The Right Business Model for Your Startup

The right business model is critical to sustainably drive scalable adoption of your startup’s product or service.  Typical business model choices for software, web services, and online media startups are advertising or direct monetization (licensing, subscription, virtual goods, ecommerce, etc).

I generally avoid customer development roles with advertising supported startups because it is very difficult to self-fund (via arbitrage) early growth.  I faced this challenge at Uproar in the mid 90s when building an ad supported business was arguably easier.  We had created very engaging online games that we were certain would eventually attract a large user base.  In the first month after launch I presented the games to the big Madison Avenue advertising agencies and they were initially excited about the integrated advertising opportunities.  However, when I explained we only had a few thousand users interest quickly faded. 

These guys had multimillion dollar monthly advertising budgets.  Even if we could offer a strong ROI on their advertising investment, it wouldn’t be worth their time setting up and managing the campaign.  Our potential contribution to overall results was a rounding error on their typical campaign.  And considering the custom integration work, it wasn’t going to appeal to anyone but the most “visionary” advertiser. 

It was at this point that I realized the life savings I invested in Uproar was in serious jeopardy.  I asked our CEO for the opportunity to focus on user growth so that we could eventually attract big budget advertisers.  We managed to generate a substantial audience (becoming the world’s biggest game site), but even then still suffered from rapidly dropping ad rates that plagued the entire web.  It seemed each time we doubled traffic, the online advertising rates cut in half.   

What I like least about an advertising supported business is that it is almost impossible to always do the right thing for your customers.  Your two primary customer groups have opposing needs.  Each time you try to please your advertisers, you damage the user experience – and vice versa. 

Of course it is possible to build a valuable advertising supported company that overcomes this challenge – just look at Google.  Google reconciled the needs of advertisers and users, improving the user experience and advertiser results with perfectly targeted advertisements.  In fact Google’s advertising results were so good that later as an advertiser I was able to scale a profitable marketing spend to millions of dollars without ever speaking to a sales person (the results sold the ads). 

Today most online marketers buy on tracked ROI.  So if you are considering an advertising model, I highly encourage you to develop one that delivers results that will minimize the need for a sales team.  I do not envy the salesperson that has to make a case on the abstract branding value of their web property.  As tracking continues to improve, it going to be a much harder to incubate a startup with advertising.  Long-term success will require years of high burn.

In my experience, it is much easier to build a lean startup using a direct monetization model such as subscription, software licensing or ecommerce.  With these business models, your customer acquisition can be self funded from the beginning because it works at a very small scale.  For example, if your users have an average lifetime value of $100, your breakeven acquisition cost is $100 less any direct costs of serving this customer (such as storage or bandwidth).  Of course if you can acquire the user for $50 and there is no marginal service cost, then you’ll generate a $50 marginal profit on this user.  With a good arbitrage model, it becomes much easier to sustainably build a customer base from day one keeping burn at a minimum.  And eventually enough marginally profitable users offset fixed costs – creating an overall profitable business. 

Arbitrage supported customer acquisition can even work on a freemium model, but your allowable acquisition cost for a free user will be much lower when you average revenue across the whole free user base.  Still, over time you can add additional monetization channels to boost your allowable acquisition cost and expand the number of viable acquisition channels.  Ultimately freemium businesses become more defensible than “premium only” businesses, because you’ve built the premium portion of your business to compete in the toughest economic scenario.  I’ve blogged about freemium several times already, but have a lot more thoughts to share as I’ve helped several additional startups implement the model since my last freemium post.  Look for a more comprehensive post soon, but in the meantime here is a link to my earlier freemium posts.

Iterating Without Understanding?

It seems there are two camps of “evolved” marketers these days. One group recognizes that it is critical to understand customer needs by engaging them at every opportunity. The other group is completely focused on metrics driven iteration. Until recently, few combined these powerful forces.

I started in the camp of online metrics and scorned the beanbag marketers who didn’t “get” analytics. At Uproar in the mid to late 90s, metrics were our competitive advantage. We tested, measured and optimized everything. We knew we couldn’t afford any waste if we were going to have a chance to beat the heavily funded Silicon Valley gaming startups and the established companies getting into online games (Microsoft, Yahoo, Sony). Ultimately, this obsession with leveraging metrics to track ROI and improve conversion through iteration was key to becoming the worldwide leader in online games and peaking at a billion dollar stock market valuation. Despite their much deeper cash war chests, the beanbag marketers couldn’t compete with our no waste metrics driven approach.

