1/31: The biggest question coming out of my recent tweet thread about the evaluation of startups is: “How important is the startup’s distribution strategy in your diligence work?” The answer is: “Damn important because the business needs customers to exist!” Unpacked:
2/31: This may sound backwards to some investors but my diligence process around a company’s marketing strategy starts with the unit economics of their product/offering. The greater the contribution margin (in absolute dollars) the more options a company has to scale.
3/31: If a product can only throw off a few dollars of contribution margin a year then the channels the company should be testing will be very different than if the product can throw off a few hundred or a few thousand dollars of contribution margin.
4/31: Even if the contribution margin isn’t understood with precision, it’s not difficult to estimate the “zip code” of the economics and back into what the acquisition costs would have to be for a new customer to pay back the marketing spend in a reasonable amount of time.
5/31: If the contribution margin is $5 a year and the required payback on marketing is 12 months then the marketing costs have to be less than $60. If the contribution margin is $250 a year, the marketing costs can be $3,000 to have a similar payback period.
6/31: To state the obvious, the channels that can produce customers for $60 are different than those that have $3,000 to work with.
7/31: The first major fork in the road is: “Can the product afford people in the process?”. Products that need to be explained by people better produce enough contribution margin to make the math work.
8/31: Sales costs are a major tax on a business because people cost between $0.50 and $1.00 a minute and sales calls can range in length from 10 minutes to 30 minutes. The success rate on sales is usually in the single digits so the tax is critical to understand.
9/31: Possible disconnect: If the product requires people in the sales process but the contribution margin is thin then the business is unlikely to find a scalable marketing channel that has a reasonable payback period. Result = High odds of failure.
10/31: The next important question to ask is: “Which of the two major forms of demand generation does the company plan on testing --- interception of signal or building of awareness?”
11/31: If a company’s target audience has a distinct problem and the audience is actively searching for solutions to that problem then it’s possible to find channels that can intercept this signal.
12/31: Pre-internet, the highest signal channel was the Yellow Pages. Today, high signal channels include Google and product specific comparison sites like Confused.com.
13/31: Intercepting signal isn’t always a smart strategy. The contribution margin and funnel efficiencies of a company relative to those of other companies competing to intercept signal in a channel determine how viable the channel is.
14/31: The advantage to incepting signal is that if a company has a truly better solution to a problem that a customer is looking to solve then the “inception of signal to sale” ratio can be amazing. But this is well understood so intercepting signal can be really expensive.
15/31: Possible disconnect: Thin economics or an inefficient funnel relative to a company’s competitors destroy a company’s ability to scale in channels predicated on bidding to intercept signal.
16/31: This disconnect materializes frequently in the evaluation of startups because many startups want to compete on price but also want to scale by intercepting signal in channels occupied by competitors with better economics. Result = High odds of failure.
17/31: Other marketing channels are designed to build awareness (Facebook, TV, Billboards, etc.). In these channels, customers aren’t directly seeking out solutions to problems. Instead, the channels present a company’s value proposition to prospects to pique their curiosity.
18/31: Building awareness can be expensive if there aren’t enough target customers in the engaged audience and if the target customers aren’t highly receptive to a company’s offering.
19/31: Cracking channels that build awareness can be tricky because it’s easy to generate low-signal top of funnel interest but difficult to generate high-signal top of funnel interest that converts to customers.
20/31: Building awareness isn’t always a smart strategy. Top of funnel demand generation can appear cheap but the funnel inefficiencies routinely crush the economics. And it’s impossible to avoid paying to build awareness with customers who have no interest in your product.
21/31: The advantage to building awareness is that if a company has a low friction sign-up process, a large target market and a compelling value proposition it’s possible to put loads of marketing dollars to work given how deep these channels are.
22/31: Possible disconnect: Awareness oriented marketing channels typically only work when a product or service is well understood by the target customer, the pitch is extremely compelling, or the product is cheap enough to generate impulse purchasing behavior.
23/31: This disconnect materializes frequently in the evaluation of startups because many startups want to test deep and flexible channels like Facebook but overestimate their ability to convert low-signal leads into customers that stick around. Result = High odds of failure.
24/31: So where do Partnerships fit in this framework? Borrowing brand and distribution through Partner channels is another form of building awareness and can be very efficient if the Partner has highly engaged customers who trust their endorsement.
25/31: Possible disconnect: Most Partnerships fail because the Partner is typically much larger than the company trying to access the Partner’s customers and this imbalance is difficult to navigate in terms of incentives and urgency.
26/31: This disconnect materializes frequently in the evaluation of startups because most startups that sign a Partner overestimate their ability to generate substantive results even when the Partner has a huge user base. Result = High odds of failure.
27/31: So where does content marketing fit in this framework? Intercepting signal with high quality content can work but it’s an investment that takes time to prove and requires unseating existing content owners.
28/31: Possible disconnect: Content marketing takes a team and constant attention to index on the first page of search results for high traffic keywords. The activity and sophistication of existing content owners has to be evaluated to understand the probability of success.
29/31: This disconnect materializes frequently in the evaluation of startups because most startups that embark on a content marketing strategy have at least one team member who managed content strategies in a less competitive era. It’s really hard to do well today.
30/31: The “so what” of this entire thread is that it’s possible to assess in advance what the odds are of a company cracking a given channel, especially if the odds are low. Eliminating channels is critical because you have to believe in the probability of cracking what’s left.
31/31: And always remember this gem: “The best place to hide a dead body is the second page of Google search.” Thoughts welcome and remember that retweeting keeps the conversation alive!

