The tortoise doesn’t always beat the hare although we might hope that will be the case.
Numerous Canadian tech companies are sitting out there wondering why they aren’t growing as fast as they should be or why they can’t seem to attract the venture capital that they need. Well if you’re one of those companies then your problem might very well be a lack of spending on marketing and sales. This lack of spending has turned you into a tortoise.
I’ve been working in and with technology companies for close to 40 years and the one opportunity I keep seeing is that of spending more on marketing and sales. I met recently with an assistive device company that had had a very successful Indiegogo campaign to raise funds to launch their product. They had launched last fall and were surprised at how slow sales were developing. I asked what they were spending their time doing and it turns out that the two founders, who were the only two employees spent about 10% to 15% of their time on marketing and sales.
Sales were coming along but very slowly. When I looked at the numbers everything looked just where it should be given their low marketing and sales efforts. The problem in their case was a long sales cycle. They hadn’t spent anything on marketing and sales before the product launch and it was just taking time for resellers to come on board and move product out to the eventual customer. If they had spent earlier on marketing and sales, they would have been growing faster.
And when you looked at the size of their market and how much of it they were able to reach just spending 10% to 15% of their expenses on marketing and sales, they were never going to reach the growth objectives they had set for themselves. As I left them they had decided to go and hire at least one additional person to focus on marketing and sales and that should put them closer to where they need to be.
This ties in as well to fundraising. Our recent Impact Brief, A Failure to Scale, revealed three critical issues that may be impacting the ability of Canadian businesses to grow rapidly:
- Canadian companies wait longer before they start raising funds.
- They raise funds less often.
- They raise less money over time.
But why do Canadian businesses delay spending money the fundraising process, which is essential to ensuring further growth? I’ve seen two things going on over the years:
- Many Canadian technology companies, just like my example above, wait until their first product is complete before spending funds marketing and sales (M&S) and raising money.
- Canadian venture capitalists (VCs) look for evidence of market traction before considering funding.
This is disconcerting because early expenditures on M&S may lead to faster market traction, more solid growth, and earlier VC funding. But practitioners in the Canadian technology scene have observed that many businesses underestimate the importance of M&S in their formative years.
We at the Impact Centre just finished another study titled Canadian Tech Tortoises. The goal of this study was to determine whether Canadian technology startups do in fact delay funding M&S activities. To this end, we looked at job classifications of employees at over 900 private Canadian technology companies that had received external investments. We could argue that if Canadian firms postponed spending on M&S, we would expect to see no or few employees in M&S roles relative to total employment in the earliest stages of development, followed by a steadily increasing percentage of M&S-related employees as companies grow.
Job classifications were used as proxy to gain insight into how firms allocate money for various functions within the business. We discovered a striking pattern: while Canadian firms with the lowest recorded levels of external funding (our proxy for growth) have only 13% of their employees engaged in M&S activities, this percentage was significantly higher for businesses that had managed to raise funds. Firms with US$50,000–US$2 million of funding have 24% of their employees engaged in M&S. Thus in the early stages of development, Canadian tech firms are likely to have a larger fraction of their workforce dedicated to research and development (R&D) than to M&S.
A smaller contingent of M&S employees means that less time will be spent on vital startup activities such as market intelligence, product marketing, and business development. Companies that neglect M&S tend to approach the market only when a product is ready, therefore delaying their first revenue and growth.
But how do top technology companies in other countries approach the same issue?
Our analysis of more than 60 tech businesses in the US showed a different recipe for success: firms that scale quickly to US$10 million in revenue spend, on average, 73% more on M&S than on R&D. Leading American firms have 40% of their employees dedicated to M&S.
This is significantly different in Canada where even the highest funded firms only have 31% of their employees in an M&S role. This creates a vicious cycle: fewer M&S employees means less M&S activity, which slows down all the processes needed for customer traction and entry into the market.
Such patterns add to the perception that Canadian companies struggle with commercialization and market adoption. They also led us to conclude that, relative to US businesses, there is a striking difference in philosophy about when to approach customers and markets and that perhaps our technology companies grow more slowly than the leading US companies because they do not spend enough on M&S.
If companies want to scale to a world-class size then they have to do three things:
- They need to start spending money on marketing and sales much earlier, in fact right from the minute they start thinking about the business.
- They need to spend much more on marketing and sales than they do on research and development.
- They need to raise money earlier, more often and in larger amounts.
Maybe then we can turn all of these Canadian Tech Tortoises into hares.
Charles Plant is a Senior Fellow at the University of Toronto’s Impact Centre. He has been the founder, CEO or CFO of several successful software companies and an investment banker and Managing Director at MaRS Toronto.