Today the Darwinian economy has killed off most web businesses that don’t leverage metrics, so this is no longer a competitive advantage – it’s a necessity. But many web marketers stop there.

In my next startup I was fortunate enough to have a venture capitalist who helped take our approach to the next level. We attracted his investment with our metrics driven online marketing approach and then he quickly improved it. He constantly grilled me with the question “Who is your customer?” During our weekly meetings he never failed to ask about the last time I spoke to a customer. I got extra brownie points for meeting with customers in person. To be honest I initially focused on engaging customers just to appease this VC. But it didn’t take long until I was able to use this information to improve results. Informed iteration helped us increase purchase transaction rates 10X in just a few months, which made scaling a profitable marketing spend infinitely easier. Later customer engagements uncovered revenue opportunities we never could have found through metrics driven iteration. These revenue opportunities eventually accounted for more than half of the company’s overall revenue volume – making possible the eventual IPO filing.

It wasn’t until I began the Interim VP Marketing role at Xobni that I discovered Steve Blank’s The Four Steps to the Epiphany. This book added a systematic process for uncovering the critical information needed to build a thriving business and keep improving results.  The great news is that Steve Blank recently started blogging at Perhaps even better news is that Venture Hacks now records Steve Blank’s lectures at UC Berkeley and posts them online.

The same Darwinian forces that made metrics a necessity for online marketers are once again shaking up the web startup world. It has become a major competitive advantage to combine Steve Blank’s customer development approach with informed metrics driven iteration. And it’s only a matter of time until this approach becomes a necessity for survival.

So what’s next? I’m certain that eventually a platform will emerge that ties it all together. This platform will facilitate the process of collecting and analyzing actionable customer information and manage the iterations that deliver optimal results. Up to this point we’ve always had to custom develop these tracking and reporting systems, while using disconnected systems to drive understanding (surveys, Excel…). Off-the-shelf analytics programs have been bloated with data that is useless for improving results.

Rather than holding my breath for someone to deliver this dream platform, I’ve been advising KISSmetrics as they work to create it. I’ve given them total visibility into my approach and turned over reports that have evolved over many years of execution. Of course they have given me equity in the company – but I’d be passionate about this metrics driven customer development platform either way.

Social Media Marketing Strategy for Startups

In the last year, Social Media sources (blogs, Digg, Twitter, Facebook, etc) have quickly emerged as the most powerful growth drivers in the startups I’ve helped launch. Despite this, I’d have a hard time writing a ten page book on Social Media Marketing. So on a recent trip to Barnes & Nobel I was surprised to see several thick books on the subject. One contained over 350 pages of social media marketing “wisdom.”

I’m sure there are a few useful nuggets in each of these books, but I doubt it would be worth wading through hundreds of pages to find them.

This will be a very brief blog post explaining how we’ve been able to drive hundreds of thousands of new users through social media in recent startups. OK, here it is: effective customer development… By figuring out who needs your product/service, why they need it, what constitutes a gratifying experience with the product/service and getting more of the right type of people to this gratifying experience (highlighting the right benefits and reducing barriers) social media can become a powerful driver for your business too.

You are probably asking: How can this possibly be an effective Social Media strategy? To understand this, you need to understand why social media is important for startup marketers. The most relevant part of social media is that it includes a person’s network of trusted online contacts. Some of these contacts broadcast their opinions widely through blogs, others a bit more narrowly through twitter and status updates and finally others through facebook wall posts, etc. Social media has given consumers better access to their expanded personal networks and a megaphone to broadcast their opinions and experiences to people who actually care.

So how does this help startups? The best innovations have always come from startups, but we’ve been blocked from the channels that were so critical for established companies. Over time these companies educated the channels and expanded their presence. A little startup had a very hard time competing even if they had a vastly superior product. And the channels were seldom awarded for trying to help the startup, since most startups went out of business anyway.

Today, social networks make it much easier for useful innovative products to spread to the masses (especially when combined with Google Adwords). But for a startup to leverage these social networks, they need to get their innovation into the hands of the right users and ensure they have the right experience. And if they are able to create a clear value proposition, these users will be able to more easily spread the innovation to their networks.

