Why Venture Capital Firms Need To Add Market Development Expertise To Their Organizations

Amassive Nod to Aaron Ross and Marylou Tyler @ predictablerevenue.com for the basis of this post.

I was chatting with a  couple of venture capital (VC) guys from 2 different firms recently and something dawned on us – Most VC firms are not well equipped to deal with the disruptive changes ongoing in the technology field today. Especially when it comes to marketing and sales execution.

We agreed the firms have great portfolios of companies and great relationship with founders. However, there is a new role that needs to start showing up in VC firms or can (should) be part of their stable of services. As well as a EIR (Entrepreneur in residence) VC firms need to have a on the ground day to day person getting their hands dirty across all the portfolio companies when required.

Here is one major area how thinking about startups, not just from the founders, executive level management perspective but how a bottoms up approach can help grow a company in the critical early stages. In the areas of sales and marketing. Also known as Growth.

One of the major problems at technology startups today is the lack of understanding of how much sales and marketing principles have changed. “If I need to double revenue growth, I need to double my sales force to drive it” or “I need to generate 1,000 leads to generate one sale. Therefore 2,000 leads will generate two sales.”

This doesn’t make sense and management teams, VC firms are confusing correlation and causality. A vendor who believes in this may as well claim, “Christmas trees cause Christmas.”

The majority of VCs and technology startup management teams are still under the influence of the 1990’s, 2000’s mind set. Sales and marketing has changed so much it’s amazing (especially in the IT industry).

The problem today: Not generating enough qualified pipeline and sales to hit and exceed estimated revenue targets.

Here are the two major root assumptions executives, founders and VC firms have that cause the majority of the problem:

I need to double my revenue, therefore I need to double my sales team & salespeople can find new business on their own.

No they won’t. They may find some but not enough to grow 30%, 40% 50% etc. Even if they do, they become too busy dealing with those deals that they fall behind (Aaron Ross of Predictable revenue calls this “lumping”. Having salespeople forced to cold, call, qualify, run the cycle, close and manage.)

Here’s why:

  1. Salespeople are not great at prospecting. (Sometimes it has taken 10, 20, 30 attempts to break into a company and qualify a brand new opportunity. Salespeople usually stop after 4 – 5 times).
  2. Salespeople typically do not like to prospect and do the upfront work to drive demand (salespeople want to sell not drive demand).
  3. Even if a salesperson does do some prospecting, as soon as they generate some pipeline, they become too busy to prospect. It’s not sustainable. This is why ramp up times are so much longer than anticipated.

Salespeople do not cause customer acquisition growth, they fulfill it.

It’s a huge shift in thinking and VC firms will be well served to develop more internal expertise and not just rely on executive management relationships. Of course a company needs more salespeople if they are getting bigger, but this is not the main cause of new customer growth.

Marketing, awareness, demand generation and engagement cause new customer acquisition and sales fulfill that demand generated by marketing.

There aren’t any quick fixes. However, there are ways to solve this. I have outlined (in brief) a few ideas below for you to consider (These are especially Important for companies with a high volume sales model).

  • Trial-and-error in awareness, demand generation (requires patience, experimentation, money) MUST be a true combination of sales and marketing team working together. I jokingly call this SMARKETING but it works.
  • Use CRM religiously and track, track, track.
  • Patience in building great word-of-mouth (the highest value lead generation source, but hardest to influence).
  • Create a well-supported demand generation (inbound and outbound) practice +sales development team with resources, This is by far the most predictable source of pipeline, but it takes time and focus (ties in to point # 1). BEST indicator of pipeline generation in the short term. We did this at a previous company and took the business from $1 Million a quarter to $ 6 Million.
  • PR & Social media outreach on a consistent basis
    Find the right online and offline network ( social and personal)
  • Target social networks that are relevant
  • Listen
  • Engage
  • Track results

How much (qualified) pipeline does your company need to generate on a monthly basis? Most startups don’t know this.

P.S: Massive assumption of this post is your product works and it solves a problem/want/need/desire.

P.S.S: Eric Ries says in the Lean Startup “New Customers come from the actions of past customers” but guess what how do you get those customers in the first place.” Next post I will outline some specific ways to generate opportunities from nothing.