Marketing Memos

I spent last Friday coaching a well funded start-up on the fundamentals of market segmentation.

Yes, in Silicon Valley you can still romance venture capitalists without a complete go-to-market strategy.

Segmentation is the second most fundamental marketing strategy activity, and one that founders rarely contemplate while running headlong into a market. Granted, between technology vision and early adopter myopia, there is little reason to segment market in the earliest phases of corporate life. But go beyond the early days and quick sales to innovators and early adopters and you will see a company flounder as sales slow and individuals attempt selling to anyone. Since new products don’t fill anybody’s whole product definition, selling to everyone means selling to almost no one.

Next comes an entry in the dead pool.

Founders tend not to segment for several reasons, none of which are rational:

Ignorance: Some founders don’t know what market segmentation is or why it is critical. This includes otherwise smart people who have read the standard books about technology marketing (Crossing the Chasm, et al) and should have grasped segmentation’s importance.

Technology Vision: Founders tend to be technologists and see the beauty of design. Their tech vision obscures market vision, and they design products for their perception of niche needs, not from identifying a part of the broad market and designing for it.

Serve Everyone: Founders often suffer from the mistaken notion that they can design a product that suits all buyers. Even IBM doesn’t do this because they can’t either.

Early Adopter Myopia: Success with early adopters blinds some founders to the realities of the majority market and how they must pick a point therein (a segment) to anchor their fortunes.

The time to segment your market is after you have proven that your generic product has early adopter success and before you seek funding. Showing that you know the difference, have broken down the market and have selected a beachhead segment will help land investors.

The way to wisely segment your market is very easy.

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Angels and VCs meet a lot of liars.

Not intentional liars, but overly optimistic and undereducated entrepreneurs who slap together business plans that are best filed under “fiction.” To egotistically quote from my own book on the art of propaganda “We accept a modicum of lying when the negative impact is limited.”

Throwing away a few millions dollars of other people’s money is not “limited impact.”

Hence, VCs and other investors have developed a large set of buncombe detectors. After all, they are in the risk business – risking money provided by other people on relatively long-shot bets in rapidly evolving markets. Investors have better odds in Vegas, but Sin City payoffs are not as big. Trying to cash-in on the next Google requires VCs to lose quite a few bets. But like the card shark who took you for your last nickel, they play the odds.

Many start-ups come to me seeking advice on business plans, believing that a good business plan is the end-all for obtaining investor lucre.  It is important to have a good business plan, if nothing else for internal use. Indeed, one of the best rules I offer entrepreneurs is that if they would not invest the same amount of money sought from VCs into their own company – based on just their business plan – then they should expect less than nothing from Sandhill Road residents.  A business plan has to reflect reality in order to pass the VC smell test.

There are a few hundred red flags that VCs watch for in pitches and business plans. The most common ones over which founders trip include:

Confusing potential markets with realistic ones: When I sit on pitch panels, the question I most often ask is “How will you sell to the two billion people in your market definition?” Entrepreneurs often mistake all potential buyers (the total market) with the buyers they can realistically reach (the addressable market). Worse yet, they have no idea how to define the latter from the former. Bragging to VCs about huge market potential marks you as an amateur.

No segmentation or growth plan: Most founders don’t understand the interplay between market segments, whole product definitions and positioning, and how this all drives defining their addressable markets. They also do not see how knowing these factors allow them to plan growing revenues through a well-constructed product development and segment assault plans (the “bowling alley” analogy). Thinking this through shows due diligence and improves the odds of landing funds.

No clue about how to sell: Even start-ups that have narrowed down their addressable market are utterly vague about how they will sell their products, using naked statements like “We will use social media to build awareness.” When I ask what their social media strategy and processes are, they often have no coherent answer. VCs need to know you have a product, a market and a valid plan for selling. The first two are meaningless without the third.

Yet a good business plan is still fiction.

People execute plans. VCs want to see a team that can turn a good product and a good plan into a ton of revenue. This is important not only for the practical reason of needing to execute, but also because no business plan is perfect. Teams will adjust plans to meet unexpected realities, and those appear daily in fast moving technology markets. Investors take faith in people with track-records who will turn investment into returns.

Get your business plan right before infesting investor offices.  Realistic market definitions, properly segmented, with valid go-to-market action plans backed by a viable team are the primary requirements for investors to take your business plan and you seriously.

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