While social media makes it easier to spread useful innovative products, it also empowers vigilante customers that have been wronged. Therefore be very careful trying to game these systems. One of the most common short-term gaming tactics is address book scraping where users are prompted to invite their entire address book to join a service. This is often successful because a small percentage of users inadvertently agree to allow their address book to be scraped when they initially sign up for the service. If one in ten people get their address book scraped and each one has 100+ contacts, growth quickly goes viral. In the short-term the marketer looks brilliant as numbers go through the roof. But many of these (former) customers are now furious and let their network know about it. Eventually these tactics bite the company in the ass.

One of my favorite travel services recently burned my mother with this tactic (after I introduced her to the service). Not only has she expressed her anger to every contact, I will never recommend the service again. And that is after I earlier blogged about the service and verbally recommended it to many. I’d reveal the name, but a good friend is an investor. Was that really worth the short term gain of address book scraping?

Effective social media marketing is really just about good old fashion doing the right thing for your customers. Once you’ve accomplished this, you can use these networks to enhance your relationship with your customers (through a company blog, twitter account, facebook page, etc), but I believe these tactics are minor compared to the approach described above.

Startup Theory VS Reality

In addition to recently starting two new customer development projects, I’ve also been busy prepping for my guest lecture in Steve Blank’s Customer Development course at Haas (UC Berkeley business school).  The lecture was Tuesday night.  One of my key objectives was to help the students understand that everything seems intuitive and easy in the classroom, but in the heat of execution you quickly get overwhelmed.  A single board member demanding quick growth can easily push you from a logical sequence of figuring things out to desperately throwing money at potential growth drivers.  Anyone who thinks it’s going to be easy is in for a big surprise. 

This blog shares the objective of grounding entrepreneurs is reality.  Most entrepreneurs (especially first timers) are unrealistically optimistic.  If they logically thought about the risks, they probably wouldn’t be starting a company in the first place.  The chances of failure far outweigh the chances of success.  But everyone thinks they are the exception to the rule – and some actually are…

I’m often disappointed that I don’t have more time to update this blog.  I guess if I did have a lot of time to update the blog, it would be full of impractical theory that isn’t grounded in reality.  Real entrepreneurs (not the armchair wannabe entrepreneurs) would quickly recognize it as an exercise in mental masturbation.  But I understand that the infrequency of my posts causes some readers to forget about it.   So rather than risk the impression that I’ve given up on the Blog, I’m going to try to start posting on a regular schedule – a new post every Monday. Fortunately the majority of my readers don’t have time to read several posts per week.  They are busy growing their own startups, etc.

More Customer Development Cycles

I kicked off this quarter’s two new customer development projects earlier this week. It seems like I just started with Dropbox and Eventbrite, but we’ve actually completed the full six months with Eventbrite and we’re in the last few weeks with Dropbox. Eventbrite and Dropbox were really the “Beta” customers for my six-month customer development program. I am extremely grateful to both for taking an early risk on my program. We’ve made enormous progress, but you never really finish customer development, so I look forward to continuing to help both however/whenever I can. Going into these next two projects, I feel like I have a much clearer understanding of the customer development success hurdles and opportunities so we can make even faster progress.

On a personal note, I’m thrilled that I can make a viable business out of working with startups on their customer development. I couldn’t imagine doing a job that would be more fun. This is by far the most exciting time in the company creation process – watching the startup get validation for years of hard development work.

One of my biggest challenges these days is keeping focus on execution while still finding time to select the next quarter’s startups. I’m averaging 15-20 introductions per month for the two spots I have to fill each quarter. Of course in this economy, this is a much better problem to have than the alternative.

I’ve gotten fairly efficient at determining which companies are a good fit. We start with a quick 10 minute phone call to see if the company is too early, late or competitive with an existing/previous client. I then give the founder/CEO a quick overview of my background and the customer development program. If they are still interested, I ask if they would be willing to have their users fill out a brief survey. This gives me some idea about early user perceptions as to how well the product meets their needs, the intensity of those needs and potential substitute products. When I combine this with potential viable angles to approach customer acquisition and information about the business model, I can quickly narrow down the list. So for the two openings for May I have it narrowed down to 7 very good fit companies. But I’m reluctant to fill both spots because I’m getting several more interesting intros each week. I’ll probably commit one of the spots in the next couple of weeks and leave the other open through the end of March.

The whole process is pretty time consuming, but essential for finding the right companies.

