Are you struggling to convince investors to back your startup? You’re not alone, but the reason for your difficulties may be simpler than you think. Granted, fundraising has been getting harder over the past few years. Still, some startups excel whilst others become stuck. Those becoming stuck often lack a clear understanding of their traction.
During my last three years as a venture capitalist and mentor, I've worked with over 100 early-stage startups. Most of them had one thing in common – they had no understanding of their traction. Knowing your traction means having answers to these questions:
- Who are your buyers?
- Where can you find them?
- How much does it cost to turn them into customers?
- Which pipeline activities are working for you?
- Most importantly: is your customer acquisition process anywhere near profitable?
To be honest, I can't blame the founders that have no answers or their teams. Just a few years ago, most later-stage investors didn't even care about a startup’s traction. For years, investors were convinced that if a startup had enough money, they’d simply figure out customer acquisition. Sounds crazy? Well, it always sounded a bit crazy to me.
Today, that mindset is shifting. Without understanding the profitability (or lack thereof) of your customer acquisition process it is becoming harder and harder to attract substantial investment.
Why traction matters
Let’s start by clarifying what we mean by traction and its profitability. As a founder, you need to know how much it costs your business to attract new customers. That cost is known as customer acquisition cost or CAC. It’s one of the key business metrics used widely.
Even if numbers are not your favorite part of running your business, understanding your CAC is imperative and a prerequisite to optimizing it. When I say CAC, I generally refer to a wider model of CAC commonly called blended CAC.
Blended CAC includes all your company’s overhead costs as well as the direct costs associated with attracting customers. When you’re calculating blended CAC, don’t forget to include costs like your and your team’s salaries, for example.
I started my career by doing affiliate marketing. This type of work provided an excellent opportunity to learn how to build profitable mini businesses. I’m crediting this time in affiliate marketing for my ability to make customer acquisition of my startups profitable. I’ve also found this to be extremely valuable in any fundraising efforts.
Here are a few examples:
- Yousician: Yousician is an interactive, educational music service that makes it easy to learn to play an instrument. When I built the company’s early customer acquisition model, it was profitable based on a daily budget of $1000.
- Freska: Freska offers flexible, high-quality home cleaning services. When I built Freska's early customer acquisition model, achieving profitability was more challenging because we had a massive monthly scaling budget of €100,000 per country. Still, we made CAC profitable by understanding exactly what was driving it.
My point is this – if you can answer the questions above for your startup, then it’s perfectly possible to make CAC profitable even in challenging circumstances.
Making CAC profitable for uour startup
So how do you start assessing the profitability of your customer acquisition process? I believe there are four main aspects to consider:
- Pipeline visibility
- Iteration of your customer persona
- Building organic online visibility
- Reviewing your CAC calculations regularly
Dedicate some time to these four aspects every week. You will soon see your insight into your own business grow without the need for a finance degree. Understanding the strengths and limits of your current customer acquisition strategy is the first step toward profitability.
1. Pipeline visibility
This point goes toward understanding where your customers are coming from. To truly answer this question, you need to make your customer pipeline visible. Depending on your industry, some or all of the metrics below are applicable.
The most important thing is consistency. Tracking performance weekly, for example, will quickly give you a good idea of the activities that are working well for you and those that may need to be improved or replaced.
Here is what to track weekly:
- Conversions per channel: learn which channels perform well for your business
- Total conversions: this involves adding up all of the results from above. A well-functioning customer relationship management (CRM) tool should make this easy
- CAC per channel: this figure will allow you to see which channels are not only delivering customers but also clarify at which cost these acquisitions come
- Blended CAC including all of your startup’s costs
- Costs broken down by channel
- Total costs to your startup, including salaries, outsourcing, advertising and marketing costs, tools, subscriptions, and any other costs. Analyzing this regularly can lead to surprising discoveries.
In a B2B environment, your sales pipeline may look much more complicated than these bullet points. If that’s the case for you, my recommendation is to start by tracking individual steps of the sales process every week.
Don't get too obsessed with marketing attribution. This subject has made quite a few headlines lately, and I believe that many founders are spending too much of their time on it. Because I feel strongly about this, I devoted a recent blog post to the subject of attribution. Channel-based data will give you sufficient guidance relating to marketing attribution. But overarching trends and the money that is coming in and going out matter more.
One thing that is important is to include blended CAC into your calculations. I see lots of startups that have monthly salary costs of tens of thousands, but there's no visibility of any of that spending in the actual acquisition cost calculation. Of course, you deserve to be paid for your work. However, in order to assess profitability realistically, the salaries of all team members need to be accounted for.
Data gathering can be time-consuming, and there are plenty of tools to automate the process. Supermetrics is one of my favorites. Despite all the benefits of automation, I actually recommend you start by gathering data manually. Spending this time allows you to process the information differently. You’ll simply gain more detailed insights than you do by automating from the beginning.
2. Iterating your Ideal Customer Persona
This point is about understanding who your current customers are and whether they match your definition of your ideal customer persona.
