I’m Founding a Startup

In case you missed my Tweet on Aug 13th “Burn the boats – I’ve reached the point of no return and finally admitting I’m founding a new startup. Details soon.”

I didn’t really intend to become a founder, but was hit with an epiphany of a huge opportunity that I was perfectly suited to execute. I actually tried to push it out of my find for several days (my consulting practice has been fun/lucrative) but I kept having a nagging feeling that it had to be done. I shared the vision with a few venture capitalist friends and they quickly offered to fund it. I then received strong need validation from potential customers, which wasn’t surprising since the original epiphany had been based on engaging many potential customers.  Momentum has been strong ever since (though surely there will be course corrections along the way).

I’ll be on a blogging vacation for the foreseeable future…

To Pay Or Not To Pay To Acquire Users?

I recently heard a VC say that startups “should spend the least amount of money possible on marketing.”  This is a healthier attitude than the opposite prescription of undisciplined land grab, but a better approach is pure ROI marketing.  Marketing opportunities that offer a fast payback with additional profit margin are a key component for reaching your startup’s full market potential.

Work from Free to Paid Drivers

Ultimately my goal with any startup is to acquire the highest number of qualified users possible – at a positive return on investment.  But it often takes several months after “launching” to transition to aggressive scaling. 

I like to start with free customer acquisition channels since they obviously offer the best opportunity to generate a positive ROI. Free drivers may include viral marketing, self-implemented SEO and listing with any directories that are appropriate for your product.  Leveraging this early user flow we optimize the first user experience for the right target users and introduce a business model that generates sufficient revenue to fund future paid user acquisition.  When we start developing paid channels, we work our way through the lowest hanging fruit first, beginning with demand harvesting channels, later adding demand creation channels. 

Kill the Opportunity for the Competition

If your growth is accelerating, you will attract competition.  And this competition will likely be savvy enough to replicate the customer acquisition and monetization approaches that you worked hard to invent.  So it is important to make it as difficult as possible for them to get traction.  I know some of you are saying “but your recent post told us to ignore the competition.”  My point was not to ignore the competition forever, simply to ignore them while you are figuring out a repeatable, positive ROI way to acquire customers. Competition (especially those that are spending irrationally) will distract you from this critical task.

But once you have optimized the first user experience and introduced a business model that generates sufficient revenue to fund user acquisition, it’s time to focus your marketing efforts to aggressively build new customer acquisition channels and scaling existing channels – both free and paid.

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.

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.

Launch Your Startup with a Trickle

Every startup wants to get a fast start out of the gates.  But starting too fast can be a mistake.  You only get one blank slate on which to build a reputation, so you better do it right the first time.  Pacing yourself at the start will allow you to offer excellent customer support as you improve the user experience.  It also lets you conserve cash until you can get a much bigger bang for your buck.

Start by driving just enough traffic to optimize every point on your conversion funnel.  Don’t worry about your initial ROI, since your overall marketing spend will still be relatively low.  Through an effective funnel optimization program, I’ve seen visit-to-purchase conversion rates improve by 2000% in just a few months.  In this case, funds spent on the exact same media after this optimization generated 2000% more revenue for every dollar invested.

Before you can begin your funnel optimization program you’ll need to determine your funnel’s baseline conversion rates through effective tracking and reporting.  If you don’t have a good tracking system, check out Google Analytics (it’s free).

Funnel optimization involves frequent tests, surveys and customer interviews.  Everything is worth testing, but surveys and interviews will point you toward tests that will yield the best results.  Be sure to isolate tests to one variable at a time.

Don’t test individual marketing programs until you have achieved significant funnel optimization.  Then many cost-effective marketing programs will be possible.  And you will also improve your chances of having satisfied customers to help you get the word out.