I apologize to anyone who I’ve been introduced to recently if this seems a bit impersonal. Hopefully this blog post will help to put it in context a bit… If we do end up working together in the future, you’ll be happy to know that I’m not spending several hours per day with prospective new startups. Once it looks like a good fit, I’ll definitely spend the time to make sure we have the right chemistry.

One other quick request for anyone that is considering working together… Please wait until we both agree there is a good potential fit before reaching out to my existing/former CEOs. As you can empathize, they are very busy. Once we agree it’s a good fit, I feel very comfortable having you contact them.

Don’t Hire a Marketer before Product/Market Fit

This must seem like heresy coming from a guy who had the title VP Marketing for 10 years and writes a blog called But the fact is marketing is not appropriate for startups in the initial stages of customer development.

A newer model is emerging originally sparked by Steve Blank, author of Four Steps to the Epiphany and teacher of customer development at both Berkley’s Haas business school and at Stanford University’s graduate school of engineering. I consider Steve Blank to be the world’s foremost expert on customer development. Through his experience as CEO, Founder or VP Marketing at 8 startups (5 of which resulted in $100m+ exits – the last was E.piphany) and advisor/board member to numerous other startups, he has concluded that the ideal model is very different from the traditional startup approach of abdicating customer development to a VP of Marketing. I completely agree with his claim that none of the traditional VP Marketing skills are relevant in the first two customer development steps of a startup’s life (page 215 Four Steps to the Epiphany).

Given the high VP Marketing turnover rate at startups and more importantly the extremely high failure rate of startups, his model is definitely worth considering vs. the traditional startup marketing approach. His recommendation is to form a customer development team led by a “head of customer development.” The team should include the CEO and spend a considerable amount of time in the field with prospective customers validating/refining hypotheses about their target customers and the problems they are solving. He says this team “must have the authority to radically change the company’s direction, product or mission and the creative, flexible mindset of an entrepreneur.”

After five years in the VP Marketing role at LogMeIn, I too recognized that the initial stages of customer development are very different from marketing in the later stages of a startup or especially a large established company. In fact, I concluded that much of my success as a later stage VP Marketing (both companies filed for IPOs) was the result of momentum we had built in the early stages of customer development. I decided that going forward I would specialize in early stage customer development.

I was first introduced to Four Steps to the Epiphany when I was Interim VP Marketing at Xobni during the first half of 2008. I had been looking for resources to help me understand how to drive adoption of this innovative market-creating product (a very different challenge than we had at LogMeIn which disrupted an existing market). The book provided a great framework to follow as we worked to drive early customer adoption. Since then I have helped to accelerate market adoption at two additional startups, while continuing to advise at Xobni.

Given my obsession with startup customer development, I was thrilled for the opportunity to meet with Steve Blank for coffee earlier this week and was flattered when he invited me to present to his class at Haas on March 10th. We agreed that my approach really begins at his Customer Validation step.

There are two key twists I’ve made to his framework. The first is that I drive the entire process with metrics. In fact I’m working closely with KISSmetrics (where I am an advisor) to define all the tools and reports needed to build a complete Customer Development Platform.

The second twist is that I add a customer development specialist when the Validation Step begins, which is the role I fill with startups. I belive eventually many people will specialize in this critical stage.  Without a specialist, startups waste critical time and resources deciding where to execute. It’s surprising how similiar the process of uncovering the critical information needed to drive customer adoption across different types of startups.

One place where my views diverge a bit from Steve Blank’s is that he suggests that a good candidate for the Head of Customer Development is someone with a product management or product marketing background. The key issue I see here is that experienced product marketers suffer from the “curse of knowledge.” They know enough about product marketing to want to focus efforts on areas that are usually irrelevant to startups. Having the discipline to follow the right process at this stage is much more important than experience. The good news is that I’ve found ambitious, analytical recent college graduates to be ideal candidates. They are easy to find and their salary and equity requirements are also much lower than a VP Marketing – freeing up resources to bring in a customer development specialist. This combination accomplishes more results faster than an experienced product marketer by themself, and generally costs the startup less cash and equity. Of course if you already have an experienced marketer I wouldn’t advocate replacing them.  This guidance is really directed at startups that are trying to hire an experienced marketer – and a warning that you will be paying a premium for skills that aren’t critical at this point.

Once the startup has discovered how to drive customer adoption and begins building momentum, it should be easier to attract the long-term VP Marketing (or promote the head of customer development).

What is a Perfect Startup Launch?

