Venture Capital Confidential: File #1

One of our students (now a colleague who teaches me a lot) has been consulting in the world of Venture Capital-backed enterprises.

He sent me some notes about his experiences recently and I thought you might find them interesting and maybe even amusing.

If you are a traditional meat and potatoes “block and tackle” business owner/marketer, have faith. A lot of these high-flying companies may appear to be run by geniuses. I assure you they’re not.

Everyone looks smart when they’re spending investor money…until the money runs out – and it will. Guaranteed.

In the meantime, let their antics provide some comic relief for those of us who make money the boring, old fashioned way – by selling things to people who need and want them. 

– Ken

All characters appearing in this work are fictitious. Any resemblance to real persons, living or dead, is purely coincidental.

The following isn’t about any one company, but is more about an epidemic that has been spreading since the year 2002.

This particular strain is based around three flawed ideas

1.    “If we build it, they will come”
2.    “We just need money to make it work”
3.    “We are a referral based business”


Daniel, a direct marketer, is called into assist an ailing 2 year old startup company (Lost Inc).

Lost has already secured 5 million in funding from Venture Capitalists and Lost is eagerly eyeing 30 million more from their next round of funding. There is just one problem.

Lost sells a six figure technology solution and the sales have been, well, poor to say the least.

Lost’s investors set an ambitious yet achievable quarterly sales goal. Lost barely hit 50% of the goal. This alarmed the investors who upon further inspection realized Lost’s CEO had no marketing plan in place.

So with the conviction only VCs can muster, they declared “turn on the marketing.” As if marketing was merely a light switch to be flipped.

While Lost is still a startup, they do have corporate tendencies. So the order to “turn on marketing” flowed downhill from the investors to the CEO to the newly appointed director of marketing, Richard.

Being given the new title and the ultimatum that he better turn things around in a few months, Richard quickly realized the peril of his situation.

Lost had an expensive CRM and marketing automation suite; they had done e-blasts, trade shows, and events. But their deal flow through their pipeline had stalled. No one was taking them up on their offers of a free demo.

Lost had a marketing agency but this agency was fond of billing five figure sums for simple creative work. So Richard avoided them and went to Daniel the direct marketer.

Into the Play Pen

Daniel arrived at the luxury downtown offices of Lost Inc. The first thing Daniel noticed was the sheer amount of people working at this startup.

There had to be at least 30 people. “What do all these people do?” Daniel thought as he was escorted into an all glass conference room.

During the next two hours, Daniel observed everything that was going on in the office. Let’s just say there was a lot more socializing and goofing off than actual work.

When Daniel inquired if this was normal, Richard replied, “Yea, it’s a Thursday afternoon, but this is fairly normal.”

And soon Daniel discovered the root of the problem. Besides Richard there were only two salespeople on staff.

This meant over 80% of the staff had nothing to do with bringing in more business. Sure there were technologists, analysts, finance people, but almost no one dedicated to selling and growing the company.

And we’re not talking about a Fortune 500 company that has matured. This is a startup.

In a startup, almost all of your effort should be focused on selling. Heck, in most companies almost all of your effort should be focused on selling 🙂

The Realization

Richard prattled on about the game changing nature of the company’s algorithm and how it provided such synergy to the marketplace.

He even proudly offered,  “Our target is large B2B companies and just to let you know, we have brought on a full time telemarketer to cold call decision makers at these companies. We’re doing this because all of our business has been referrals up to this point.”

Daniel, smelling a rat, asked a very simple question, “Who is your target customer?” Because of the look of concern on Richard’s face, Daniel rephrased, “What segment of the market are you selling to?”

Richard hoping to pacify Daniel, “We just started exploring target segments two weeks ago at our sales summit. We don’t have a clear answer yet, but we should within a month.”

So here was a startup acting like a big corporation. Target customer identification, which is step #1 in direct marketing, had been relegated to a committee and would take six weeks to complete.

It wasn’t Richard’s fault. He wasn’t a direct marketer, he didn’t own this company. He just needed to show some sort of progress being made to justify his job.

Collaboration and meetings usually hide lack of progress very well. When no one wants to risk making a decision, a committee is formed and any hope of progress is stalled.

Daniel spent the remainder of the meeting trying to narrow down the target customer and showing Richard where the target customers hang out online and off.

From there, he showed Richard that prospecting was not just a step in the funnel, but actually a complex task that required much planning and surgical execution.

The rest of the funnel didn’t matter if the prospects weren’t pre-qualified before they spoke to a sales rep. Garbage in garbage out.

The meeting ended with Daniel sharing a simple but brutal truth with Richard, “I can’t help until you figure out at least a general idea of your target customers.”

Richard was disappointed but was beginning to understand why his company wasn’t growing.

It’s pretty hard to grow when your funnel has been based only on warm referral traffic.

It’s pretty hard to grow when you haven’t eliminated anyone as your potential customer.

It’s pretty hard to grow when you think of marketing as a light switch that you merely need to flip on.

As Daniel left, he observed the 2pm status meeting aka the Thursday afternoon office party.

And at that point he realized where most of the VCs’ money was going: subsidizing a twenty-somethings’ office fraternity.

Lessons to Heed

1.    Raising tens of millions of dollars does not allow you to skip marketing and more importantly identifying your target customers. Everything else you do is just window dressing.

2.    No one cares about your algorithm, software, or solution unless you show them 1) they have a problem 2) they need to address that problem now 3) you have a solution for their problem 4) you have the best solution for their problem 5) you have a reason for them to act now

3.    No matter the size of your company if you exist solely on referrals, you aren’t reaching your true marketing potential.

4.    Your marketing agency is most likely a design agency. While they are very good at artistic design that does not mean they have a clue about the art of the sale.

5.    For some reason in B2B sales, people assume cold calling will work best. You have to remember even in B2B you are speaking to a person or group of people. Not some faceless corporation. Faceless corporations don’t make decisions. And we all know how much people love receiving cold calls.

6.    Cold calling assumes everyone is equally likely to buy your product. Which is never the case even in small niche B2B sales. And like Sisyphus pushing the rock up the hill, you never truly make much progress with cold calling. Because tomorrow is the same as today: you, your smile, your phone, and a whole lot of rejection.

– Ken McCarthy

P.S. For over 25 years I’ve been sharing the simple but powerful things that matter in business with my clients.

If you’d like direction for your business that will work today, tomorrow and twenty years from now, visit us at the System Club.

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