Half of my investment is wasted, but I don’t know which half

Today we could be armed with more customer information than ever before, so why do so many companies fail? Alan Costello, Venture Investment Leader at NDRC, discusses.

A common marketing belief is: “Half the money I spend on advertising is wasted; the trouble is I don't know which half.”

Marketers, not long ago, had little feedback from the market to prove that a consumer bought a product after seeing a billboard, reading an article in a magazine or hearing a promotion on the radio.

‘Spray and pray’ became the go-to approach, hoping enough of the spend would stick. Web based automated tools like Hubspot and Google Analytics are starting to change that trend now, thankfully.

Unfortunately, I think we could take that old marketing line and apply it to investments in startups: “Half of my investment is wasted, but I don’t know which half.” 

Investors want to see startups using their capital for the best possible purposes, with the best possible return on their investment. But, sadly, spraying and praying is too often the easiest approach, and it could do more harm than good.

Startups are sometimes (often?) more than happy to spend money on building new features, reinventing the stack, searching for customers in the wrong place, in the wrong way. Waste, waste, waste.

But it doesn’t have to be that way. ‘Customer validation’ is the term used for investigating, and justifying, customer types. Who is the target customer? Why will they buy? This, alone, often proves the single most important part of a startup’s journey.

Customer validation can be highly inexpensive and leads to deeper insight and knowledge. It tells businesses what features a customer might want but, additionally, it allows businesses to understand why that particular feature is needed, helping lead to a solution.

Startups spend money on building new features, reinventing the stack, searching for customers in the wrong place, in the wrong way. Waste, waste, waste

How you build something is pretty immaterial to the customer. Sometimes, what you build is functional to them, but why you build it is crucial to high growth and high value creation.

Deeper understanding of this will help you to establish the full value chain of the enterprise system that you're trying to enter. We have seen examples where NDRC invested in startups that thought they were building one product, even having Version 1 of it already built.

However, through the process of customer validation, one startup in particular discovered a bigger need in its audience which, if satisfied, would lead to greater appetite of their users.

It turns out their customers didn’t just want information, they wanted to be able to share it and peer learn from it, so the product changed from being an aggregator of content to a sharing and peer learning platform.

The process can even help entrepreneurs understand how others have failed to solve the problem in the past, even though they've tried. It could help startups understand how customers solve this problem in other markets with different technologies or workarounds - we see that in the Middle East accelerator we are currently working with in Oman, where companies there are learning from business models and startup launches in other countries to apply the best results to themselves.

This all starts with a hypothesis. This is backed up, in parallel, by secondary market research to understand the market dynamics. Do this validation before trying to push your product or service out to the customer – it will ultimately save you time and money.

In other words, really expensive stuff comes after you've done better customer discovery and better customer validation.

At NDRC we are big fans of Bill Aulet’s book, ‘Disciplined Entrepreneurship’, on top of Steve Blank’s ‘Four Steps to the Epiphany’.

These discuss the process of early customer engagement and validation before building a product. Even then, when you do start to build new, build quick, test quick and revise quick.

In today’s marketing, we use Google Analytics, detailed advertising reports, click-through stats, conversion valuation and more. We don’t know it all, but we know a lot more now than before. The ‘half my spend wasted’ rule should be becoming redundant.

How do you avoid wasting half of your investment? Pay close attention to your early customer validation, build the right product, and build it at the right time.