Conventional wisdom says “launch” is a big bang event that happens in a very short period. It includes a press tour, an expensive launch marketing campaign, and if you could shoot balloons out of your homepage, most would think that’s a key element. The hard work is in orchestrating it all, so on the day of launch there is a big party where everyone drinks champagne and congratulates themselves on a job well done. New product launches that follow this conventional wisdom fail more than 80% of the time

I’ve always launched the way it should be done – initially because I was an untrained marketer. A perfect launch lasts several months and is a very iterative, metrics-driven process. It should start with the understanding that all of your assumptions are probably wrong. You don’t know who your most passionate users will be, you have no idea how to position the product and can’t understand what will prevent potentially passionate users from reaching a gratifying experience. I once heard Vinod Khosla describe this period as watching a flock of sheep grazing in an open field. The flock always gravitates towards the best grass. The launch period is about watching the flock to identify this best grass and figuring out how to describe it to drive as many of the right people (or to stick with the metaphor, sheep) toward this grass.

Those that follow the conventional “big bang launch” waste a lot of money incorrectly positioning their products and attracting the wrong types of users.  Executing the launch phase correctly improves results from external customer acquisition intiatives by 200% to 1000% within a few months.  For this reason alone it is better to conserve marketing dollars until after successfully completing the launch phase.  

I’ve recently begun calling 12in6 a “launch accelerator” because the true value we offer is the ability to quickly uncover key information by engaging early users and iterating/improving the complete customer acquisition process based on their feedback and measured results.  The five startups launched with this approach have become leaders in their respective categories (2 filed for IPOs). Luck is only part of the reason.

What Makes A Great Startup?

That’s the zillion dollar question.  And no one knows the answer definitively.  Even the most successful VCs have major duds in their portfolios.  But every startup that becomes a large profitable company has the following two elements in common. 

1) Product/service people really want or need

A “product/service people want” is the starting point for any successful startup and part of the reason that I love working with Y Combinator startups.  They drill the mantra “make something people want” into hackers’ heads who are actually capable of executing the vision. 

MBAs often spend way too much time obsessing over the business model before they’ve figured out how to create a useful product. A great business model can never make up for a product that doesn’t meet a want or need. 

I don’t really consider myself an expert on creating useful products.  In fact, I’m not sure anyone is an expert.   Steve Jobs may be considered the world’s best product visionary, but NeXT Computer was hardly a smash hit.  And the executive behind Microsoft’s lucrative Xbox business has added much less value with the Zune. 

I was lucky in my first two startups to work with great products – the original founder’s vision really resonated with users.  I helped both companies reach their potential, but I didn’t create that potential.  Luck of stumbling into great products can’t last forever, so I now obsess over finding better ways to figure out if a product has potential before committing to take it to market.  Every launch program starts with a discovery phase where we dig into how well the product is resonating with users, who really needs it, and why it’s resonating.  Then we decide a timeline for going to market.

The only way to know if a product will resonate is to get actual users on it – and the sooner the better.   If the product isn’t striking a nerve, it’s better to delay an aggressive go to market push.  Many startups succeed with a refined vision rather than their original product.  See this list for examples.  

Sean O’Malley’s blog and Eric Ries’ blog are both great resources for helping you hone your product.  But remember, the only way to know if you’ve succeeded is to trickle some users onto it.  Sean O’Malley’s slideshare presentation below is also very helpful.

2) Business model that works

Ultimately startups get VC funding based on their potenital to create a thriving business.  This requires combining a needed product with a business model that pays the costs of building a lucrative business.  There is as much art in creating a strong business model as there is in creating the perfect product.  It is a thing of beauty when all the pieces fit together in a perfectly tuned economic engine.  Each ingredient is relatively simple, but making them work together at scale is extremely difficult.  

These are the key variables to consider when developing a business model that supports profitable, scalable user acquisition channels:

  • Lifetime value of a user
  • Cost of acquiring a user
  • Marginal costs (besides acquisition cost)

The lifetime value of a user must exceed the cost of acquiring the user and any marginal material/service costs (costs that increase incrementally with each customer).   This is generally pretty easy to achieve if you have low marginal costs.  Most traditional software has zero marginal cost, which is why freeware is possible (it may not be profitable, but it is sustainable).  If you’re lucky, the lifetime value of each user is significantly higher than the marginal cost.  In this case you have a lot left over to spend on profitable customer acquisition.  On the other hand, if you have marginal costs that exceed the lifetime value, then this is a non-starter, no matter how useful the product is. 

