What Marketers Can Learn from The World of Venture Capital
Stealing effective ideas from other industries often leads to transformational innovation. One of the most famous examples of this is how Toyota’s study of grocery store processes led to the development of Lean Manufacturing and has since been adapted to facilitate project management principles like Kanban.
In the spirit of learning from other disciplines, industries, and perspectives, our team has made a commitment to intentionally immersing ourselves in and learning from the broader business environment. That is what led me to spend a couple of days in Chattanooga, TN attending the 2015 Angel Summit where venture capitalists, angel investors, lawyers, entrepreneurs, and community leaders met to discuss their experiences and approaches in the investment arena.
My goal was to learn and understand more about the stages involved in the formation and growth of a business: from raising the initial capital to subsequent follow-on rounds, to the (hopefully) profitable liquidity event. Golden Spiral works with a lot of early stage technology companies, and my experience at the Angel Summit afforded some great insight into their processes and the factors that influence decision making.
There was also some very clear crossover between sound venture investment principles and strong marketing strategy and positioning. Here are a few applications of how these investment principles apply in the marketing space:
Market potential matters most
The conference commenced with a keynote by Mark Kvamme, now the managing partner at Drive Capital, who led investments in LinkedIn, MarkLogic, and Cast Iron Systems (among others) while a partner at Sequoia Capital. When asked what is most important to him when considering a new investment, he stated that there are three aspects of a great opportunity:
- Market potential
Though all three matter, Kvamme’s main determining factor when considering an investment is the market potential. He stated that it’s possible to overcome a mediocre team with a mediocre technology as long as there is great market potential because there is at least the opportunity for a huge success. In contrast, you can have the best people and technology in the world, but if there is no market, it’s not worth anything.
While not every technology company has to answer to an investor, the facts remain: If your solution is not solving a problem as perceived by your market, it has little chance of achieving true success. Conversely, you may have a great product that eliminates a market problem but has very little market opportunity. If a company is looking at a $20M market, but there are ten companies vying for marketshare, the ceiling is too low and the climb is too steep. Now, a $200M market with two companies that make up 10% of the market? That’s an opportunity. It is important to use metrics to understand the true market size and to map the trajectory for capturing a considerable marketshare.
Failure happens, but risk is necessary
Risk was a theme throughout the conference. Scott Case, founding CTO of Priceline.com, dedicated his entire keynote to his recent experience with a failed venture, which was focused on utilizing business metrics in the restaurant industry to widen margins. The keynote was a very candid view into the pain and process of a failed venture. He opened the keynote with a slide that read:
“When you do everything right, you can still fail.”
He stressed the importance of “Pivoting completely” when you realize that something isn’t working. Because his company was very open to listening to the needs of the market, they pivoted 12 times. Despite making changes, despite securing the necessary capital, and despite generating revenue over the course of approximately two years, they failed to gain traction in the market. Case explained that they could have brought on additional capital, but for what? Their model failed not because of lack of resources but likely due to the lack of readiness/adaptability of the marketplace.
Despite this recent failure, Case emphasized that there is no opportunity without risk. He concluded the keynote with the following quote by Teddy Roosevelt:
“If he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”
Putting these principles into action
There is no secret formula, but your best chance for success lies in the relationship between true potential and mitigated risk. During his keynote, Kvamme explained that while with Sequoia Capital he led $150M in investments. Of that $150M, he wrote off $110M — over 70% of the money originally invested was completely lost. While that’s a lot to lose, the other $40M led to a $3B return. (Yes, the “B” stands for “Billion”.) In Kvamme’s eyes, considerable success is only achieved through mitigated risk, which, at times, can result in failure.
The ideal scenario is to realize full potential with very little risk but, unfortunately, this is not a world in which entrepreneurs, VCs, or even buyers live. Understanding this, it is your job to mitigate your risk by understanding your company’s true potential. That means doing a deep dive into your market, and making a brutally honest assessment of your fit. If after assessing your potential it looks like the opportunity is there, move forward boldly.
Enter risk. You cannot be sure you will see success in the market, the best you can do is position yourself for success. If you’ve done your homework and are wiling to do the hard work that awaits, you are putting yourself in the best possible scenario. The rest will be determined by the marketplace and your willingness to listen and adapt your strategies accordingly.