Startups are the same as any other brand in that they must meet a consumer need. But they usually reek of short-termism and need a better path to private equity-backed success.
This story was originally published on Mediatel News.
There is an almost mythological status given to start-up culture.
The normally relatively staid Harvard Business Review said: “There’s an essential, intangible something in start-ups – an energy, a soul. It inspires people to contribute their talent, money, and enthusiasm and fosters a sense of deep connection and mutual purpose.”
Beyond the hype, the reality is that it’s a high-risk method of concept testing, usually with investors’ money and with a one-in-10 chance of success.
I’ve witnessed both the good and bad.
Pinterest scaled up in an increasingly empty WeWork in Midtown. We were based in what the world saw as a tech-enabled co-working community with a peak valuation of nearly $50bn (worth almost half the entire value of publicly traded US real estate investment trusts).
Again the reality was different – the office was actually an increasingly empty and soulless building of short-lease offices with free beer and yoga classes thrown in. It was sheer hype and hubris fostered by the personality cult of the founder.
The same was true with the gripping trial of Elizabeth Holmes, the founder of Theranos, which attracted similar valuations from hardened investors (like Rupert Murdoch) for technology that didn’t seem to work.
Government data from 2019 indicates the failure rate of new businesses was around 90% with over half of start-ups failing within two years.
Why do so many fail?
The biggest reason is cash flow, meaning the business has run out of money. This is poor business planning, it means costs are too high for the revenue they generate. So, either the market isn’t there or it’s taking longer to win customers than forecast.
The way to avoid this is to forensically identify potential consumers. This requires insight, data and specialist knowledge.
If this work isn’t done properly, financial forecasting is almost impossible. The economist J.K. Galbraith said: “The only function of economic forecasting is to make astrology look respectable.”
I’ve seen a lot of investment decks; many have an evangelistic zeal. The financial modelling is usually robust, but often the marketing strategy is weak. Investors make decisions using the magic metric, evaluating customer acquisition cost against lifetime value of customers. If it’s over three, they might invest.
So, if the key metric that investors are interested in is “cost of acquisition and retention”, I’d start my pitch with robust consumer insight and demonstrate a long-term strategy that quickly builds a significant brand.
Many start-ups bootstrap their marketing, starting the business using a mix of social and search. We usually get approached when this is becoming increasingly expensive and unproductive: “Brand X is two-years-old and is disrupting the Y market, having acquired 2,000 customers in our first two years and now feel it’s right to invest in brand building”. This reeks of short termism.
I’ve just read Cazoo’s presentation to analysts from May this year, which has a completely different approach. They are driven by their values: customer obsession (“people come before cars”) and then data driven (“it’s part of our DNA”.)
Their focus is understanding current and potential customers before any financial metrics. They’ve taken a long-term view, built a famous brand (they have 69% national UK brand awareness and yet they’ve only sold 25,000 cars!)
They focus on the future and understanding the whole onboarding process in micro detail and are constantly testing and learning. They predict they will reduce customer acquisition costs by over 75% in four years!
Customer acquisition cost
Bust mythology with robust methodology
Many people will say that’s fine if you have a £50m launch budget. But the same principles apply at every level: any successful launch needs to identify their high opportunity customers, what motivates them and where they are located.
Locational marketing technology allows any start-up to run highly effective brand and acquisition tests that can be scaled once proven. This can be fast, at low cost and generate significant insights.
Successful start-ups need to be people obsessed, who are the most valuable customers and why?
We need to breakdown the mythology. Start-ups are the same as any other brand in that they must meet a consumer need.
This can’t be guessed; it requires robust research and insight that creates a long term roadmap.
If I was an institutional investor, I’d start with product, but then quickly dive into consumer insight and marketing strategy. If that wasn’t robust, I’d show them the door.
Charlie Makin is managing director, Pintarget, part of What’s Possible Group. He was a co-founder and chief strategy officer of BLM (Booth Lockett Makin), which sold to Havas and became Arena Media