When was the last time you reviewed your customer persona? The better you understand who your customers are as human beings, the easier it becomes to target them efficiently. This goes for both existing and prospective customers.
To access the proverbial hearts and minds of your customers, data is often not enough. Consider dedicating time to interviewing several customers to maximize insights. Here are a few questions that are relevant to most startups:
- Do you want to know which search terms your customers Google when they look for your services? Ask them.
- Do you know which social media platforms your customers prefer? You need to answer that question before starting a social media advertising campaign. Where do you find the information? The answer is simple - ask them.
- Do you have a hard time understanding why your potential customers are not buying? Ask them. Perhaps your lack of conversions is down to a lack of trust. This happened to me in a previous job. Understanding the problem helped us find a solution that allowed the company to grow exponentially.
Asking customers is easier than you think. Most of your early customers will understand your position as a startup and appreciate that you are trying to improve your products and services. Many startup founders and their core teams are surprised by how much information they can gather simply by chatting directly with their clients.
It’s also a good idea to gather and store any information related to your ideal customer persona in the same place as your customer acquisition data. This makes it easier to compare and contrast your findings. You can track changes over time more easily by following this process.
Like human beings, customer personas are fluid and change regularly. To help you target your ideal customers, you need to iterate your ideal customer persona all the time. How often is enough? Whenever you learn more about your customers, you should take the time to update your customer personas.
Many businesses target more than one customer persona. If your startup is at a very early stage, offering only one product, then one customer persona may be enough. But if your company has progressed past these initial stages and is offering several products or services, it’s time to expand and diversify customer personas.
As your company matures, your customer personas may mature with it. Alternatively, they may simply outgrow your product. Understanding your customers as human beings helps you predict your customers’ actions and direct your efforts accordingly.
3. Build organic online visibility now
Building your company’s visibility online means investing time and effort into search engine optimization (SEO). These results are known as organic because you don’t pay search engines for your ranking. Instead, Google and others crawl your website and list it depending on how well it matches a potential customer’s search terms.
Many startups don’t really prioritize SEO because they consider it a slow channel. That’s at least partially true. Building organic visibility does take time. However, that makes starting now even more important. It may take months of consistent efforts to improve your rankings.
Improving rankings starts with figuring out the purchase intent keywords your clients use. Remember, if you’re unsure about the answer, just ask. Once you know those keywords, create simple landing pages that match customers’ search terms and start building relevant backlinks to your website. That's how to create SEO TLDR.
If you feel that you need to increase your startup’s visibility online more quickly, consider combining SEO with its paid-for equivalent, search engine marketing (SEM). SEM is also known as pay-per-click advertising (PPC).
SEM allows you to target a position in the adverts at the top of search engine results pages. It works faster than SEO and can support the SEO work you do. Any downsides? You need to devote some of your marketing budget as well as your time to it unless you want to outsource that part of your marketing.
Why is SEO so important? Take it from me: in all my years working with more than 100 startups, all my profitable customer acquisition mixes have been based on excellent organic visibility. It can take months, but it’s worth persevering and investing the time.
Once your SEO has ramped up and you’re starting to rank highly, you’ll get 50 new clients from organic Google searches without adding to your workload. Plus, you’re also not spending anything more on advertising - unless you continue to pursue SEM leads. Being able to show that performance will be hugely beneficial the next time you talk to potential investors.
Plus, maintaining high rankings is easier than achieving them in the first place. Whilst you may need to invest substantial amounts of time to rank highly initially, maintenance is less time-consuming.
4. Sanity-check your CAC calculations
Like customer personas, conversions and customer acquisition costs don’t stay static for long. That’s why it’s important to update any data you gathered and review it regularly. Again, these checks don’t require a finance or accounting degree. Especially, once you’ve invested the time in manual weekly tracking, you’ll have a good grasp of your data. At this stage, it’s merely a case of sense-checking numbers.
Regular checks of your data also allow you to spot seasonal changes. Some startups can be strongly affected by those, whilst others barely notice any variation at all. There is no right or wrong finding here. Instead, it’s all about creating a better understanding of your customer acquisition process and optimizing this process wherever you can.
If you are looking for one guideline to consider over all others, a north star, so to speak, check your bank account. Money coming in is the most obvious sign that your business is managing to acquire customers profitably. Granted, income and outgoings can vary between months and seasons, but you’re looking for trends.
If you generally have more money coming in than what your business is spending once all expenses have been accounted for, you are gaining traction and are on your way to profitability.
Put yourself in the position of a potential investor for a moment: before dedicating a substantial sum of money to a startup or any other investment, most people are seeking some kind of reassurance. For many angel investors, venture capitalists, and other investors in startups, that security is based on seeing that the business is attracting customers.
Showing that you can attract clients is one aspect of convincing investors to take a chance on your startup. Being able to demonstrate that your customer acquisition is profitable will go further. You are letting potential investors know that you have a firm grasp on the company’s performance as well as its financial position.
Knowing this will assure investors that your proposition is likely to grow beyond the early company stages and grow successfully. Therefore, the risk is easier to calculate, and you’ll find it easier to convince investors to back your startup.