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In this day and age of shrinking VC funding for startups, you might think your company is the exception. You might think your business model is so ripe for growth with a small cash injection that VCs should compete to see who can be your primary investor.
Aside from the fact that startup founders are rarely objective about their business prospects, it’s always good to get outside perspectives before going down the potentially long, winding, and soul-wrenching road of VC pitches.
Do you know who you would like to check out as a first step before you put a lot of time and energy into your pitch deck? Your marketing agency. (If you don’t have a desk, befriend an agency exec.)
If an agency isn’t your first choice as a sounding board, hear me out. I’ve worked with dozens and dozens of intelligent, ambitious startups since I founded Playbook Media. Throughout all those relationships, I’ve recognized a few key indicators that indicate whether your company is capable of growing unicorn wings with some extra resources – or whether you need to address some fundamental issues before taking your pitch to your version of Sand Hill Road .
Related: The 10 Most Reliable Ways to Fund a Startup
1. Burning threshold
Also called a “burn multiple,” this metric takes a broad view of your business to calculate how much revenue you’re bringing in for every dollar you spend. Divide your net consumption by the net new income for a certain period and you have your number. (Anything over 2 these days, and you’ll struggle to get funding because your operational efficiency needs work.)
Your agency partners don’t have all that data to calculate your burn threshold, but there are plenty of ways they can help you improve it. They can reduce costs by lowering your average CAC (the cost of acquiring a customer). They can improve your customers’ average LTV (lifetime value) using lifecycle marketing, referral programs, upsell campaigns, etc. They can also run frequent forecasting models to ensure your strategic decisions are based on current data and market conditions – which change rapidly evolve. .
An agency can be helpful in understanding your full marketing picture and assessing where you can make cuts and experience minimal revenue impact. Agencies adept at MMM (media mix modelling, which I’ll get into more later) will be great partners in this.
Your K-factor is your natural growth rate when you’re not marketing. It usually comes down to product-led growth and virality that comes from your existing customer base, site users, media outlets picking up on your momentum, etc. By the way, this isn’t specific to products; if you have a software service or platform, you can build tons of product-driven growth.
Agencies can help you determine your K-factor if they thoroughly understand the impact of each of your advertising channels. Ideally, your agency will use media mix modeling to determine the incremental impact of each channel; when they analyze all of your channels and touchpoints and compare it to your overall growth, they can isolate a base level of growth that is not explained by those channels. That’s your K-factor.
The key to optimizing your K-factor is growth loops. Reforge defines growth loops as “closed systems where the input through some process generates more output that can be reinvested in the input.” This can also go beyond organic loops — although K-factors are defined in the absence of ads, you can have a big impact with a small advertising budget if you work with growth loops. An example is taking a popular TikTok post from your company’s page or a relevant creator and running a Spark ad, which boosts the post and creates more engagement that fuels the post’s organic momentum.
Related: You Can’t Get VC Funding for Your Startup. What now?
3. Channel Dependency
Despite recent setbacks (check out the last few quarterly reports), Google and Facebook still dominate their competitors in gobbling up advertising budgets, as we see time and time again with new customers coming to us to jump-start their growth.
I think brands should hardly ever spend more than 50% of their budget on Google and Facebook (combined), which is easier said than done. There are several reasons for this, but the two main ones are that Google and Facebook are getting more and more expensive and that all companies need to protect themselves against over-reliance on one channel that could be hit by algorithm updates or outside influences such as the iOS14 release.
Aside from these reasons, there are clear warning signs that you need to diversify your marketing channels as soon as possible:
- Diminishing returns (CPAs keep rising no matter what you try)
- A lack of new users
- Demographic trends are shifting away from your core platforms (for example, younger generations now use TikTok instead of Google for their preferred search engine)
- Business goals that are inconsistent with your core channels
If any of these sound familiar, start working out ideas and resources to reallocate budget to new channels.
Related: 9 Extremely Smart Startup Financing Stories
4. Market penetration
There are a few market penetration scenarios that potential investors will immediately target (for better or for worse):
- The market is small and you dominate, but may have a hard growth cap (example: Wild Earth)
- The market is large but ripe for disruption and you have one or more differentiators that will help you gain market share (Example: Dollar Shave Club)
- The market is new and you have the plan to publicize the market need and your solution (example: Fitbit, early 2010s)
Agencies can analyze and tell you which segment you are in. For Wild Earth, an agency would help define the target market by segmenting data into silos (e.g., vegans, dog owners, owners who only feed their dogs dry food, owners who feed online, and owners who pay a premium for food and shipping). Refer to that relatively small audience that lives at the intersection of those segments with data such as rising CACs and relatively high impression share. That company seems like a bad choice for investor funds unless you can leverage what you already do in other product categories.
If things like search volume and available impression volume are strangely low, you may have a great opportunity to build exposure for your product or service as the leader of a new market (or market segment). “Video rentals” probably had a ton of search volume when Netflix was in its infancy, but “online video rentals” or “video rentals by mail” were exponentially less popular searches that, when combined with the rising trends of online shopping and engagement, showed a market ripe for introduction. Brands like Peleton (home spinning classes vs. spinning classes) and Rent the Runway (luxury fashion for rent vs. luxury fashion) represent similar scenarios that, when told right, represent catnip to intelligent investors.
The takeaway meals
With start-up funding relatively hard to come by, recognize that poor indicators in any of these areas put you out of the position of leaving behind a multimillion-dollar VC pitch. But there is still hope. First, most problems in these areas are fixable. Second, if you solve them now, you’ll be extremely well positioned to take full advantage of future VC investments if you have a better story.