There used to be a saying back in the day that “the best way to kill a bad product was to market the hell out of it.” Perhaps related to the Ulysses S. Grant quote, “The best way to get rid of a bad law is to enforce it.”
The Forbes article For Even Hot Startups Premature Marketing Can Mean Premature Death by Derek Lidow is a case study of how way too much VC money enabled companies like Munchery to overrun their headlights by marketing their services before they were fully baked.
I’ve referred previously to the firm CB Insights and how they analyzed 100 defunct startups to identify the top 20 reasons they failed. As noted, “no market need” was number one. That jibes with the findings of NSF (The National Science Foundation) that the number one reason post-docs’s startups failed was because they built products no one needed. The number two CB Insights’ reason was “ran out of cash.” Spending millions on marketing to try to buy marketshare and catch the elusive “first mover advantage” is a fast way to run out of cash.
Munchery raised $120 million in equity financing and more than $11 million in venture debt financing before declaring bankruptcy. In between they pivoted so often the employees all got motion sickness.
Mr. Lidow outlines what he sees are the three distinct stages that almost every successful startup must navigate: customer validation, operational validation and scale-up. Only in the scale-up stage does marketing come seriously into play. I’ll add my comments to his three stages. However, before I do that I should point out that he skips the all-important first stage: customer discovery. Before you can validate your customer you must discover them through dozens of interviews based on your initial hypotheses. Pivoting during customer discovery costs nothing! And as you work your way through various customer types and segments you will be setting yourself up to later validate your business proposition with your target customer. Skip this stage at your peril!
Customer validation Here’s where having a robust prototype can pay off as you wear out shoe leather going back to those customers you identified during the customer discovery phase to ascertain if your solution fits with the problem you discovered that your target customers all share. As Mr. Lidow says, “Stage one ends when you can describe, with a high degree of certainty, who will buy your product or service and how you will deliver it.” Though I believe “how you deliver it” better fits in the operational validation phase. Thus I’d change this to “… who will buy your product or service and why.”
Operational validation. Too much startup literature is focused on product and not enough on process. But if you do not build the proper processes: financial, distribution. customer service, technical infrastructure and administration you will fail to scale. The canonical example of this is Friendster, inventor of the social network. Friendster failed as it never built enough infrastructure to prevent its site from crashing due to the unforeseen tsunami of users. Like changing a product, once you have launched, it can be painful and expensive to change your operations well. Before attempting to scale you need to stress test all of your operations to shore up any weaknesses you find.
Scale-up. This is why the VCs invest – they want growth. Why do they want growth? Simple, because it’s the only path to either world domination (very, very rare); an IPO, rare but doable; or an acquisition, the most common exit for VC-backed companies. Here’s where you take your foot off the brake and hit the marketing accelerator to drive demand. If you have kept your gun powder dry through the previous three stages you will be able to go after the business holy grail: economies of scale. Which not only drives down your unit costs, but give you a pricing advantage over competitors.
This advice does not mean you wait under launch to hire your marketing and sales team! What it means is you don’t unlock their budgets until you are in a position to scale. Before that they are participating in customer discovery, validation, and operations – working on such mundane but critical issues as pricing and returns policies, and planning the traditional media and social media pr and marketing efforts. Trying to paste marketing onto an existing product is almost as dangerous as spending money on marketing before you are in a position to scale.
The key issue in marketing spend is timing. Too soon and you waste money; too late, and you will lose customers to competitors.