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🤷♀️The Trust Paradox
How did startups with businesses anchored on overcoming a large threshold of trust acquire early customers when they have no track record to fall back on?
Hello frens 👋,
Trust is irrational nor is it predictable
Human beings have some disposition to trust others, and looking through the evolution of our behaviors, we had to grapple with many unknowns and make giant trust leaps. We would have still been stuck in the middle ages had we not done that.
Since my last post and over the new year break, I embarked on this research project to understand the process of establishing trust through the lens of tech startups.
Trust touches many aspects of our day-to-day lives— consciously or subconsciously — and the goal of this research is not to try to understand how trust dynamics work or why we trust others.
Instead, what I’m trying to understand is more akin to network effects. How did startups with businesses anchored on overcoming an extensive trust threshold acquire early customers when they had no track record to fall back on?
I found five characteristics, whenever any is present in a company, an ostentatiously high-level of trust is required before they can effectively acquire their first customers. Those characteristics include:
Having a large transaction value
Having a large level of time (or effort) commitment to extract value from the product
Need for personal/sensitive information
Being serviced by an unknown 3rd party
The presence of offline interactions
It is easy to understand why that would be the case; if trust hinges on our exposure to others’ action & intentions, these 5 broad categories encompass a great degree of risk.
What is trust?
There are more definitions and frameworks for quantifying trust than I can count. For the purposes of this piece ,I found Sandra Sucher’s— a Harvard Business School professor— definition of trust to be the most resilient when applied to early-stage companies.
As Sandra defines trust:
(trust is the) willingness to make yourself vulnerable to the intentions and actions of others.
Trust can be further divided into its different building blocks. There are 5 overarching types trust, some more important than others depending on: the stage of the company, the industry it operates in, its business model and customer profile.
The 5 types of trust are:
Competence-based trust: Confidence in one’s/company’s ability to get the job done effectively.
Systemic-based trust: Having a fair processes underpinning the system. This is often referred to as “institutional trust”
Values/Integrity-based trust: The close alignment in world views/beliefs between the trustee and the trustor.
Motives-based trust: Having good intentions and consistently acting in the best interest of the other party.
Impact-based trust: The mere existence of your product or service having positive intended and unintended consequence on external stakeholders.
While motive & impact-based trust are essential in increasing the level of consumer trust in a company, I found that they are mainly utilized much later in a company’s journey; when trust is used “as a competitive advantage.”
In the early stages— when a company has close to zero customers— all of the 60 companies included in this research did not have impact and motive as a core part of their trust-building strategy. Only years later, after they had gained traction and product-market fit, they have started highlighting those aspects.
The Trust Paradox
Companies that reliably live up to the promises accrue customer trust over time. On the other hand, those that don’t erode their amassed trust. Trust is dynamic.
The Trust Paradox that some early-stage startups face is needing to rack up a high level of trust before acquiring and activating any customers.
This is commonly needed when operating in industries with historically low (and/or deteriorating levels of) consumer trust or when the downside risk of adapting your product has a far more detrimental impact on users’ lives that outweighs the upside to be had by adopting it.
For instance, the risk of fraud/impersonation from providing your social security number outweighs the benefit of monitoring your credit score. Similarly, the risk of physical harm from having a stranger caring for your children in your absence outweighs the benefit of having an on-time short-notice sitter available.
Without having the luxury of historical proof points of reliably delivering on your promises, newly formed startups need a mechanic to bootstrap trust to acquire the first cohort of customers, enabling them to build a track of reliability and, in turn, gain consumer trust.
To unlock trust, understand risk
It does not matter if that risk is real (will my startup survive long enough to serve my customers) or perceived (Facebook is eavesdropping on my conversation). Both rational and irrational risks must be adequately addressed to establish trust.
As with trust, risk comes in different flavors, each requiring a slightly different approach to overcome:
Technical: The risk of not being able to create and deliver products and/or services needed.
Financial: The risk of not getting an adequate agreed upon service or thing in return to a financial transaction. It also includes the risk of being defrauded
Social: The risk imposed on person’s status or standing in society.
Psychological: The risk of producing negative affective states as anxiety, depression, guilt, shock and loss of self-esteem. Data breaches & privacy invasion are two examples of causes that could lead to psychological risks.
Physical: The risk attaining to the person’s wellbeing and/or health
Businesses encounter different combination of these risk types, each to a different extent. A two-sided marketplace connecting elderly caregivers to seniors faces a high-degree of physical and technical risk and less so in terms of financial risk. On the other hand, an online auction house faces a high degree of financial risk, moderate technical risk and to a much lesser extent physical risk.
Understanding the risks associated with your business is the first step to laying down the groundwork to establishing trust which we’ll address together in the sections below.
Building competence-based trust
Q: Can the company get the job done?
When thinking of competence-based trust, we’re not concerned with whether something is right or wrong just how effective it is. This is the social-proof, logo based kind of trust.
The need for establishing competence-based trust is the most common of all types. Even when establishing other kinds of trust is more paramount , it is almost always the case that a startup needs to create some-degree of competence-based trust.
This kind of trust is especially important to display when the main risk your business poses, from a customer prospective, is technical.
It’s most often associated with large transaction as applying to a loan via Juno, buying a car online via Shift or a large effort (or time) commitment. Some examples of large commitment transactions include setting up your estate planning via Trust&Will or migrating your data storage to Snowflake.
Throughout my research, I found 4 common themes utilized by companies in their early-life to bootstrap competence-based trust:
Borrowing Trust: When companies set out to borrow trust, many times it is for something tangentially related to their product (and not the product itself).
