Tuesday, September 4, 2012

Lesson #120: Budget for Proof-of-Concept Marketing from Day One

It is a sad, but familiar, story in startup land.  An entrepreneur raises a limited amount of funds, plows it entirely into building out their product, and has no gas left in the tank for driving users to the site once the product is complete.  Then they go out hat-in-hand to the venture community looking for additional growth capital, without achieving the proof-of-concept required by the venture investors (in the form of initial user adoption).  Hence, leaving them out-of-luck with the VC's and scratching their head on how to raise sales and marketing monies to achieve their proof-of-concept.  They then typically turn to their friends and family, the same ones they most likely tapped for their initial seed financing to build-out their products, who have nothing left to invest.  This is the typical cycle I see over and over again with the startups that reach out to me for financing assistance.

Fortunately, for new ventures, this is an easily solvable problem to address, assuming you fund your businesses with enough proof-of-concept foresight right from the start.  When you are deciding how much money to raise day one, you can't only think about the cost of building out the product, you also have to leave enough cash cushion in the bank, to allow you to hit the sales and marketing accelerator once the product is built.  And, frankly, this latter amount is equally important as the product itself, as without it, you will not achieve the proof-of-concept points that will open up the additional venture capital to scale up your business from there.

Every business has its own unique sales and marketing objectives.  B2C businesses are usually marketing driven.  B2B businesses are usually sales driven, with enterprise-facing businesses having different challenges than SMB-facing businesses (e.g., tough to identify key relationships, longer sales cycle to drive revenues).  So, you need to think ahead of time for: (i) which tactics are best for your business (e.g., search marketing, social media, media relations, trade shows, salespeople); (ii) what is the "tipping point" that will get the longer-term venture investors over the proof-of-concept hurdle (by establishing relationships with them upfront, well ahead of asking them for capital); and (iii) budgeting how much sales and marketing monies will be required to allow you to reasonably achieve those objectives.

For example, let's say you are an e-commerce website.  And, the venture investor says, we would like to see 1,000 customers buy your product first, before investing.  With a 3% average conversion rate for e-commerce sites (which you learned from market research), you need to be able to afford driving 33,333 consumers to your website after the product is built.  And, if you are planning on buying paid search traffic from Google to do that, you will need to research the average price per click for your keywords and industry.  So, if that answer is $1 cost per click, you need to have $33,333 sitting in reserve to hit the gas on the marketing. 

And, worth mentioning, nothing goes perfectly as planned with startups, so I would set aside at least double what you think you will need.  As an example, if the average conversion rate for e-commerce sites is 3% overall.  It may only be 1% for a brand new company with no brand name recognition in the market, which suggests you would need to set aside $100,000, in the example above, to hit your proof of concept point.

Don't make the same mistakes of the thousands of entrepreneurs before you.  Start thinking through your proof-of-concept marketing needs from day one, to make sure you are raising enough funds right from the start.

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