If your product is useful and the basic business economics work, then the next part of the business model puzzle is figuring out “customer acquisition channels.”  VC funded businesses must have very scalable customer acquisition opportunities.  No VC is interested in funding a business that maxes out at $1 million/year in revenue – even if it has 90% profit margins. 

Once you have a basic engine that works, keep tuning all pieces to make it work better (improve conversion rates, bring marginal costs down, find ways to increase LTV…).  This will open additional profitable customer acquisition channels.  And obsessively tuning all these areas has been a major factor in my ability to attract 10’s of millions of users for startups that ultimately filed for NASDAQ IPOs. 

The Ultimate Startup

The ultimate startup would be one where the product meets a critical need for a huge addressable market, users have a very high average lifetime value, there are no marginal costs  and there are very scalable user acquisition channels that are completely free  (ie viral).  Unfortunately I don’t know any businesses like this.  Facebook comes close, which helps explain their valuation of $15 billion (who knows what it is now??)…  The only piece they are missing is a high lifetime value per user. 

The science behind viral marketing has rapidly evolved in recent years, so I’m axiously waiting for this ultimate startup to launch. Hope I can get some of the early equity in it.

Recruiting Startup Marketers from Wall Street

Rather than wasting their time on Wall Street, Mathematicians should be guiding online marketing for startups. 

For years Wall Street has used brilliant mathematicians to create investment models that they hoped would reduce risk and generate billions of dollars in investment returns. They increasingly leveraged their investments falsely believing that they had eliminated most of the risk – which of course added more risk.  Unfortunately most Wall Street investments are based on speculation which makes it is nearly impossible to remove risk regardless of the sophistication of the model.  Before I stopped watching the news CNBC was blaming these mathematicians for creating the complicated investment instruments that led to the recent collapse – claiming that even the CEOs didn’t understand them. And it’s not the first time that too much trust has been put into the abilities of these whiz kids. The financial crisis of 1998 has also been blamed on overconfidence in mathematicians ability to predict speculative markets.

I have zero confidence in really smart people being able to predict speculative markets. I’ve never trusted mutual fund managers with my cash – instead always putting most non-angel investments into S&P 500 index funds.

However, this is a place where mathematicians can create vast wealth – and that’s in startups.  The returns in online marketing are a lot more predictable than investment banking.  By knowing the lifetime value of your users, you know exactly how much you can pay to acquire new users with an acceptable profit margin.  As long as you don’t saturate a source, it generally delivers the same ROI with each campaign.  The beauty is that a very small investment can give you excellent guidance for the returns of a much larger investment.  Even with 7 figure monthly budgets, I’ve always insisted my teams test every new media with $5o0 buys.  I’ve used this approach to discover ways to spend millions with a very fast return on investment.

At my last long term VP marketing role, my first hire was a trained actuary (the guys that calculate risk for insurance companies).  And the marketers at two startups I’m working with now are both sharp mathematicians – one recently graduated from MIT with a math major.

I first witnessed the power of marketing number crunchers when I was at Uproar.  In 2000 we acquired a startup called iWin.  In a very short time they had created the second most popular casual game website in the world on cashflow positive results.  Their secret weapon?  Several math whizzes in their early 20s who had spent a year in investment banking before running the iWin marketing and product teams.  They were so effective that they took over the marketing and product leadership at Uproar (I had already moved on to President of Uproar Europe).

The math behind viral marketing is even more intriguing.  Read Andrew Chen’s Blog  for the inside scoop on how it works.  Viral Marketing has created some of the fastest growing companies in history and most have never spent a dime on marketing.  And who is dominating the field of viral marketing?  You guessed it – mathematicians. 

Unlike investment banking where leverage increases both risk and reward, in online marketing leverage only increases the reward.  The 12in6 Methodology is all about focusing on high leverage projects that improve the ROI of every future marketing initiative.

Looking to hire someone to lead your marketing?  Hire one of the recently unemployed Wall Street analysts (and show them this post to get them excited about the potential of their new job).

The Startup Marketing Launch Process is Broken

**See updates at bottom posted on Jan 20, 2009**

Originally published March 2, 2008

The majority of VC funded startups fail and a large part of the blame should fall on marketing.  Specifically, executing a flawed marketing process during the startup’s critical customer traction stage.