For instance when Visiblerisk (a cybersecurity company) was getting started they leaned heavily on the trust accumulated by Moody & Team8 the brands behind joint-venture as well as articles co-authored by its cofounder in the WSJ & World economic forum. These articles tackled his views on the relationship between board governance and cyber security without explicitly (or implicitly) mentioning VisibleRisk
“As featured in” “Created by people who built” “Used by people at” “in partnership with” are all familiar widespread modes of borrowing trust.
Filling an information gap: Another technique to bootstrapping competence-based trust is solving minor customer problems that arise just before the need to use your product, in many cases filling an informational gap. Understanding the tax implication before buying a property or the current state of research on alternative hair-growth treatments before purchasing a hair growth supplement are examples of more minor problems people encounter on their journey to making a more meaningful purchase decision.
Tools, simulators, calculators and educational content are different means companies use to fill information gaps.
Credit Karma, the credit monitoring tool, built tools like debt repayment calculators and credit score simulators to address information gaps in their domain. Hims, the personal wellness company, addressed questions such as the impact of zinc on resurrecting hair growth and common myths in their blog in an easy and digestible way. Villahomes, the backyard cottage building company, held (and continue to hold) weekly webinars breaking down the local regulations impacting backyard cottages.
What those three companies have in common is gaining competence-trust by adding value to consumers in a small— yet meaningful— way before they engage with its core product.
Building offline relationships: In some cases, the best way to establish competence-based trust is through creating and nurturing offline interactions with potential customers.
Bankaya’s, a Mexican fintech model of mobilizing a street salesforce in supermarkets, vaccine centers, and other high-traffic places, demonstrates bridging competence-trust through offline relationships at scale. The company facilitated over 800,000 transactions from launching in just under a year, driven predominantly via its offline efforts.
Using a trust anchor: Getting a huge and reputable first customer to adapt the product that customers in the domain you are operating in respect.
Military, Government, Fortune 500, and even mega-influencers are good starting points for landing a trust anchor.
Building systemic-based trust
Q: Can I trust the process? Can I rely on the system if something goes wrong?
When thinking about trust in the context of tech companies, one's mind probably wonders about systemic trust, the kind of trust the Ubers and Airbnbs are known for popularizing.
Building systemic trust is the answer to dealing with physical and financial risk. It is a table-stake when dealing with online to offline 2-sided marketplaces and large financial transactions.
Unlike a competence-based trust, systemic trust requires many processes and systems working in tandem to be effective.
I highlight some of the most common levers companies pull on to establish systemic trust below:
Access → Who is allowed in v.s who will be kicked out. HopSkipDrive, an Uber for kids, central messaging on their zero-tolerance and Shift’s, an online used car marketplace, 150-point inspection are both great examples of using the access lever as a means to establish systemic-trust.
Transparency → Making past and present behaviors/interactions visible to all participants. Social profiles & ratings are essential aspects and should not be overlooked, yet the transparency lever encompasses more than just social profiles; it includes transparency on company processes, decision making, and expected outcomes. Ynab, a personal finance tool, leans into (instead of shying away from) underscoring the amount of effort and commitment required from users to improve their financial situation. This level of transparency allowed them to quickly gain consumer trust in an industry that proudly snagged that lowest position in the annual SAI global consumer trust index.
Intermediation → Acting as an intermediary between different parties interacting on the platform. Upwork & Alibaba’s escrow services are examples of using the platform intermediation as a means to achieve systemic trust.
Mitigation → How a platform handles mishaps or prevent them from happening in the first place. Reversible transactions and transparent guarantees are the most commonly used tools here.
Other levers, including contracts, incentive structures & control mechanics, were also common in establishing systemic trust, yet not as prevalent as the 4 highlighted above.
Building values/integrity-based trust
Q: Do I trust their character?
Values-based trust (often referred to as Integrity-based trust in academia) is vital when dealing with service companies dealing with vulnerable third parties (kids, seniors), in industries having large asymmetric availability of information (real-estate, construction) or when sensitive personal information is needed to get the job done.
In terms of risk, values-based trust is most direly needed when the main risks faced by the company are social, psychological, or financial.
The 2 most common paths to establishing values/integrity-based trust are:
“In group positioning”: Being in-group is signaling belonging to potential customers. Usually is done through copy/messaging. When Hims was set out to sell their first product, a hair growth supplement, their introduction of the product read":
“Against staggering odds, two things happened: one, the universe, two, you. Let’s walk at our full height, honor the forebears, have a smile, and for god’s sake, floss.”
A more creative way to signal belonging is by incorporating users into the company's core process. Ibisa, an insuretech company, crowdsource data from local “watchers,” which are used in assessing damages and payouts to the community. Making people feel as though they’re part of the process, even if they have no control over the outcome, shows a level of value-alignment that can be translated into trust.
Third party Moderation/validation → Adding a go-between that can facilitate, govern or validate your company processes. This is frequently done through accreditation or certification.
Auctioneerlive, an online auction platform, very visibly highlighted their BBB accreditation in the early days as a means to showcase their good faith effort + commitment to handling consumer complaints.
Similarly, Lemonade, the insuretech company, noticeably and visibly highlighted their B-corp (social impact) certification and their A-Exceptional insurance rating on their homepage during the first years of their existence.
Bootstrapping trust for your company
For me, If I were starting an early-stage company today that hinged on having a high trust threshold, I would begin by first understanding the main customer risks: the big hurdle keeping people from adopting your solution.
From there, once I have a good grasp of the risks involved and their stacked ranking, proceeding to map out what types of trust I need to establish and use the corresponding trust-building mechanics highlighted in this research piece as a starting point to get the creative juices flowing.
This is all I have for today,
Until we meet next Tuesday 😉,