Just what do investors want to see from a startup with regards to the company’s marketing? I recently spoke on this topic to a cohort of early-stage technology startup entrepreneurs at Softeq Venture Studio, an accelerator program that helps founders build investable technologies and businesses.
Here are some of the highlights of our discussion.
Building the base for marketing efforts
It’s important for company founders to think about the bigger picture. When we’re talking to clients at Craig Group, we talk about market growth and revenue growth, not just marketing. Because that’s what the investors are thinking about.
Things like the EBITDA margin and recurring revenue are important to investors. They prefer predictable revenue growth rather than uneven or project based fluctuations . Investors also expect the founders to have a plan for the scalability of their business.
Entrepreneurs need to consider how they are going to scale and where they are going to scale. What markets are they going to address and what’s the plan for that — what’s the timeframe?
An exit plan is also a must because even if the founder is planning on staying in the business, investors are seeking a return on investment with another transaction after the successful growth, and profitability, of a company. Founders have to begin with the end in mind.
A marketing strategy that appeals to investors
There are hundreds of private equity firms interested in lower middle-market companies, defined by having between $2 million and $20 million in EBITDA, or earnings before interest, taxes, depreciation, and amortization. It’s competitive but there’s a lot of money to be put to work.
Startup founders need to focus on the basics first when setting the expectations for marketing investment. And they need to know who their customers are and where their ideal target audience is.
Considerations include the serviceable obtainable market (SOM) which is what the company thinks that they can logically support today. That is separate from the serviceable addressable market (SAM) and the total addressable market, which is what a company will work towards penetrating.
You want to know how many of these potential customers exist, and to do that, you need data. If you don’t have it, you can look at adjacent markets. Build the customer acquisition cost that you can afford. It’s not as important what the number starts out with but how it trends, as it should become more efficient over time.
The marketing investment will grow top-line revenue, target the most profitable customers, be able to reach potential customers in more scale and more quickly than sales efforts alone, and elevate the perception of the company prior to the investor’s exit.
Key parts of a strategic marketing plan
The most expensive customer is a new customer.
In the marketing cycle, “pre-awareness” requires the biggest marketing investment. If potential customers don’t understand what a product or service is, it is going to cost the company a lot to educate them on a new category, so that is best left to those with more resources than a middle-market startup.
A more cost-effective way to reach customers is during the research or comparison part of the marketing cycle. You can demonstrate what differentiates you from your competitors. Are you selling on price? Are you selling on service? Think about a side by side comparison.
Once the buyer has reached the decision and loyalty part of the sales funnel and purchased from the company, then the marketing has been effective, and customer retention becomes a key focus.
In complicated business to business sales cycles, there might be a number of people involved in making the decision to buy your product or service. What is important to the IT decision maker might not be important to the potential customer in finance or purchasing. You need to have compelling messaging for all of them, which means you need your marketing to be like your customer, and meet their needs directly.
Sales and marketing 101
Many middle market companies don’t pay enough attention to their front door, which is a company’s website.
Your potential customer is going to be on your website often but certainly 20 to 30 minutes before a sales meeting. And if they don’t find something compelling, they probably won’t be inclined to move forward with your product or service.
Digital strategy and content geared toward both awareness and lead generation can help with the ultimate goal of profitability.
Entrepreneurs shouldn’t spend on marketing tactics until they have a solid strategy, but once they do start investing in advertising or other marketing tactics, they should be able to get metrics and ROI on their campaigns from their marketing partners.
It is important to focus on efficient top line revenue growth as a business grows and scales. Digital marketing is an important part of the overall growth plan, and should not be overlooked. The clock starts ticking on profitability growth once a business owner partners with investors. Make sure your business has an effective plan to meet the goals set out.
Libby Covington is partner at Houston-based The Craig Group, a strategic digital marketing solutions consulting firm. Her specialty is in understanding how sales and marketing work together effectively.