Through running marketing at two startups for the full cycle from launch to IPO filing, I’ve discovered that success at various stages requires very different marketing skills.  It also became clear that early stage marketing execution was the most critical to long-term success.  Yet it is nearly impossible to get good at this critical marketing stage.

Why?  Because effective marketers don’t get enough repetition in the early stage to master it.  Any skills they do develop become rusty.  Stock option vesting periods lock them in well beyond the traction stage (typically four years).

I actually stayed five years in each of my last two startups.  In that final year I had very little time for hands on marketing; I was too busy with such things as managing a team of marketers, recruiting more marketers, meeting with the sales team and other executives, preparing for board meetings, traveling to conferences and trade shows, etc, etc…

I know that my skills are best suited to the earliest stage of marketing, but I wasn’t about to walk away from extremely valuable options.  Even after the options vest it’s still hard to walk away.  Beyond paying hundreds of thousands of dollars to exercise options, you also have to pay income tax on the appreciated value of those options.  If the company isn’t public, you can’t even sell the options to get the money to pay the tax…  Anyway, the point is that despite knowing I’m best at marketing during the early traction stage, I was compelled every year to let those skills get rustier as my options appreciated and vested.

My solution to the problem may seem a bit radical at first, but considering the billions lost in failed VC investments it deserves careful consideration.  Here it is: Startups should plan from the beginning to have different marketing leaders at different stages of the company.  One marketing leader to gain traction and kick start growth, one to manage growth until an IPO and one for post IPO leadership.  Considering the average tenure of a VP Marketing is less than 2 years anyway, this really isn’t that radical.  It’s just planning the transitions rather than making a bunch of disruptive firing/demoting/hiring decisions.

You might be thinking that a consultant approach would work here, but I believe to be effective the marketing leader needs to be totally immersed in the role.   Another common approach is just to force the early stage marketer out when they become less effective (the disruptive approach mentioned above).  If they have played a key role in the company’s success, I don’t believe this is a very ethical approach – even though it’s probably the best thing for the company.

So rather than forcing out the effective early stage marketer, have an agreement from the start that it is a short-term role.   I recommend calling it an interim VP Marketing role and planning for full time 3 to 6 months followed by another 6 to 12 months of advising (working with the longer term VP marketing).  This ensures full knowledge transfer and gives the company access to two sharp marketing thinkers during the very important second stage of the company’s growth.  Options will still be an important motivator for the Interim VP Marketing, but they should have a much shorter vesting period.  The total options allocation to marketers will be higher, but this approach should result in faster market traction, meaning less burn and less need for future dilutive rounds of funding.

It’s probably already clear that I am now specializing in this traction stage.  Xobni is my first assignment.  Of course everybody warns that it will be tempting to want to stay on (especially since Xobni is really picking up steam), but I am very committed to developing this approach over the next few years.

Another advantage of this approach is that it will hone my ability to identify great startup opportunities.   Even the best marketing approach can’t save a crappy idea.  The challenges and opportunities of each former assignment will be fresh in my mind when I look for the next startup to join.   I’ll try to avoid startups with key challenges that I could not previously overcome and try to join startups that have the types of assets that proved important in an earlier assignment.

This knowledge is also very valuable to VCs and I already have several that have asked me to help them assess new investment opportunities.   I’m expecting this will be my pipeline for finding new startup opportunities. Given the alignment of my interest with VCs in picking the right opportunities, they are willing to pay me to conduct a marketing viability assessments to dig into target customer’s need for the solution, real addressable market size and segments and any existing current demand for the category.  If everything looks good after this assessment, the VC can make a less risky investment and I can make a less risky decision to try to take on the interim VP marketing role (if a marketing leader is not already in place).

Update Jan 20, 2009: I temporarily removed this post several months ago with the intention of making a few edits and quickly reposting it.  Unfortunately it slipped through the cracks despite being one of my more popular posts.  My thinking has a evolved quite a bit since I wrote this post 9 months ago.  During that time I have nearly doubled my experience taking startups to market (despite being in startups for 10 years).  As much as the idea of interim VP Marketing roles sounded good at the time, it really limits my ability to help several startups and requires more energy than I could possibly muster (this is a very intense period in startups).  Instead I have shifted my focus to work alongside a long-term marketer and guide them through executing the key phases of going to market.  This approach has worked very well at both Dropbox and Eventbrite.

We still have a long way to go before the launch problem is fixed at VC backed startups, but there has been a lot of progress in the last year.