In the first phase of company building, founders focus on product. They go “heads down” on making something that someone, somewhere will find useful. Generally this product-building phase is followed by (or run in tandem with) months of customer development. Founders pound the pavement and tell everyone who will listen about that killer use case for the awesome product that they’ve built. They get a few users/customers/downloads/subscriptions/views/whatever. Time to scale.
When it’s time to scale, founders often go out to raise money. The rationale is, “we have something here- we need your money so we can pour fuel on this fire.” In the VC pitch deck, they show an annotated product/milestone timeline trending up and to the right. They talk about traction. They talk about power users and engagement. They talk about early adopters and negative churn. They talk about organic growth. Then, they drop the bomb: “…and that’s without spending a single dollar on marketing!”
That statement worries me. Investors are evaluating whether or not to invest in your company. They’re deciding whether to give you their money. Once you get it, you’ll need to spend their money. You’ll need to spend it fast.
“You can’t start a fire without a spark” – Springsteen
Don’t get me wrong- generating traction/product market fit/scale without spending on marketing is very, very impressive. It’s a great way to start building a business. However, there are three reasons to consider experimenting a bit with paid customer acquisition before talking to VCs:
Do You Know How to Spend Marketing Dollars?
This was one of my favorite questions when I was a seed investor. Here’s my logic: ok, you’re asking for 1-2 million dollars to scale your startup. 50-65% of that will go to new hires, including a marketer. Some will go to office space + perks and maybe some salary bumps. Most of the rest will go toward marketing. So in total, you’ll be investing at least a few hundred thousand dollars + a new team member + a mid level salary + equity toward your marketing organization.
Of course I’m going to ask this question. I need to feel comfortable that you know how to spend it.
Before raising external capital, you’ve spent your own money on team and you’ve spent on tech, so I can clearly see that you know how to do that; I’m fine giving you money to scale your headcount and work on product. But if you have’t spent on marketing, we’re going to need to have this conversation.
Early Adopters Might Not Scale
Understanding your existing customer base is obviously important. However, once you raise money, you’ll need to grow at an insane pace – think 5-10x in 24 months. That means that your first 100 users could look dramatically different than your next 1,000. Allocating some money to a few tests via paid social or AdWords could really help you understand where the next cohort of users will come from.
Two examples we see all the time at Dozen Digital:
- Kickstarter/ Indiegogo company figures out who their backers were and doubles down, building a company on top of that exact demographic. It could work, but those numbers can be deceiving once you leave the friendly confines of a crowdfunding site’s distribution network.
- Direct-to-consumer company goes after the Warby Parker/ Everlane/ Bonobos/ Harry’s crowd. Good news: nice initial traction. Bad news: that crowd is tiny relative to web scale. If you’re making a direct to consumer widget, you’re in the widget business, not the “direct to consumer cool internet company” business. There are potential widget customers literally everywhere on the internet.
In both cases, it might make sense to test some new audiences with paid marketing before going back to VCs.
Scrappy Doesn’t Mean Cheap
Everyone loves a scrappy founding team. However, founders often stay in the “scrappy” mindset, even after they raise money. This can lead to pennywise/pound foolish decision making. Again, investors are giving you their money so you can spend it really, really fast.
If you project that you’re afraid to take big swings and spend large amounts of money for even larger payoffs, that could signal to VCs that you’re not cut out to be a VC-backed founder. Keep in mind that their business depends on exponential returns, so your job as a portfolio company CEO is to swing for the fences.
Let me know if I’m missing any obvious examples. Thanks for reading!