Saturday, March 1, 2014

Lesson #169: Budget for Startup Marketing from Day One

Posted By: George Deeb - 3/01/2014

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I am not sure how many of you remember the 1989 film, Field of Dreams, starring Kevin Costner, who plays a farmer who builds a baseball field in the middle of an Iowa cornfield, after hearing a voice tell him "if you build it, he will come". And, sure enough, despite people thinking he was crazy, people did end up coming to watch a bunch of baseball legends of years gone by, reunited for a modern-day baseball game.

I often feel that startup entrepreneurs are building their own Field of Dreams, when launching their startups. But, unlike the Hollywood script, often times the sad reality is: "if you build it, they may not come", especially without any foresight to building a sales and marketing plan and budget to help get initial users engaged with your product.

Most startups are so focused on building their products (e.g., website, mobile app), that they simply raise enough seed capital to fund that development project. They often have little cash left in the bank, with which to start driving prospective customers to that product. This leads them to errantly go out, hat in hand, to the venture capital community, looking for capital with which to use for their sales and marketing efforts.

The problem is, most venture capitalists do not fund companies until there has been a sufficient proof-of-concept around that business. This typically means a large and growing base of website traffic, customer pipeline, revenues or other metric which proves there is solid demand for the product. In addition, most venture capitalists are looking to accelerate proven marketing initiatives that have been successfully tested in the past. They do not typically hand out sales and marketing dollars for entrepreneurs to experiment with.

Most entrepreneurs learn this hard fact way too late in the process of building their business, often burning out of cash before the company had a reasonable chance for success. Had they planned ahead and pre-funded the required sales and marketing efforts that would be needed down the road, before they even got started with their development efforts, they would have raised enough seed capital, to fund both the product and the proof-of-concept marketing. In this scenario, when they ultimately do seek additional growth capital from venture capitalists, the odds of closing that capital would be materially higher, with their proof-of-concept behind the company.

Too many entrepreneurs think they are living in a world much like Field of Dreams. Not all startups are going to attract initial users on their own. Not all startups are going to light a viral fire, like Groupon or Pinterest did. They are the rare exception. For most startups, driving initial awareness and users is very difficult, and can get expensive as you are testing ad buys on Google, Yahoo, Bing, Facebook, Twitter, LinkedIn or elsewhere, looking to find your "magic bullet" with a profitable customer acquisition cost to scale with.

Yes, I agree with many people, that if you focus on building a great product, the customers will surely follow. But, the question is, by when will they come, and do you have enough cash runway to bridge your path to profitability? In most cases, you will not. So, before you even get started, make sure you raise enough money to cover the required sales and marketing efforts to allow you to acheive your proof-of-concept, and hopefully, make you a much more attractive venture capital candidate down the road, for the next phase of your growth.

For future posts, please follow me at:  www.twitter.com/georgedeeb.


3 comments:

Jerome Gentolia said...

George,

Loving your series. Just want you to know I appreciate all your stuff.

George Deeb said...

Glad you're enjoying them, Jerome!!

Anne Johnsons said...

Interesting read. Most entrepreneurs know that the key into it is financial planning. For instance, if your startup business do not need in-house employees, then cut cost by outsourcing your workforce! I know this may depend on the type of startup business, but if hiring a virtual assistant is feasible , then why not? Or if you are really eager to start a business, then try to think of something that would not need an in-house employee.

You might be interested to read this blogpost too: How to Grow Your Business on a Budget

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