Leaders in the marketing and VC communities discuss the rise & fall of the ‘grow at all costs’ mindset and review the strategies actually leading to sustained growth and investment.
Christopher Jones (CJ), Managing Partner at Markacy:
For many of the participants in the audience, who cover both the business and investment communities, the last 12 plus months have been relatively surreal. The capital markets nearly dried up in Q4 2022 on the heels of significant shifts in macroeconomic policy, and many businesses were forced to alter their business investments significantly. Marketing budgets were cut by 25-50%, headcount was reduced, and capital raises were shelved as founders and executives tried to navigate what might be the ‘new normal’ for the foreseeable future. This challenging environment has forced companies to get leaner and more efficient, focusing on balancing profitability objectives with growth, which is something you would’ve hardly heard mentioned during many tech/VC forums during the 2015-2021 ‘grow at all costs’ cycle. As we look ahead, building a profitable business is at the heart of go-forward decision-making, so we wanted to take some time to demonstrate how businesses at the pre-seed, seed, and series A stages can still be growth-centric while making more sound financial/investment decisions that best position themselves for successful capital raises and sustainable growth.
CJ: I’d like to start with you, Chris Rigas. When we think about pre-seed companies, we typically define them as having less than $2m in revenue and usually less than $1-2m in funding. Now, businesses at this stage have a lot of distractions because they’re often operating in uncharted territory, especially if they’re incredibly innovative. When you’re advising or working with companies at this level, what 1-2 metrics do you suggest they focus on?
Chris Rigas, Vice President at Markacy: The goal is really nailing product-market fit (PMF). I suggest they focus on Monthly Recurring Revenue (MRR) to demonstrate to potential investors that there is a real market and people are actually buying your product. Another metric to focus on is MER or CAC, which indicates the incremental cost of acquiring a customer. Over time, you’ll achieve some efficiencies of scale to make the overall profit margin work.
CJ to Josh Haberman, Investor at Sidekick: Josh, from your perspective on the investment side, how do you like to get involved with pre-seed companies in terms of strategic support?
Josh Haberman (JH): I often work closely with them to help identify the key metrics that will drive success and to provide guidance on how to achieve their short and long-term goals. I take on a mentorship and advisory role, leveraging my experience to help founders make informed decisions, overcome challenges, and identify opportunity areas. I utilize my network and resources to connect pre-seed companies with potential partners and investors. My approach is adaptable and customized to meet the specific needs of each startup, and I continuously monitor progress while providing guidance to ensure they stay on a path towards growth and success.
CJ: What do you see your top founders focus on as far as activities to drive growth and also prepare themselves for the next phase?
JH: At this stage, it is crucial for founders to focus on building a robust product that meets market needs while also establishing a clear roadmap for growth. This means creating a product that is well-designed, easy to use, and solves a real problem for customers. It also means gathering feedback from customers and iterating on the product on an ongoing basis.
Establishing a clear roadmap for growth is also important for founders who want to prepare for the next phase. This means having a plan for how you will acquire new customers, increase sales, and expand into new markets. It also means setting clear goals and milestones so you can track your progress and make necessary adjustments along the way.
CJ: I’d like to spend some time highlighting a case study for our audience. The company we will be reviewing is in the pet space with ARR below $2M at the time of pre-seed funding. They’re obviously very successful now, but what was it like early on in their growth lifecycle?
Chris Rigas (CR): In the early stages, there was a heavy focus on product iteration and media spend tied to an MER target. They operated with barebones CRM and site functions. Looking back, they launched a lot of ancillary products like dog toys and leashes that didn’t move the needle much. However, minor changes to the core product, the crate, such as introducing new colors and accessories, drove significant growth. It was essential to focus on the core area where they differentiated and where customers recognized them. That was a key learning for us – that hero products should really consume 90% + of mental bandwidth and resourcing early-on.
CJ: As we move onto the Seed phase, which we typically define as companies with less than $10m in revenue and funding, the priority evolves from PMF to enhancing the foundation. This is often the first time leaders and founders receive a substantial financial boost, leading to meaningful hires and increased spending on marketing and product innovation. Matt, could you shed light on the key activities that define success at this stage?
Matt Crider, Strategy Director at Markacy: Thanks Chris. Developing a clear Go-To-Market (GTM) strategy is vital at this stage. This includes defining your target market, understanding the competitor landscape, and developing marketing and sales strategies while creating a product roadmap. It’s also crucial to focus on customer acquisition AND retention. As you open your product to a wider audience, maintaining excellent customer service and transparent communication throughout their journey becomes essential.
CJ to Chris Rigas (CR): Chris, how do you think about the measurement of different channels when prioritizing investments?
CR: It’s about finding the right balance between different channels and constantly evaluating their performance to ensure the highest ROI. Leveraging data analytics can help in making informed decisions and optimizing the marketing mix for better results.