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More from @fintechjunkie

27 Nov
1/30: There’s a supply/demand imbalance in the startup world (too much capital/not enough great companies). This means it’s a great time to be a Founder if you have an epic idea, but how do you know if your idea is any good? I asked some amazing VCs and here’s their advice:
2/30: Put a prototype in users' hands. When you try to take it away from them, do they kick and scream and tell you to get lost? If so, you've got a good idea. If not, keep iterating. (@Mark_Goldberg)
3/30: Can you can describe it in 30 seconds or less to a tech-illiterate relative at Thanksgiving? Great ideas are simple, but non-obvious. (@Mark_Goldberg)
Read 30 tweets
19 Nov
1/30: Many #Startup CEOs struggle to redefine their own role as their company scales. I’ve been asked by startup CEOs many times: “What should my job be?” What follows is a framework I’ve used to guide various CEOs through the evolution from a “Small Team CEO” to a “Proper CEO”:
2/30: But, before I share the framework I almost universally have to re-set their expectations because most first time CEOs think that their primary function is to “make all critical decisions”. Breaking them out of a “control everything” mentality is uncomfortable but essential.
3/30: What’s disappointing is that many CEOs can’t wrap their heads around the thought that they won’t be directly involved in everything happening at their company and in the middle of all critical decisions. Only when they’re ready to deal with this they can evolve.
Read 30 tweets
10 Nov
1/32: Building a #StartUp business has similarities to a spacecraft crashing down on an unknown planet. I talk to Founders about this all the time. Unpacked:
2/32: We’ve all seen blockbuster “how the heck are we going to survive” SciFi movies. The one commonality is that there’s an obvious prioritization of what has to be solved and in what order.
3/32: This is because all human beings need 3 things to survive: Oxygen, Water and Food. Without any of them we can’t survive. But, bad things start to happen if we don’t have oxygen for 3 minutes, water for 3 days or food for 3 weeks.
Read 32 tweets
3 Nov
1/29: Have you ever had a concept explained to you that helps frame complex issues you’ve been wrestling with and opens your eyes to new possibilities? A concept that I share that seems to resonate well with Entrepreneurs and Investors is what I call “Truth Files”. Unpacked:
2/29: So what is a “Truth File?” Simple definition: “A truth file contains data that without need of additional confirmation can be considered factual.” Not all truth files are 100% accurate and not all are valuable, but the best ones can be transformational.
3/29: The operative question that defines how valuable a truth file is: “What does the truth file reveal that can be used as a substitute for investigative work or help make more accurate decisions?” The first reduces friction and the second improves outcomes.
Read 29 tweets
26 Oct
1/15: Of all the questions I’m being asked on recent diligence calls about our companies, the most common is “What are the skills/gaps of the Founder(s)?” Given COVID, this has become an important topic so I thought it would be worth sharing how I think about the issue. Unpacked:
2/15: In every conversation I try to level-set the outsider and speak in “truisms” before diving into specifics. The first truism is that the skill set needed to run a high growth, disruptive start-up is multi-dimensional and that it’s about tradeoffs vs. insisting on completism.
3/15: We’d love if our Founders were world class on dimensions that include: Action orientation, ability to make decisions with limited/changing data, magnet for talent, ability to frame a business vision, and fundraising skills. These are just a few of the many important skills.
Read 15 tweets
16 Oct
1/42: What the heck is going on with the #fintech ecosystem’s obsession with Neo-Banks? Do they actually make sense in the US? Traditional Bankers say “absolutely not”. I say “they can”. Unpacked:
2/42: Because there’s so much confusion about the topic, it’s worth starting with a definitional statement about what a Neo-Bank is. One definition: A Neo-Bank is a COMPANY that offers a LIMITED SUITE OF BANKING PRODUCTS with NO OWNERSHIP OF BRANCH LOCATIONS.
3/42: COMPANY does not mean Bank. There are many forms and fashions of Neo-Banks but not many of them are actually Banks. It’s possible with today’s technological solutions for a non-Bank to offer Banking products.
Read 42 tweets

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