In my years of angel investing, many is the time I’ve been in due diligence groups looking at a projection and someone asks “so where is the marketing spend to support that growth?” Usually the answer is along the lines that folks will discover the product online, or refer their friends, that it will “go viral”, and that’s what we’re all investing for, because we believe that it’s that kind of product, right? Another common answer is that one of the roles will really be spending 50% of their time on sales, or that sales will be part of everyone’s job.
Many years and a few hands-on lessons later, I have a more experiential awareness of what needs to underlie that answer. Once you’re in a company, trying to manage to those numbers, it becomes clear that there’s no substance to it. We modeled 10% month-over-month growth! Well, it didn’t happen this month so now what? Without a plan of the measurable activities that were expected to generate that growth, there’s no way to look back and ask: did those activities happen? If yes, perhaps they’re not the right activities so let’s try some different ones. Perhaps we think they are the right activities but the sales cycle is turning out to be longer than we expected, let’s keep an eye on that and prepare to make some adjustments lest we run out of capital before we’ve figured out the true cost of a sale. If those activities didn’t happen, why not?
Startups are fundamentally short-handed and the sales/marketing person is often not a specialist, and maybe they haven’t done sales/marketing before. Likely they’re getting some uptake because it’s a new product or service and they get a little bit of earned media attention and they don’t know that the product won’t continue to sell itself. A few things do grow purely on word of mouth, or are fundamentally viral in that use of the product inevitable exposes new potential users to it. Even those things can be broken down into assumptions: each user uses the product x times per month and exposes Y other users to it, Z% of those decide to try it for themselves.
But sadly, the truth is things have to be sold, and over time I notice how successful businesses build the cost of selling into the product – things like mutual funds having “12b-1 trails” that throw a small percentage to the platforms that carry them, or retail products having to build into their price assumptions about doing periodic discounting, offering coupons, paying cuts to distributors and brokers.
I felt validated to see in a recent business competition, Business Impact NW went beyond asking for a financial projection and also asked for a specific sales projection. They work with small, local businesses, and apparently they’ve also decided it’s an important next step to making sure the business is actually successful.
So going forward, my experience is that a general question about “where’s your marketing spend?” isn’t really enlightening or helpful to the business. A better question would be: where’s your sales plan – who will do what activities to promote the product/service and what’s your expected effort-to-reward ratio? I have heard investors ask “how long is your sales cycle?” when looking at products that will be making dozens of large sales. Time is one measure of effort, and thinking about person-hours and intermediary fees and google ads needs to apply to the hundreds of small sales too. Helping an entrepreneur break that down ahead of time will help them figure out how to adapt as they gather more data, and set them up to start measuring/monitoring those assumptions from the start.
Shaulablog 