Okay so here is the deal. I’m going to demystify the process of raising your initial Series A.
In a world where there is so much speculation and not enough hard facts and proof, I personally don’t want you, the startup founder, to feel like raising your first venture-backed round is something exponentially out of reach. In fact, I’m so confident that this solution is something that no one else (literally no one) is trying other than the handful of companies that have pulled it off due to luck, or a great in-house marketing team.
Having worked with a ton of startups at CMMG, and even know some of the founders personally, I have seen first hand from the outside looking in, what these founders need in order to have solid “proof of concept” for scalability. Yet they have their blinders on because they are too easily distracted by how good the product looks, what their next PR move will be, and even stuff as unimportant as planning their company’s internal culture stake while they only have 5 employees. Really?
First, let’s take a step back. Let’s pretend that the entire venture-backed funding system disappeared yesterday. What would you do? How would you pay your employees? How would you have that safety net of venture money in your bank account to live in that nice NYC apartment of yours?
Now, you’re in a position where you would HAVE to make money on your own in order to grow and scale your business. So how do you do it?
Well, first you have to create ROI. After all, you are a business and you need to MAKE MONEY.
How do you create ROI? Simple, you put $2 in and $6 comes out.
If you were to ask any person on the street to put in that initial $2 they would do it in a heartbeat. The only difference is that you are working on a much bigger scale, and at this point, the $2 is actually $2 Million, and that is what an investor has in order to make $6 Million based on your projected LTV of your customers or clients.
And we have even shied away from this bare-bones way of looking at it and allowed founders to raise millions of dollars just based on a number of users and a small amount of revenue. Without even having to prove tangible LTV-ROI in the beginning stages.
But imagine if you could prove ROI in the beginning. Think of much of a breath of fresh air that would be to an investor.
The solid truth is that you need marketing to get you to your next round. Marketing is what proves scalability and is the quickest way to prove ROI and profitability. Not a perfect product or message, but “am I making an ROI as a business”. Are we making money?
“Can I create a marketing campaign where I can put in $2 and $6 comes out in a reasonable amount of time?”
Here are the steps on how to do this
1. Find out your LTV (Long Term Value) of your customers and clients.
This number is the amount of money that your client or customer spends with you over a specific period of time after the initial CAC (Customer Acquisition Cost). An example would be that it costs you $30 to gain a new customer. Let’s say it’s a nonprofit who is spending money on your freelancing platform. Over the course of 6 months, you have to determine that on average that non-profit completes 4 jobs with your freelancing platform at $100 a job. You profit 10% of each job which equals $40 in revenue for the business but $10 in actual profit (you spent $30 to acquire the customer). So you just put in $30, and $40 came out after 6 months. So technically you profited $10. But now you can take this, and look at your marketing and try to get that $30 CAC down to around $5 or $6. Another thing you could do is sell higher packages on retainer so you are making $100 a month with the nonprofit for over 6 months. And also work on efforts to keep them as a recurring client for a lifetime. If the CAC is $5 but the LTV is $600. Then there ya go. That’s $595 in actual profit per customer after 6 months.
But you could only decrease that CAC through improved marketing efforts. That’s the key.
Take THAT to an investor.
2. Don’t hire a senior CMO to improve your marketing at $150k per year.
I know that it may seem enticing to hire a person that says that they will improve your marketing efforts like in the example above. But think of it like this. In today’s day and age of social media and digital marketing, you will spend just as much on creative production of marketing (videos, photos, content management, repurposing, digital advertising management, etc.) as you would hiring a CMO to fulfill this role and spearhead the project. So in order to fix this problem, you would end up spending close to $350k-$400k in total.
Here is the solution to this – Hire a marketing agency as your fractional CMO to create these ROI marketing campaigns.
You could take that same $150k per year salary that you would pay an in-house CMO (who I’ll remind you is only one person who can’t create all of the content you need by themselves) and pay an agency at $10k-$15k per month who will work with you to get your marketing efforts to an ROI positive campaign. At the end of the contract, export what they are doing an duplicate it in-house, or keep them as your in-house marketing team and reduce costs and overhead in the long term as your business grows.
The role of the fractional CMO can be a huge leg up for your startup. And a fractional CMO doesn’t have to be one person spearheading it all. It can be a team of people who want to see you succeed and who are all supporting you and your business to raise your next round.
Don’t count out what an agency can do for you.
Jon Sicherman is the CEO and Founder of Creative Minds Media Group.
A modern premium full-service digital agency located in New York City. An end-to-end solution working with Series A-D startups and larger companies.
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