Over the weekend I was talking with an early stage VC about how much traction he likes to see in a company before he invests (answer: enough to have some confidence that the product works, the go to market works and there is some demand). Subsequently I was thinking through how companies would get themselves to that stage without needing the sort of funding he provides. There are a number of answers of course, including true seed stage friends and family and angel funding, but the most important answer to to find a way to achieve a lot with a little.
This morning I have been reading through Fred Wilson’s three recent posts on marketing and the responses from Alan Patrick and randfish of seoMOZ which discuss the pitfalls, benefits and likely trends in marketing spending at startups and I have been thinking back to my conversation of the weekend.
From our perspective as a VC fund that focuses on Series A and Series B investments whilst, also doing the occasional seed deal, we are not allergic to companies that plan to spend money on marketing. That said, companies that have found ways to be capital efficient with their marketing are always going to be more attractive, and plans to spend BIG on marketing will only work for us in businesses that have a proven customer acquisition model which gives a high degree of confidence in the link between spend today and profits tomorrow.
In his second post Fred describes how his scepticism about marketing spend comes partly from his experience in the last bubble when a lot of VC money was wasted on marketing and brand building. We at DFJ Esprit have similar scars but our broader investment focus means that many of our companies have to get by without the tips and tricks that are available to internet businesses in their earliest stages.
What is common across all sectors of tech, however, is the importance of being able to achieve a lot with a little in the earliest stages of a companies life. In his first post Fred lists eight ways that web companies can get the word out with little expenditure, and many of them apply to software and other tech sectors too. Another way that non-web businesses achieve a lot for nothing is to leverage the founders connections and background to generate early sales (we approved an investment yesterday in a software business that has done just that), another is to have a large beta community using a bare bones version of the product (again we are looking at a couple of companies who have done that).
To be achieving a lot with a little doesn’t necessarily mean no marketing spend, but marketing is unlikely to be a big line item. The magic that generates a lot from a little will most likely come from someone in house, most often a founder, but selective use of outside advisors can make a huge difference (the point that randfish makes). However, good marketing advisors are outnumbered by bad ones in my experience, so caution is called for. Be wary or anyone who seeks to mystify what they do, or is reluctant to share their secrets before they get paid.
The point that Alan Patrick makes is that the hotter a market is, the more companies there will be, making it harder to get noticed, which leads people to spend more on marketing. His thesis is that we are at the early stages of another bubble now, in an equivalent position to 1996 from the last time round. The nature of a bubble of course is that investment size and VC valuations rise together with M&A and IPO valuations as more and more money sloshes round the system – if Alan is right in his bubble timing analysis then larger portions of those rounds will get allocated to ‘marketing’. Although this time round I expect the term ‘marketing’ to be understood more broadly and include throwing greater resource at areas which might achieve a lot for a little rather than the crude brand building of last time round (e.g. build social hooks into the product or build a great API and invest in a developer community).
Which brings me nicely to the point I want to finish on – marketing can never be a substitute for great product, and if a product is truly great then marketing is so much easier. Marketing and great product are both critical to success, but whilst it is ok to let product get ahead of marketing sometimes, when marketing gets ahead of product the problems are harder to solve.