CJ to Josh Haberman (JH): Josh, when you are evaluating leadership teams, is there a typical profile you look for to invest in? Also, what milestones or KPIs do you consider as key signals before investing in a Seed?
JH: I look for startup teams with a diverse skill set, a clear vision, and a proven track record of executing strategies successfully. I also appreciate founders who know their weaknesses and are looking to raise capital to fill those weak spots. When it comes to KPIs, I focus on the company’s growth trajectory, the customer acquisition cost, and the lifetime value of a customer.
In other words, I am looking for a team that has the potential to make a big impact in the market. They should have the skills and experience to execute their vision, and they should be realistic about their capabilities and willing to take steps to improve their chances of success.
CJ: Let’s delve into a Seed case study involving a skincare brand. They were very innovative and at the initial stages of working with them, they had finalized their product development and were ready to start acquiring customers. Matt, could you elaborate on the activities they were focused on and how media performance played into their success?
Matt Crider (MC): Absolutely. Initially, they worked on ensuring a streamlined supply chain process to fulfill orders readily based on forecasted customer demand. They also established a customer service team to provide a hands-on experience given the high-tech nature of their product. In terms of media performance, paid media played a crucial role, allowing us to target specific demographics, interests, and behaviors. We established a media investment framework that actively tracked contribution margin & MRR to identify efficiency guardrails for spend across channels while remaining profitable. This level of transparency enabled more effective resource allocation and product fulfillment projections.
CJ: What strategies worked best in media, and what didn’t?
MC: We developed creative content that catered to different stages in the funnel of prospective customers, with a mix of educational and storytelling content for upper funnel campaigns, visual benefits and a heavy focus on the product for the middle funnel, and a high level of personalization for the lower funnel. Initially, the website was too scientific, which made it difficult for customers to understand their specific needs. We simplified a quiz to provide a more seamless purchasing experience.
CJ: What activities would you say they focused too much on or were perhaps misguided?
MC: They chased too many customers initially. It’s more effective to focus on a specific target market and define your ideal customer. Over time, they realized the importance of honing in on their target customer and segmenting their marketing efforts accordingly to increase the average Customer Lifetime Value (CLTV).
CJ: As we transition to discussing the Series A segment, we often find companies at a crossroads, reevaluating their identity and possibly drifting away from what got them to Series A. It’s vital to assess the foundation across people, processes, and technology without over-investing to fix everything right away. Chris, could you share the struggles companies face when they first get Series A funding, especially concerning marketing investments and tech apps?
Chris Rigas (CR): Certainly. Companies often struggle with extending into unprofitable areas, overhead costs including too many people and tech costs, often unnecessary, and overspending on marketing in pursuit of growth, acquiring customers at an unprofitable level. It’s a delicate balance between growth and efficiency, and companies need to rigorously evaluate the best uses of capital.
CJ to Josh Haberman (JH): Josh, could you share your perspective on the level of involvement necessary with Series A founders/CEOs and the optimal uses of funding for Series A rounds?
JH: At the Series A stage, it’s essential to work closely with founders and CEOs to help them navigate the complexities of scaling a business. The optimal use of funding should be towards strengthening the product offering, enhancing the technology infrastructure, and building a talented team that can execute the company’s vision effectively.
The Series A round is a critical juncture in a company’s development, as it provides the capital needed to scale the business and reach new markets. Ensuring that you are set up for scalable success by identifying profitability measures is important to make sure that your burn rate is in line with your growth agenda.
CJ: Let’s wrap up with a Series A case study involving a high-growth subscription brand. At the time of funding, they faced challenges with a high churn rate leading to profitability issues. Chris, could you elaborate on what was going well and what wasn’t, and how they approached the growth versus efficiency paradox?
Chris Rigas (CR): Growth was good, but the high churn rate was a significant issue. Investors had prioritized growth over profitability for several years, and most companies reaching this stage had solid unit economics. However, they ventured into unprofitable areas and had too many overhead costs. They realized that direct response had become less incremental and pivoted to more brand investment, which kickstarted growth in the core business at an efficient rate. It was a learning curve to understand the importance of focusing on areas that truly differentiated them and offered the highest return on investment.
CJ: How did they prioritize the product roadmap, which is often one of the most critical priorities for brands?
Chris Rigas (CR): They launched several ancillary products, but faced challenges with a high churn rate as their core subscription service constituted over 90% of the revenue. The takeaway here is that while product innovation can be a big driver of growth, the hit rate is low, so brands need to rigorously evaluate the best uses of capital and focus on enhancing their core offerings.
For more information on how Markacy can help your company accelerate growth – please reach out to firstname.lastname@example.org to get in touch with a representative of the team.
Disclaimer: The opinions expressed by Josh Haberman (JH) in this document are solely those of Josh Haberman and do not necessarily reflect the views of Sidekick Partners.