Venture Capitalist at Theory

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3 minute read / Jun 6, 2014 /

The Riskiest Investment a Startup Can Make

Marketing investments are unlike any other investment a startup. They are the least-tangible, least-measurable investments and that’s why they are perceived as the riskiest investments.

After raising a round of capital, a startup’s management team has a pool of capital to invest. They can choose from different projects: growing the engineering team to build products faster, spending more on infrastructure to speed page load times, moving to a bigger office, adding salespeople to prospect more customers. All of the aforementioned products have long-term value and the benefit of the investment can be seen immediately. New hires are in the office every day and will remain with the company for years. The speed benefits of faster infrastructure accrue to the company daily and a better product engenders a happier customer base.

But marketing spend is different. A dollar spent to distribute a marketing campaign may buy ad impressions that the company never sees At Google, we ran into this problem often. An AdWords advertiser would call their salesperson and say, “We spent $50k on AdSense last month, but our CEO couldn’t find our ad. Can you send me a screenshot of the ad running on the placements we bought?” Those CEOs were searching for tangibility beyond the impression and click reports offered in the AdWords UI. Their dollar had vanished, so they thought, unlike the new salesperson making calls a few feet away from the CEO’s desk.

On top of this, if you believe the tired aphorism that half of marketing dollars are wasted, but no one knows which half, then the odds of making money with marketing spend is about the same as playing a hand in BlackJack. Like a scratched off lottery ticket, I could argue residual value of a marketing campaign is often zero or very close to zero. Poof! Once, spent the dollar is gone.

Of course, that’s probably too strong a statement. A performance marketing campaign can generate leads for the sales team to close, and a content marketing campaign can increase brand awareness, or a brand advertising campaign can improve the brand’s perception and thereby increase the value of the brand. The challenge with the latter two examples is the lack of tangibility or method to measure it, which is at the core of what makes marketing investments unique and challenging. And the challenge with performance marketing is the attribution problem: which of the seven ad units the customer saw actually triggered them to buy our product? The first, the six in-between and/or the last one?

Yesterday, I spoke with a sophisticated marketer and she mentioned a marketing concept that was new to me called ROMO or Return on Marketing Objectives. In addition to a pure return on investment (ROI) calculation, ROMO includes measurements of changes in brand equity value, Net-Promoter Score and brand-recall metrics to measure the impact of a marketing dollar. Broadening out the way to measure of marketing spend makes sense to me because it helps articulate more of the value of a dollar of marketing spend. After all, intuitively we know Superbowl ads increase brand awareness, which can be incredibly valuable, even if the ads don’t immediately increase sales.

I’m not sure if we will ever get to point where we can truly quantify marketing and eliminate the risks startups face in spending marketing dollars. Understanding the chemistry between an ad unit, or a blog post, or a tweet and a prospective customer may be too difficult or simply impossible to measure for certain types of marketing spend. Finding ways of getting a sense of marketing impact, like ROMO, may be helpful in the meantime, though, to describe some of the broader impacts of a dollar of marketing spend.

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