more comprehensive solution. Then, assess whether you have the resources and know how to develop and maintain multiple products simultaneously.
How do you know if your compound startup is resonating with customers?
Focus on metrics such as customer acquisition cost (CAC), customer lifetime value (CLV), product adoption rates across different offerings, and cross-product engagement. These metrics should help you understand the effectiveness of your compound approach and help you refine your strategy.
Disclaimer: 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 or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.