Early-stage startup firms are more likely to conduct systematic marketing if they have top management team members with previously successful entrepreneurial experience and are backed by investors with a financial stake in the firm.
Systematic marketing is one of the most effective ways for an early-stage business-to-business (B2B) startup firm to grow, yet nearly half of such firms choose not to do any marketing, according to the findings of a paper co-authored by a Smeal College of Business professor and published in Industrial Marketing Management.
Two empirical studies by Smeal Distinguished Research Professor of Management Science Gary Lilien and University of Technology Sydney associate professor Ofer Mintz examined which startup firms conduct systematic marketing, what causes them to do so and what benefits they derive from that investment. The first study used data from the online valuation platform Equidam on 693 B2B or business-to-consumer (B2C) startup firms that had launched between July 2016 and April 2018, 202 of which also provided current and anticipated financial information for the next two years.
To address the potential bias in the Equidam study that those startup firms, which had contacted the company because they were interested in financial valuation, would differ from the larger startup population, Lilien and Mintz conducted a separate validation study that surveyed 377 startup firms selected from a Survey Sampling International panel of entrepreneurs. They also included a theoretical framework that used insights from interviews with startup founders, investors and startup firm consultants.
Fifty-five percent of the startup firms reported conducting systematic marketing and 45% said they did not. In both studies, the researchers discovered that early-stage B2B startup firms were the least likely of all B2B startup firms to conduct systematic marketing but the most likely to benefit from it, while early-stage B2C startups were the most likely to conduct systematic marketing but the least likely to benefit from it. Late-stage B2B startup firms also benefited less from conducting systematic marketing than early-stage firms.
They also found that startup firms’ decision on whether to conduct systematic marketing influenced the firms’ valuations, and that more than half of the startup firms surveyed in the two studies — 60% of those in the Equidam study and 61% in the validation study — got the decision about whether to conduct systematic marketing wrong.
“I would ask if, say, an investor gave you $10,000 or $100,000, or whatever additional number, how much would you spend on marketing? And most would say zero. That was the ‘aha’ moment.”
Lilien met Mintz while on sabbatical at the University of Technology in Sydney. Lilien, a co-founder of Smeal’s Institute for the Study of Business Markets, had extensive experience in B2B, while Mintz, the associate head of the university’s marketing department, had previously done work for a startup and connections to other startups and investors. Both had a desire to study B2B startups, said Lilien, because the majority of academic researchers are studying B2C startup firms but less attention has been paid to B2B startups.
Mintz initially thought the study would be more about “what types of marketing are best for startups?” but discovered during early interviews that many startup managers didn’t consider marketing at all.
“I would ask if, say, an investor gave you $10,000 or $100,000, or whatever additional number, how much would you spend on marketing? And most would say zero,” Mintz said. “That was the ‘aha’ moment, when we knew we were on to something bigger than we thought.”
The scarcity of available data on startup firms posed a challenge for Lilien and Mintz. More than half of startups are out of business within five years.
“There’s what’s called a survivor bias — the ones that are hanging around you can study,” Lilien said. “So that’s wonderful, but how do you determine what separated them from the ones that did not survive?”
The researchers hypothesized that investing in marketing for startup firms was not a yes or no question, and would depend on factors such as the firm’s cash flow, the experience of its top management team and market concentration. Some early-stage startup firms reported being hesitant to conduct systematic marketing because it would mean redirecting already scarce financial resources.
Lilien and Mintz also found that early-stage startup firms were more likely to conduct systematic marketing if they had top management team members with previously successful entrepreneurial experience and were backed by investors with a financial stake in the firm. They observed that some B2B startup firms — many of them spinoffs from existing companies — had smaller but more knowledgeable customer bases than B2C startup firms and therefore a greater ability to verify the credibility of their firms through marketing.
“Marketing for these companies is really sales and tech support,” Lilien said. “And getting a deep understanding of the evolving needs of the existing customers and co-developing products with them.”
Startup firms that conducted systematic marketing provided an observable signal to potential investors about the firms’ level of quality. The paper includes a framework about when and why startup firms allocate resources to conduct systematic marketing with the hope that it is used to provide guidance for both early-stage startup firms themselves and for investors. The researchers concluded that future research is needed to determine how to best encourage early-stage B2B startups to conduct systematic marketing.
“I think this work is going to be of most benefit to venture capitalists,” Lilien said. “We have a recipe that tells you whether or not to add that marketing side to this particular dish.”
